Will 2026 usher in a fourth consecutive year of strong market performance? This year, we’ve crafted a three-part harmony to describe what we believe the path forward holds as investors face a mix of familiar and new challenges. Our annual Top 10 Investor Themes are intended to help investors maneuver these continuing trends as well as the key forces we expect to emerge for markets in the new year.
10. Clarity on cryptocurrency
After cryptocurrency (crypto) suffered one of its worst performing years relative to most traditional assets, with bitcoin lagging the S&P 500® by 24% in 2025, crypto investors enter 2026 with more questions than answers compared to a year ago. Momentum from the passage of stablecoin legislation in July 2025 — the Guiding and Establishing National Innovation for U.S. Stablecoins Act, or GENIUS Act — has not yet translated into further regulatory clarity for the crypto industry at large. Meanwhile, the Digital Asset Market Clarity Act of 2025, or CLARITY Act, is awaiting Senate action in early 2026.
Layers of ambiguity remain, from legal jurisdiction and money transmission to definitions and enforcement, and will likely continue to shape the crypto industry and investor opportunities. Clarity is on the horizon, but it will arrive incrementally and unevenly across regions and asset types.
9. Sustained valuation headwinds
Believe it or not, the S&P 500’s forward price-to-earnings (P/E) ratio is essentially unchanged from what it was at the start of 2025 — 21.5x on
January 1, 2025 vs. 22.0x as of January 2, 2026 — despite the impressive 18.5% return the index generated in 2025. The 10 largest stocks in the index ended 2025 at an average forward P/E ratio of 33.9x vs. 21.0x for the remaining 490 stocks. With earnings growth expected to be more than 14% in 2026, we expect a similar scenario to play out relative to 2025, in which earnings are the primary driver of market returns —not valuation multiple expansion.
That said, with valuations at elevated, albeit not bubble-territory, levels for the broad market, it is possible that markets experience the “good kind” of multiple contraction throughout 2026, i.e., one in which a sustained earnings growth acceleration ultimately leads to a net decline in valuations (the ‘E’ outpaces the ‘P’ in P/E). Overall, we expect 2026 to be a positive-returning year for markets.
8. Artificial intelligence / automation / robotics innovation
We expect artificial intelligence (AI) use cases to accelerate in 2026 as the spread of AI agents becomes more mainstream in sectors such as healthcare and financial services. The speed of innovation should also begin to show progress in hardware; industrial and consumer robotics, transportation and other areas should begin to show evidence of an upward turn in the AI innovation cycle.
Broader adoption of AI translating into efficiency enhancements could give operating margins (which are already near an all-time high of 13.6%) an additional boost in 2026 to help sustain the trajectory of earnings growth.
7. Capital expenditure-driven productivity gains
After three years of extremely concentrated capital expenditure (capex) focus on AI infrastructure and data-center construction, we expect new sources of capex demand to emerge in 2026 — a healthy evolution of the cycle, in our view. In part, this new demand and investment should be supported by the 100% bonus depreciation provision on new and used tangible assets that was part of the One Big Beautiful Bill Act passed in July 2025.
The 100% bonus depreciation provision is a powerful incentive for capex because it allows businesses to fully expense the cost of qualifying assets in the year they’re placed in service, rather than depreciating them over several years. We expect this to feed directly into nonresidential fixed investment activity, potentially helping to further boost GDP growth forecasts in 2026 (consensus 1.8% - 2% in 2026 and 4.9% for 2025) and beyond.
6. Solid fundamentals — economic and earnings growth
In contrast to the continued softening of economic data observed throughout 2025, including surveys, expectations and consumer and investor sentiment, hard economic datapoints such as GDP growth, retail sales and corporate earnings have all continued to surprise to the upside and should remain solid in 2026. Largely driven by strong wage growth and productivity gains, we expect retail spending to remain a key driver for economic growth in 2026.
After accelerating in both 2024 and 2025, we also expect S&P 500 earnings growth to continue that trend in 2026. While the AI-driven Technology sector led in 2025, we expect other sectors such as Financials and Industrials, to drive earnings growth and help profit margins make new all-time highs in 2026.
5. Steeper yield curve due to deficits and debt levels
While the Federal Reserve (Fed) has lowered its policy rate by approximately 175 basis points (bps) since mid-September 2024, the 10-year U.S. Treasury yield has actually increased by approximately 80 – 100 bps over the same period. It moved from 3.6% to a high of 4.9% and settled at 4.2% as of December 31, 2025. Since the passage of the One Big Beautiful Bill Act on July 4, 2025, the 2-year Treasury yield has declined approximately 30 bps, whereas the 30-year Treasury has only declined 3 bps. Both portions of the yield curve are steepening, which reflects continued investor concern regarding U.S. deficit and debt levels.
While Fed policy can typically influence the short end of the curve, the long end is being anchored higher by investor expectations for inflation, growth and risk. The U.S. federal budget deficit of -5.3% is still materially wider than its 30-year average of -3.9%, and the current account deficit is near the lowest level since 2007. The ongoing twin deficits should pressure long-term rates higher, even if Fed action takes short-term rates lower. Translation: the bond market is not giving policymakers a lot of room in 2026.
