2026 Outlook: 7 Important Ideas for Long-Term Investors

For the sixth time in the past seven years, the stock market is expected to deliver returns above 10%. This impressive run, with only 2022 as an exception due to rising prices, has left many investors in a good financial position.

There's an old saying that expecting something is often better than experiencing it. On one side, investors always want strong returns like these, which clearly help portfolios and financial goals. This is especially true as more types of stocks beyond artificial intelligence companies have done well, international markets have recovered, and bonds have helped support portfolios. On the other side, once these gains happen, investors often get worried, especially with major stock indexes near record highs and prices approaching historic levels last seen during the dot-com bubble.

In 2025, there were changes in many of the challenges investors have dealt with over recent years. Rising prices, which continue to affect households, have steadied around 3%. Tariffs (fees on imported goods), while high compared to history and the main reason for stock market ups and downs in 2025, have not caused the economic problems many worried about. The Federal Reserve (the central bank that manages interest rates) has continued lowering rates, and the economy has grown at a good pace.

When we step back, perhaps the most important lesson for the new year is that what investors worry about most often doesn't happen. The recession (economic downturn) many have feared since 2022 did not occur. History shows that for every real market problem, like the 2020 pandemic or 2008 financial crisis, there are many more feared "black swans" (unexpected, rare events) that never happen. The challenge for long-term investors isn't guessing which events will matter, but keeping perspective and staying disciplined in all market conditions.

As we look toward 2026, the investment world presents both opportunities and challenges. Topics likely to be in the news include the upcoming midterm election, new leadership at the Federal Reserve, the future of AI (artificial intelligence), growing concerns around loans, the direction of the U.S. dollar, and more. What matters most isn't whether investors can predict every change, but whether their portfolio is set up to handle uncertainty while capturing long-term growth. Here are seven key ideas that can help guide how investors think about the year ahead.

Many different investments are helping portfolios heading into 2026

Importantly for investors, many different types of investments are contributing to portfolio returns as we approach 2026. This is different from much of the past decade when U.S. stocks did better than the rest of the world. In 2025, international stocks are beating U.S. markets, with developed market stocks (measured by MSCI EAFE) and emerging market stocks (measured by MSCI EM) each gaining around 30% in U.S. dollar terms. This has been driven by two main factors: improving growth expectations in many economies and the weakening dollar, which increases returns for U.S.-based investors.

Bonds are also playing an important steadying role in portfolios. The Bloomberg U.S. Aggregate Bond Index (a measure of bond performance) has gained 7% for the year as the Federal Reserve continues lowering interest rates and inflation (rising prices) stabilizes. Higher-quality bonds have been doing their job by providing income and balancing out stock market ups and downs during periods of market uncertainty.

In the coming year, this highlights the importance of balance and spreading investments across different types (diversification). While it may be tempting to make sudden portfolio changes based on news headlines, investors who stick with their financial plans are likely to be rewarded.

Stock prices compared to company earnings are approaching dot-com levels

One result of the strong returns of the past several years is that stock prices compared to company earnings continue to rise. This comparison is called a price-to-earnings ratio. The S&P 500 (a major stock index) currently has a price-to-earnings ratio of 22.5x, approaching the all-time high of 24.5x reached during the dot-com bubble. By definition, this means that investors are paying more for each dollar of future earnings than in recent years.

Investors typically worry about these price levels (valuations) when they become disconnected from the underlying business performance (fundamentals). For example, the dot-com bubble had historic price levels that far exceeded revenues and earnings, as investors rewarded any company related to the "new economy." While prices are expensive today due to excitement around AI and ongoing economic growth, corporate fundamentals remain strong. Earnings have grown at a healthy pace, with expectations they could continue to do so according to consensus estimates data by LSEG.

So, it's important to understand what high valuations do and do not tell us. Valuations don't necessarily predict immediate market declines since markets can stay expensive for long periods. While some investors worry about an "AI bubble," the reality is that not all bubbles burst dramatically. Instead, some deflate slowly as the fundamentals catch up. This is one difference between the dot-com bust of the late 1990s and early 2000s and the growth of cloud computing over the past decade.

