Investment Outlook, January 2026
January 1, 2026
The year began with talk of “U.S. exceptionalism,” reflecting the economy’s relative strength; it ends with renewed attention to the “K-shaped” economy, one in which outcomes diverge meaningfully across households and sectors. Throughout the year, markets and growth consistently defied bearish forecasts, supported by sustained consumer spending and a powerful surge in AI-related investment. As we look toward 2026, the economy appears stable, but the durability of growth is less certain. Mega-cap technology is priced for near-perfection, while opportunities increasingly reside in less crowded areas of the market that will be our investment focus in the year ahead.
Early in the year, inflation was gradually declining, interest rate cuts were anticipated, and employment appeared stable. That narrative shifted sharply on “Liberation Day,” when tariff announcements injected significant uncertainty into an otherwise strong economic backdrop. Historically, tariffs initially push inflation higher, then new price levels stabilize, but tariffs can also weigh on global growth over time. As policies evolved through delays and renegotiations, inflation stalled near 3% rather than continuing toward the Federal Reserve’s 2% target. A cautious Fed kept rates elevated longer than expected. Only this fall did rate cuts begin, with the policy rate now at 3.5%, down from 4.25% a year ago. Encouragingly, the latest inflation reading declined to 2.7%, even as some tariff uncertainty persists.
With inflation easing and rates beginning to fall, attention has shifted to the labor market. Unemployment has risen to 4.6%, the highest level since 2021, but still low by historical standards and lower than most reports of the past two decades. Wage growth has remained solid, running between 3.5% and 4% and continuing to outpace inflation. The key uncertainty really lies in the quality of our employment data today. The Bureau of Labor Statistics’ nonfarm payroll figures shifted midyear materially and have since been revised lower for several months. By contrast, ADP’s private-sector employment data suggests a more stable labor environment. As a result, the underlying employment trend remains difficult to assess heading into 2026.
Despite relatively stable macroeconomic data, companies continue to navigate uncertainty around supply chains, tariff-related pricing, AI investment priorities, and workforce needs. Tariff announcements caused many firms to pause capital plans and hiring earlier in the year. While some clarity has returned, import costs remain elevated, pressuring margins. Many companies are turning to AI-driven efficiency as a potential offset, investing heavily in productivity gains that are still largely unproven. As these technologies evolve, the impact on job displacement and new skill requirements remains unclear. With labor markets tight in both the skilled and manual labor pools, many firms remain uncertain about their hiring outlook for 2026. All these uncertainties are now reflected in forward-looking economic surveys and earnings estimates.
Consumer sentiment surveys reflect the pessimistic view of many everyday Americans. The Consumer Sentiment Index is roughly 30% below its level at the end of 2024, indicating heightened concern about both current conditions and the future. Despite lower inflation and rising real wages, consumers report that prices feel high, and job security feels fragile. We have discussed this disconnect between “soft” sentiment data and “hard” economic data before. While confidence is weak, spending remains resilient. Given that consumer activity accounts for more than two-thirds of GDP, sentiment bears watching, but hard data continues to carry greater weight in our outlook. For now, we see economic stability and even modest improvement into spring 2026.
Despite the economic and political volatility of 2025, equity markets will finish the year strongly. The S&P 500 is up approximately 17%, driven largely by the extraordinary concentration of returns among the top 10 companies, which are dominated by technology giants . Few investors, however, maintain portfolios with such concentration. The equal-weighted S&P 500 is up just over 10%, highlighting the narrowness of market leadership. Our portfolios participated meaningfully in this year’s strength without adopting the index’s elevated concentration risk. Looking ahead, we see the greatest opportunity in sectors that have lagged. We began repositioning last quarter and will continue broadening exposure in 2026. We have added homebuilders, which should benefit from lower interest rates over time, and see potential opportunities in consumer discretionary and health care sectors as we manage expected profit-taking in technology.
It is rare to enter a new year with high conviction about the precise path of the economy or markets. Our approach remains anchored in longer-term trends, with an understanding that both domestic and global policies can alter conditions quickly. As we begin 2026, we see an environment characterized by relative stability and selective opportunity. We will remain attentive and adaptive as conditions evolve.
Please see our important disclosure.