4. Midterm election year — change of control?
While a lot can happen between now and the November 2026 midterm elections, betting markets currently indicate that market consensus expects a change of control. Historically during the midterms, the party controlling the White House has almost always lost seats in the House of Representatives — it turned over in 20 out of the last 22 midterm elections.
A divided government, i.e., one in which the political party in the White House does not retain majority control over Congress, tends to be the most favorable outcome for the market. Markets prefer gridlock as it limits the potential for significant political surprises. A divided government has also historically generated the highest market returns, averaging in the 13%+ range.
3. Geopolitical tensions remain elevated
February will mark the fourth year of the Russia-Ukraine war, with seemingly no immediate solutions to end the conflict. Additionally, increasing tensions in the Middle East and Nigeria, as well as the strategic airstrikes and capture of Venezuelan President Nicolás Maduro at the beginning of the new year, add to the mix of geopolitical conflicts investors will likely wrestle with in 2026.
From an investor perspective, markets have historically only focused on geopolitical events for more than a few days if they materially disrupt oil production. As of this writing, we do not expect the U.S. military/law enforcement actions taken in Venezuela to do that, so while we are not betting on specific outcomes, at large, these events remain a wildcard for markets in 2026.
2. More accommodative monetary policy tools
Fed funds futures markets expect one or two 25-bp interest rate cuts in 2026, bringing the total rate-cutting cycle to approximately 200 - 225 bps since September 2024. While it looks like we are nearing the tail end of the cycle and that one or two 25-bps cuts may not sound very “accommodating” on a relative basis, there is more to the story than just rate cuts.
Indeed, we expect the Fed to utilize other tools in its policy toolkit to drive further accommodation in 2026. Examples include quantitative easing to help manage short-term financial market liquidity, tilting its balance sheet mix in favor of shorter-term Treasury holdings and away from mortgage-backed securities, as well as offering more dovish forward guidance.
A new Fed chair in 2026 (perhaps some guy named Kevin?) will likely be viewed as more dovish by markets, but the composition of the Fed in total, and which governors ultimately get reappointed, will be crucial to how monetary policy plays out from here. All of this to say, we expect monetary policy to be an important tailwind, yet again, for equity markets in 2026.
1. U.S. fiscal policy uncertainties
We expect the purple haze of fiscal policy uncertainty to continue well into 2026. Key issues on our radar include:
- The looming debt-ceiling deadline early this year
- Unresolved federal budget and appropriations that could trigger another government shutdown
- Potential shortfalls in infrastructure trust funds
- Debates over tax policy extensions/permanency
- A Supreme Court ruling on tariffs/trade policy and
- A focus on entitlement programs in a midterm election year
...... just to name a few.
Given the wide range of potential outcomes around each of these issues, we expect fiscal policy to remain quite noisy in 2026, just like it was in 2025, and to ultimately be the major driving force for global financial markets.
2026 song(s) of the year
- “Purple Haze” — Jimi Hendrix, 1967
- “The Song Remains the Same” — Led Zeppelin, 1973
- “Mr. Blue Sky” — Electric Light Orchestra, 1977
In 2025, our market anthem was Jimi Hendrix’s “Purple Haze,” which became a rather apt pick for an environment clouded by policy uncertainty. Investors were navigating a haze of mixed signals and unanswered questions about inflation, interest rates, consumer health, election outcomes, tariffs, corporate tax rates, the federal budget deficit and more. While we received some clarity as the year progressed, the metaphor was crystal clear — visibility was going to be severely limited amid the purple haze.
Fast forward to 2026, and for the first time in more than a decade of selecting musical references for the markets, you’re getting a three-part harmony this year, delivering a musical soundtrack throughout the course of the year, with expectations that uncertainties ultimately lead to blue skies by year end. For 2026, we’ve chosen the classic rock track, “The Song Remains the Same,” by Led Zeppelin and the progressive rock track, “Mr. Blue Sky,” by Electric Light Orchestra — two legendary English rock bands.
Why? Because, despite the headlines and short-term noise, the underlying melody of the market has not changed much compared to a year ago. We are entering the new year with elevated valuations and an accelerating economic and earnings growth backdrop, but the single most important driver of markets in 2026 is likely to continue to be the purple haze of policy uncertainty — until we expect it to lift toward year end.
Besides the literal interpretation of “the song remains the same,” its underlying meaning is often interpreted as a reflection on continuity and universality despite change. It suggests that while circumstances, places and experiences evolve, the essence, i.e., the “song,” remains the constant.
“Mr. Blue Sky” is widely interpreted as a celebration of optimism and renewal after a period of gloom — in our case, the purple haze of policy uncertainty.
Together, these songs convey the theme of timelessness. Life’s core truths and emotions persist even as the world shifts. Music is about the journey, not the destination. OK, maybe it’s a little bit about the destination — coming in the form of positive market returns and nothin’ but blue skies by year end!
To me, the songs are about constancy amid transformation, which makes them a powerful metaphor for markets: structural forces and long-term drivers remain largely intact, even as the market improvises around them, creating tactical asset allocation opportunities for investors in 2026. The tempo may vary but the tune is familiar.
For investors, this year’s message is simple: don’t get lost in the solos, focus on the underlying rhythm. The same enduring drivers are shaping opportunities and staying disciplined and nimble will matter more than ever. The challenge is to tune out the noise, turn up the volume and listen to the melody that endures.