However, high valuations do suggest that returns could be more modest going forward, since markets are already accounting for future growth. This can also increase the market's sensitivity to disappointments. Investors often say that markets like these are "priced for perfection," so even small misses on earnings or economic data can cause volatility (price swings). This means that being selective and maintaining balance across different parts of the market—including different types of investments, sectors, company sizes, investment styles, and more—will only grow in importance.

AI is driving economic growth and investment returns

Perhaps no single trend has captured investor attention more than AI (artificial intelligence). Capital expenditures (money spent on equipment and infrastructure) on AI reached extraordinary levels in 2025, with the total investment easily reaching trillions of dollars. This includes building new data centers, purchasing equipment such as GPUs (graphics processing units), and hiring AI researchers.

Some of these investments involve deals that seem circular. For example, Nvidia invested up to $100 billion in OpenAI, which in turn is buying millions of Nvidia's chips. These interconnected relationships have raised concerns about whether the AI ecosystem can sustain itself if excitement decreases.

These trends reflect the reality that AI requires infrastructure that few companies can afford alone. The question is whether the technology will ultimately create enough value to justify the enormous spending. As it stands, AI investment is currently a large contributor to the overall economy.

Surveys suggest that businesses are increasingly adopting AI into their workflows. According to the Census Bureau's Business Trend and Outlook Survey, the share of businesses reporting use of AI more than doubled from 4% in September 2023 to 10% in September 2025. The share of businesses that anticipate using AI over the next six months rose at a similar rate, from 6% to 14% over the same period.¹ While these numbers have jumped, they still have significant room for growth.

For investors, AI presents both upside potential and downside risk. The Magnificent 7 technology companies continue to lead markets higher, driven by infrastructure investments and growing adoption of AI tools. However, this concentration (having a lot in one area) creates vulnerability. These companies now represent about one-third of the S&P 500, meaning most investors have substantial exposure, whether they realize it or not.

The challenge isn't whether AI will transform the economy—it clearly will. Rather, it's whether current prices adequately reflect realistic timelines for returns on these massive investments. History from the railroad boom of the 1860s to the dot-com era of the 1990s shows that transformative technologies often follow similar patterns: initial skepticism, rapid adoption, market excitement, and eventual integration into the broader economy.

The key lesson is that markets often overestimate the speed at which profits can be generated. The reality is that most investors likely have exposure to AI stocks whether directly or through major indexes, so being aware of this concentration, and staying true to an appropriate mix of investments (asset allocation) that fits with long-term goals, will be needed in the coming year.

Economic growth is slowing but remains positive

Economic growth trends have slowed but remain stronger than many had feared. U.S. GDP (Gross Domestic Product, which measures total economic output) experienced a slightly negative dip in the first quarter of 2025, but this bounced back quickly as tariff uncertainty faded. The 3.8% growth rate in the second quarter not only exceeded expectations, but is one of the strongest quarterly growth rates in years.

When it comes to global GDP, the International Monetary Fund projects that growth could ease just slightly from 3.2% in 2024 to 3.1% in 2026. Advanced economies are projected to grow around 1.5%, while emerging markets are projected to maintain growth above 4%.²

Although positive overall, economic growth has been uneven across different income groups and sectors. This concept is often referred to as a "two-speed" or "K-shaped" economy, since some experience growth while others struggle.

In today's economy, this difference is primarily driven by technology trends, since those positioned to benefit from the growth of AI could experience greater job prospects than those in traditional industries. However, it's not just about AI, since consumer debt, auto loan delinquencies (late payments), and other financial challenges can affect whether individuals benefit from economic growth.

When it comes to long-term economic growth, perhaps the most important question is whether productivity (output per worker) will rise due to recent technological advances. Productivity measures how much, either in terms of quality or quantity, a worker can produce in a given amount of time. Historically, better equipment, training, and education have driven greater productivity, which is what drives real economic growth.

As the chart above shows, productivity growth averaged only 1.2% per year during the 2010s. The hope of AI and new technologies is a boost to worker output. However, this often takes longer than expected, and won't necessarily benefit everyone equally. For investors, the promise of greater productivity is that profit margins can improve, supporting the broader economy and investor portfolios.

The impact of tariffs remains uncertain

While tariffs were the primary driver of stock market ups and downs in 2025, their economic effects have been mixed. In fact, one of the ongoing puzzles is how little immediate impact tariffs have had on inflation and growth. Despite tariff costs increasing ten times their average level compared to prior years, measures such as the Consumer Price Index (which tracks prices) have ticked up only slightly.

