In 2025, markets exceeded expectations as continued economic growth and innovation drove demand for stocks, especially in the second half of the year. As we look ahead to 2026, our view is straightforward: the U.S. economy continues to grow, but markets are likely to remain volatile. We see risks, but we also see a healthy foundation underneath the surface. For long-term investors, this remains an environment where discipline not prediction matters most.
Economic Growth:Slower, but Still Moving Forward
We expect the U.S. economy to continue expanding next year, though at a slower pace than in the past two years. Our base case calls for GDP growth in the 1.75% 2.25% range, which is modest but still firmly positive.
A few forces support our outlook:
- Consumers are still spending, despite a weakening job market.
- Inflation has cooled significantly, giving households more breathing room.
- Global growth remains steady, providing a stable backdrop for U.S. exporters.
We are mindful of some emerging stress points such as rising delinquencies in auto loans and credit cards, as well as high profile layoff announcements (Verizon, UPS, Meta). However, at this stage, these pressures appear concentrated in lower-income households and have not pushed the broader economy toward recession.
Inflation & Interest Rates:Progress, but the Last Mile Is Harder
Inflation is trending lower, though we expect the remaining progress to be slower. New tariffs, shifting supply chains, and immigration-related labor constraints may prevent inflation from falling quickly back to the Federal Reserve s 2% target.
The good news: interest rates are likely to move lower in 2026, easing some pressure on borrowing and business investment. That said, rates will probably remain higher than what investors were used to for most of the last decade, meaning housing affordability isn t going to drastically shift any time soon, even if mortgage rates subtly decline.
Globally, most major central banks are also cutting interest rates, which further supports financial conditions here at home.
U.S. Markets:A Mature Bull Market with a Bumpier Road Ahead
U.S. stocks have had an impressive run since 2022. While we believe the long-term trend remains positive, the next phase is likely to feel different than the last:
- Valuations are elevated, leaving less room for error.
- Seasonal and political cycles suggest more volatility in 2026.
- Policy uncertainty remains high, especially following the major tariff actions and shifting regulatory priorities.
We believe stocks can still advance over the next year, but with more frequent pullbacks and sharper day-to-day swings. This isn t unusual late-stage bull markets often behave this way. Our discipline maintains a long-term focus rather than reacting emotionally to short-lived market noise.
What Could Drive Markets in 2026
Here are the themes we see influencing portfolios next year:
- Consumer strength: Spending slows but stays positive.
- Corporate earnings: Growth continues, but at a moderate pace.
- Interest rate cuts: Supportive, but not aggressive.
- Global demand: Stable, led by continued growth in emerging markets.
- Politics and trade: A persistent source of short-term volatility.
Overall, the environment favors balanced, diversified portfolios rather than concentrated bets.
A Note on AI:Opportunity with Real Risks
We remain optimistic about the long-term potential of artificial intelligence to improve productivity and drive economic value. However, we are also aware that many AI-related stocks are priced for very rapid growth, and any disappointment in earnings could create sharp swings in this segment of the market.
We do not view AI as a true bubble, but we believe it is an area where expectations are extremely high. Our approach is to participate in the opportunity while managing the risks through prudent position sizing and diversification.
Bottom Line
Our outlook for 2026 is balanced:
- The economy is still growing.
- Inflation is moderating.
- Markets may stay choppy, but long-term fundamentals remain intact.
In this environment, successful investing will rely less on predicting every twist in the market and more on maintaining a thoughtful, balanced strategy built to earn productive returns within a variety of outcomes.
Your Pacific Wealth Management team sends warm wishes to you and your family for a fun holiday season and a happy, healthy 2026.