Our 2026 Outlook — It's an AI World — explores the impact of the AI supercycle on the U.S. economy and markets

Our research tells us we are still early days, with 2026 marked by capacity expansion rather than full-scale adoption. It's exciting stuff, full of promise and opportunity ... and risk. Increasingly it feels as though the economy, the stock market, and, perhaps at some point in the future, the bond market depend on a single theme. 

Of course, as much as AI is overtaking the country, other variables still matter, though maybe less than they otherwise would. 

In this Outlook, we also took a close look at the U.S. housing market and the global debt deluge, both of which we think could impact markets. 

The key question we continued to return to throughout our research:

What do these views mean for individual investors, 

both for their expectations and their portfolio positioning?

In that spirit, you'll find investment implications sprinkled throughout. But let me call out the most important principles I think investors should cling to this year, and every year, as they harness markets to achieve their financial goals.

Investing

It's tempting to use closely held political views or convincing market narratives to time the market. It rarely works out in your favor. And I know of no example in which it works consistently over time. However, I know of countless examples of long-term investing leading to wealth creation. 

Diversifying

With AI enveloping the economy and the markets, this is harder than ever. That’s why we highlight areas of the market that investors have overlooked in order to offer a different type of exposure investors can consider. And don’t forget: It's a global world, across stocks and bonds. Finding ways to broaden as appropriate for your particular financial goal may help generate more consistent results.

Planning

It’s hard not to zoom in on what's topping markets: Gold! Crypto! AI! But not every asset class makes sense for every portfolio. Know what you own, and know what you want to achieve. Everything else is secondary.

Wishing you and yours all the best as we close out 2025 and turn our gaze forward to 2026.
 

Capital expenditures

Capital expenditures in the AI race are an increasingly important part of the economy.
Impact: Economy and stocks

Cloud revenue

Cloud revenue is an indication of AI adoption in the broader economy.
Impact: Economy and stocks

Tech debt issuance

This is a growing source of funding in the AI race.
Impact: Economy, stocks, and bonds

Housing

Housing is closely tied to wealth creation and higher-income consumer spending.
Impact: Economy

Stock market valuations

High valuations create vulnerability for stocks and the economy.
Impact: Economy and stocks

The wealth effect

Consumer spending from the high-income consumer depends partly on home values and somewhat on investment portfolios.
Impact: Economy

Inflation

Sticky inflation could slow the Fed's ability to lower rates.
Impact: Economy and bonds
 

Asset allocation barometer

2026 Outlook — It’s an AI world.

Equity

• We are somewhat constructive on U.S. large-caps, but we are wary of still-tight valuations and the extent to which the AI capex cycle dominates the narrative — and not just for the hyperscalers, but suddenly for the entire U.S. market.

• US small- and mid-caps are the last valuation opportunity left standing, but we’re wary of their sensitivity to the economic cycle and rates. It may also be harder for many SMID sectors to hitch their fortunes to the AI bandwagon.

• We think non-U.S.-developed equities are no longer as cheap as they were a year ago. They may still benefit from dollar weakness, but several European countries have demonstrated their own debt sensitivities.

• A U.S. dollar tailwind may still help certain emerging markets. However, China rallied strongly in 2025, taking out some of the obvious opportunity. We believe it will be a "show-me" market in 2026, with China AI in a starring role.

Fixed income

• We think the Fed will continue cutting in 2026, but we are wary that market expectations might be too aggressive on that front without a big(ger) reset in U.S. labor markets.

• Yields remain compelling and total returns may benefit from Fed cuts, but term premiums tend to widen during Fed-cutting cycles. Generous fiscal policy remains a concern both here and abroad.

• Like large-cap equity valuations, spreads remain very tight, even relative to very strong fundamentals. We view sub-prime problems issues as isolated for now, and we’re also watching to see if AI hyperscaler debt issuance influences market technicals.

Overview I Economy I Equity market I Bond market I AI I Housing market I Global debt