At the beginning of last year, I shared ten market predictions and committed to revisiting them at year-end. By my count, seven of the ten held up, which is a solid result in a business where precision is difficult, and outcomes are often shaped by forces no one anticipates.
I also came close to an eighth. I was right that Magnificent 7 dominance would slow, but wrong in saying the equal-weighted S&P 500 would outperform the market-cap-weighted index.
With that context, here are our ten predictions for 2026, drawing on current market expectations, economic data, and where we believe consensus views may be either too optimistic or too pessimistic.
1. U.S. Stocks Outperform Developed International Stocks
We have been overweight international stocks relative to the U.S., and that call proved correct in 2025. After years of underperformance, developed international markets finally had their moment. However, the earnings gap never closed, meaning company profits never caught up to what investors expected.
U.S. earnings outpaced those of developed international markets in 2025 and are expected to do so again in 2026. Valuations abroad remain more reasonable, but valuation alone rarely sustains outperformance if earnings continue to lag. Without stronger profit growth overseas, we think it will be difficult for developed international stocks to repeat last year’s relative success.
2. Chinese Stocks Outperform U.S. Stocks
This is a non-consensus call, and one we approach cautiously. China has disappointed investors repeatedly over the last decade, driving sentiment, positioning, and expectations to extremely low levels.
What’s changed is not that China’s challenges have disappeared, but that markets may now be pricing in an overly dire outcome. Financial conditions have begun to ease, policy has shifted incrementally toward stabilization, and investor positioning remains very defensive, meaning portfolios are structured to protect against losses rather than aggressively pursue growth. When expectations are this low, markets don’t need strong growth to perform well. They simply need outcomes to be less bad than what’s already priced in.
3. Unemployment Rises
The labor market continues to soften beneath the surface. Job openings have declined, hiring has slowed, and wage growth has moderated.
We do not expect a sharp spike in unemployment, but we do think it will trend higher over the course of the year. A strong labor market has helped the economy withstand higher interest rates (since people with jobs continue spending, even when borrowing becomes more expensive). As that strength fades, it will increasingly influence both markets and the Fed’s policy path.
4. Inflation Cools Further, Moving Closer to 2% but Not Quite Getting There
This is another non-consensus view, as many expect tariffs to push inflation meaningfully higher.
Tariffs matter, but inflation is driven by components, and several of the largest components continue to point lower. Labor cost growth (the pace at which employers’ labor expenses are increasing) has cooled, housing inflation is decelerating, and goods prices remain under pressure from excess capacity and improved supply chains. We think these disinflationary forces outweigh the temporary upward pressure from tariffs.
Inflation is likely to move closer to the Fed’s 2% mandate but not quite reach it, leaving policymakers in a difficult balancing act.
5. The U.S. Avoids a Recession in 2026
Despite rising unemployment and slower growth, we do not expect a recession in 2026.
Household balance sheets remain relatively healthy, corporate earnings are still growing, and financial conditions, while tighter than in recent years, are not restrictive enough to force a contraction. Growth slows, risks rise, but the economy stays on the right side of zero.
6. A Meaningful Mid-Year Correction and the Lowest Stock Market Returns Since 2022
We expect a substantial mid-year correction, and the lowest calendar-year returns since 2022.
Importantly, this would not be a bad outcome. Earnings are likely to grow at a double-digit pace, and a sell-off that compresses valuations while earnings continue to rise would be healthy for the longevity of this bull market.
Several factors could contribute to such a correction: the Fed remaining on hold longer than markets expect, concerns around overinvestment in AI among some mega-cap technology companies, and continued softening in the labor market. Corrections driven by valuation rather than recession risk tend to be uncomfortable, but constructive.
7. Oil Prices Move Meaningfully Lower, and Energy Is One of the Best-Performing Sectors
We think crude oil trades materially lower in 2026 and could reach the $40s at some point during the year. Global supply continues to grow, inventories are building, and it will not take much of a demand slowdown to pressure prices. This is very different from the setup of the last few years, when supply constraints dominated the narrative.
Despite that, we still like energy equities. The sector has shifted away from growth-at-any-cost and toward capital discipline and cash returns, with breakeven costs well below current prices. If oil falls because supply is ample rather than demand is collapsing, many energy companies can still generate strong free cash flow and return it to shareholders.
8. The Fed Holds Rates Steady Through the End of Powell’s Term, Then Cuts Multiple Times in the Second Half of the Year
We expect the Fed to remain patient through the first part of the year, particularly as inflation remains above target.
As the year progresses, inflation and unemployment are likely to move in opposite directions, creating the conditions for multiple rate cuts in the second half of the year. This would be less about stimulus and more about preventing policy from becoming unintentionally restrictive.
9. Bonds Recover from a Rough Start and Post a Fourth Straight Positive Year
After a difficult start, we expect bonds to recover and finish the year in positive territory.
Falling inflation, rising unemployment, and eventual Fed easing create a favorable backdrop for fixed income. While returns may not be spectacular, bonds once again play an important role as a stabilizer within diversified portfolios.
10. Small Caps Outperform Large Caps for the First Time Since 2020
Small caps remain cheaper, have higher expected earnings growth, and are beginning to show improving momentum.
Valuations are historically attractive, and the AI narrative is gradually broadening beyond mega-cap names into smaller companies that benefit indirectly through productivity gains. If earnings growth materializes and financial conditions ease modestly, small caps are well positioned to outperform.
If history is any guide, some of these predictions will prove correct, others won’t, and at least one will be overtaken by an event no one is currently discussing. If you’d like to talk through how our portfolios are positioned in light of these views, we’re always happy to go deeper.
Christian
