2025 was another exceptional year for stocks, with all major market indices up double digits – and then some. The S&P 500 Index finished the year up 17.8%, the Dow Jones Industrial Average up 14.9%, small/mid-cap stocks finished up approximately 12%, and international stocks led the pack, with the Vanguard Total International Stock Index up 32%.

For 2026, we continue to believe the path of least resistance for global equities is up. The same fundamental tailwinds – namely strong earnings growth, a resilient economy, stable to lower interest rates, and a powerful AI investment boom – remains very much intact.

Let’s briefly touch on all.

A Resilient Economy
GDP growth is expected to climb 2-3% in 2026 aided by tax cuts, de-regulation, and an expected $100 billion in tax refunds to consumers between now and June.¹ Yes, employment growth has been stagnant – 2025 generated the lowest number of jobs created in a non-recession year since 2003² – but much of that can be attributed to one-time government job losses. Furthermore, wage growth has been strong, with average hourly earnings up on average 3.5% year-over-year, comfortably ahead of the rate of inflation.

So, from our vantage point, the economy looks to be in good shape.

Interest Rates & Federal Reserve Independence
As I write this, the Department of Justice has launched a criminal investigation into Federal Reserve Chair, Jerome Powell, related to the $2.5 billion renovation of the Central Bank’s headquarters.

Powell – along with most economists and Wall Street firms – believe the probe is related to President Trump’s frustration over Powell not cutting interest rates as swiftly as he would have liked.

Along with the criminal probe of Jay Powell is the pending Supreme Court ruling on the ousting of board member, Lisa Cook, which is expected soon.

Powell’s eight-year term ends in May, so he has likely made his last interest rate cut, nevertheless. Currently, the consensus forecast is that the Federal Reserve will cut interest rates twice in the second half of 2026. We believe this should be an added tailwind for the markets, all else being equal.

As for his replacement, the betting markets are currently implying that former Fed Governor, Kevin Warsh, will become Trump’s pick for the new Fed Chair. I believe investors should be fine with that. Not far behind, however, is Director of the National Economic Council, Kevin Hassett, who is viewed as more amenable to President Trump’s political persuasions.

Needless to say, I believe Federal Reserve independence is of utmost importance to the economy and financial markets.

Strong Corporate Earnings
S&P 500 companies have had two years of double-digit earnings growth and, according to FactSet, are projected to have their third consecutive year in 2026, with an average consensus of 14% growth – well above the long-term average. Furthermore, earnings growth from S&P 500 Companies outside of the AI dominated Magnificent Seven are actually accelerating, a trend we view as healthy and constructive for the overall market.

Simply put, robust double-digit earnings growth, especially across the broader market, provides a strong underpinning for higher stock prices in 2026.³

I believe the market will be pleased with earnings growth anywhere north of 10%. And, if we get 10%+ earnings growth, with two interest rate cuts, and no multiple expansion, we could still get high single digits, or even double digit returns in 2026.

The Promise of AI
Since ChatGPT launched in late 2022, investors have been captivated by the promise of AI.⁴ Adoption is growing around the world, with roughly one in six people worldwide using some sort of generative AI tool like ChatGPT in 2025.⁵

Based on our research, we believe that the artificial intelligence investment boom is still probably in its relatively early stages, with spending amongst the five largest hyperscalers alone projected to grow 30% in 2026 alone.

While the investment in and adoption of AI has been dominated by the mega-cap hyperscalers, adoption among corporations is broadening. Generative AI is expected to have significant impacts across banking, healthcare, manufacturing, and logistics, and could eventually add the equivalent of anywhere from $2.6-$4.4 trillion in annual economic value according to McKinsey.⁶ Even at the lower end of this range, there is little doubt that AI is here to stay, and its impact will only broaden.

Without question, AI investment and adaptation has been a fundamental driving force behind the S&P 500’s three straight years of 15%+ returns.

I believe this trend will continue throughout 2026 – and beyond.

So, overall, stocks have plenty to like with a fine economic backdrop and accommodative Fed policy, yet there is also plenty to be worried about.⁷

The aforementioned AI earnings machine could disappoint, bringing into question our previous commentary about a transformative economic application. Geopolitical conflicts such as what is happening in Venezuela, Iran, etc. could escalate and spin out of control. Political tensions in the United States are simmering at dangerous levels. Stocks have a relatively higher tendency to underperform in a president’s second year.⁷

Inflation has been running well above the Fed’s 2% target and with too much monetary/fiscal support could cause an additional spike upward which likely would compress market multiples sharply. In fact, resurgent inflation is my biggest concern for 2026.

Stocks are expensive on an historical basis, and any significant economic weakness would negatively impact what investors are willing to pay for equities. Finally, there’s always a possibility of any “black swan” event that cannot be forecasted or foreseen that derails this bull market.

We must be prepared for sharp corrections – and even bear markets – at any time, for any reason, or no reason at all. Nevertheless, the key drivers behind our bullish outlook for stocks in 2026 are likely to persist.

To close, these are certainly pleasant days for equity investors. As the bull market enters its fourth year, we remain constructive on the outlook equities in 2026, while acknowledging many of the “what ifs” that could inject sharp volatility into the mix.

Best wishes,

Jim C. Burns, CFA
President

1 Goldman Sachs “The Global Economy Is Forecast to Post ‘Sturdy’ Growth of 2.8% in 2026.” 19 December 2025.
2 CNBC
3 Haverford Annual Economic Outlook. January 2026
4 J.P. Morgan – “2026 Outlook – Promise and Pressure.”
5 Microsoft. “Global AI Adoption in 2025 – A Widening Digital Divide.” 8 January 2026.
6 Mckinsey. The Economic Potential of Generative AI.
7 Fisher Investments, “2025 Stock Market Outlook – Part IV.” October, 2025