There are several possible explanations as to why tariffs have not had their expected effect. First, many of the announced tariffs were quickly paused or scaled back. Second, many companies absorbed the initial cost of tariffs by keeping their prices steady and importing goods ahead of tariff announcements. Finally, strong consumer spending, government stimulus, and healthy growth in AI-related sectors helped offset any negative impact on overall growth. It's also worth noting that the Supreme Court may rule in 2026 on the legality of the economic justification used for these tariffs.

For long-term investors, these recent developments, along with the first round of trade negotiations in 2018, highlight the fact that tariffs are part of the government's playbook. Rather than reacting to these tariffs as a shift in the world order, they instead represent tools for the administration to support broader policy goals. While tariffs aren't going away, their impact on day-to-day market activity could diminish.

Midterm election and government debt will be at the forefront in 2026

In addition to changes in trade policy, 2025 also had a historic 43-day government shutdown and ongoing concerns over the size of the budget deficit (when government spending exceeds revenue). At the same time, the recently passed One Big Beautiful Bill Act (OBBBA) tax legislation has created more clarity for investors and taxpayers.

The new year will begin with more uncertainty in Washington as the short-term funding bill expires at the end of January. This means there could be another wave of negotiations that could result in another government shutdown. Then, some investors expect households and businesses to benefit from greater tax refunds due to provisions in the OBBBA such as full expensing of research and development.

Looking further ahead, investors will likely shift their attention to the midterm election and what it could mean for tariffs, regulation, government spending, and more. The chart above shows that midterm elections have historically experienced healthy returns, averaging 8.6% since 1933, even if they are slightly lower than non-election and presidential election years.

Still, the biggest concern for many investors is the ever-growing national debt. The truth is that the historically high national debt, which is hovering around 120% of GDP (economic output) for total debt, or over $36 trillion, is unlikely to be solved any time soon. In fact, it's estimated that the OBBBA could increase the national debt by over $4 trillion in the next decade. As it stands, the national debt amounts to over $106,000 per American.

For long-term investors, it's important to recognize what we can and cannot control. For example, the national debt has been a challenge for decades, yet making investment decisions based on these concerns would have resulted in the wrong portfolio positioning. While the sustainability of the U.S. federal debt may have implications for economic growth and interest rates, history shows that this should not be the primary driver of portfolios.

Instead, what investors can control in the short run is understanding the key changes to tax legislation and how it impacts long-term planning. These include the fact that lower tax rates from the Tax Cuts and Jobs Act are now permanent, estate tax exemption levels will remain higher, SALT deduction caps (limits on state and local tax deductions) have risen, and many other provisions. It's the perfect time to review your tax strategies to ensure you take full advantage of these new rules.

The Federal Reserve will support the economy

The Fed (Federal Reserve, the central bank) resumed lowering rates in September after pausing earlier in the year. As we enter 2026, the path of monetary policy (decisions about interest rates and money supply) could become less certain. This is because the risk of runaway inflation may no longer be the primary concern as a weaker job market has grown in importance. This requires small adjustments to policy rates rather than dramatic shifts, such as those seen in 2022.

An additional complication is that Fed Chair Jerome Powell's term will end on May 15, 2026, paving the way for new leadership at the Fed. The White House is expected to appoint a successor who may favor additional rate cuts to support the administration's economic agenda of lower interest rates.

The chart above shows that the economy has performed well across Fed Chairs appointed by both parties. It's important to note that the Fed only controls the "short end" of the yield curve (the relationship between interest rates and bond maturity dates), that is, interest rates that are closely tied to the federal funds rate (the rate banks charge each other for overnight loans). Long-term interest rates depend on many other factors, such as economic growth, inflation, and productivity. So, rather than follow the Fed's every move and analyze every statement, investors should continue to focus on these longer-term trends to understand the impact on interest rates and bonds.

Keeping perspective in 2026

As we enter 2026, investors face a familiar challenge: balancing concerns with the reality that markets have consistently rewarded patient, disciplined investors over time. The list of worries is ever-present, yet history suggests that for every crisis that disrupts markets, many more feared events have failed to happen. What separates successful long-term investors isn't the ability to predict which concerns matter most, but the ability to stay balanced throughout all phases of the market cycle.