Continued Growth Heading into 2026
The economic word of the year for 2025 was once again “resilience.”
The U.S. economy remains in expansionary territory (notwithstanding a likely soft 4Q 2025 GDP number from the recent government shutdown). We can thank consumers that still spend, the massive buildout of artificial intelligence infrastructure, and the lack of international retaliation for new U.S. tariffs.
Meanwhile, most major asset classes remain in uptrends. (A notable exception was bitcoin, down about 6% in 2025).
As we ponder what 2026 might have in store for investors, we remember economist Milton Friedman’s famous quote: “Monetary actions affect economic conditions only after a lag that is both long and variable.” In plainspeak, Friedman’s quote describes how the Federal Reserve’s changes in interest-rate policy take a long time (from months to years) to influence the economy. Historically, that’s generally been the case. And there’s a lot of Fed easing still working its way through the system: The Fed cut a total of one percentage point at the end of 2024 and another 0.75 percentage point in the final months of 2025.
That could prove to be a powerful tailwind for 2026. Not only would it support the economy and financial markets in the aggregate, but it could also provide some lift for some of the more cyclical, non-AI areas of the stock market. In fact, we see acceleration in earnings growth from the 493 companies in the S&P 500 that aren’t the so-called “Magnificent Seven” large tech-focused stocks. See the exhibit for annual earnings growth trends.
Exhibit: Year-Over-Year Earnings Growth of S&P 500 Companies
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management, Clayton Wealth Partners.
Wall Street still expects outsized earnings growth from the Magnificent Seven. But their expected growth rate for 2026 is lower than two of the previous three years. Meanwhile, the growth rate from the “S&P 493” is expected to accelerate for the third year in a row. In financial analysis, the level, trend, and rate of change of data are all important metrics. All else equal, this bodes well for the S&P 493.
Of course, 2026 will have its share of controversy, headwinds, and risk. Here, too, the Fed lies in front and center. In addition, some of the risks we monitored in 2025 carry over into 2026: an uneven economy increasingly supported by the spending of older and wealthier consumers, and elevated valuations of the S&P 500 and index concentration by a handful of large tech companies.
Diversification was a key factor that mitigated these risks in 2025 (and added to positive portfolio returns). Whether to reduce risk or provide additional investment opportunities, we expect diversification will come in handy again in 2026.
Bullish
- The Fed has restarted its rate-lowering campaign, providing relief for consumers and small businesses.
- Yields for fixed income and cash remain attractive.
- Credit spreads remain contained.
- Consumer and corporate balance sheets generally remain healthy.
Bearish
- Trade policy uncertainty is having a negative effect on consumer and business confidence.
- Housing affordability remains at a decades-low.
- Job growth has slowed to a standstill.
- Delinquency rates on consumer loans are rising.
- Russia-Ukraine war and other geopolitical concerns.
- China is experiencing a growth recession and deflation fears.
- Federal debt and deficits have ballooned.