The phase in which wonder, faith, anecdotes and early use cases can shoulder once-in-a-generation valuation levels and technology buildout is coming to an end. In 2026, “show me” is likely to be the disposition of investors and financial markets. Show me that companies are seeing robust returns on artificial intelligence (AI) investments. Show me that AI capital expenditure overbuilding won’t engulf the economy. Show me that elevated stock market valuations are justified by ever-expanding profits and productivity gains. And show me that a bifurcating, “K-shaped” economy won’t follow the lower pen stroke downward.
The Federal Reserve (Fed), too, is expecting a similar level of tangible proof of the economy’s direction. Lowering the short-term policy rate from more than 5% in mid-2024 to its current range of 3.5% - 3.75% simply required balanced risks. The prospect of getting to a rate of 3% or below, however, likely requires convincing data that indicates persistent labor market weakening, even amid healthy economic growth, and that inflation is moving sustainably toward the Fed’s 2% target.
Fortunately, we believe the “show me” expectations of 2026 will be largely met. Productivity gains, supported by monetary and fiscal policies, should result in a fourth consecutive year of favorable returns. Considerations of structural change are likely to occur alongside discussions of historical averages. Risks are indeed present, and it is possible that hidden imbalances will emerge or that our expectation for long-term interest rates to remain range-bound will be jarred loose. Further, the burdensome list of proof that the market seeks could itself be indicative of an economy with a below-average ability to absorb an unexpected shock.
We expect 2026 will provide a deeper appreciation of the transformational trends that are just beginning to take place. Financial markets attempt to “price in” the impacts of an uncertain future, and the current range of expected outcomes is exceptionally broad. Ultimately, a “show me” mindset is not primarily about data but about understanding the path ahead.
