Overview
THE YEAR 2025 was a good example of the prevailing regime. That is, we are witnessing markets that are driven less by fundamentals and traditional business-cycle dynamics and more by fiscal and monetary policy influence. As fundamentals have taken the back seat, policy decisions have emerged as one of the most impactful forces driving market direction. What does that mean for 2026? In an environment where policy shifts and market momentum increasingly outweigh fundamentals and valuations, we believe investors should remain patient and avoid overreacting to short-term sentiment swings — as policy and momentum-driven markets cause severe fluctuations in price, which can then challenge behavioral biases. We saw this in 2025, when stock prices swung wildly from policy-induced lows to momentum-driven highs, and we expect this pattern of higher volatility to persist. The good news is that we expect policy to be a tailwind for markets. We believe monetary decision-makers will continue easing policy as economic conditions downshift and inflation remains contained. Corporate earnings may help, though there will be little room for error. Core bonds will quietly offer some value, which should be aided by a more dovish Federal Reserve (Fed). In this policy and momentumdriven market, we strongly encourage investors to look at non-correlated alternative investments. As you explore the 2026 Outlook, please know that the LPL Research team continuously monitors for these market regime shifts. We use a multitude of tools that allows us to analyze momentum, policy inputs, sentiment, fundamentals, and more to plot a course under any conditions. The market has become more complex, so we invite you to increasingly lean on us. Thank you for the trust and confidence you place in our team.
Economy
The U.S. economy is expected to experience a modest slowdown in early 2026 before rebounding later in the year. Underlying resilience from AI-driven investment and fiscal spending should help offset weaker household activity and steer the economy clear of a recession. A cooling labor market and softer consumer demand will help ease inflation, though price pressures are expected to linger. We anticipate the Fed will proceed with rate cuts gradually in 2026, balancing inflation concerns with a softening labor market.
Stocks
The bull market appears poised to extend its run in 2026, fueled by ongoing enthusiasm around artificial intelligence (AI) and further easing of monetary policy from the Fed. However, with valuations running high and mid-cycle years often bringing more volatility, gains may be more tempered in 2026. Maintain current allocations and stay patient for pullbacks to selectively increase equity exposures. Our S&P 500 fair value target range for 2026 is 7,300 to 7,400.
Alternative Investments
Given the evolving market dynamics, we continue to favor strategies that offer enhanced diversification, downside risk mitigation, and the potential for excess returns less reliant on broad market direction — specifically equity market-neutral and discretionary macro approaches. We are also more positive on merger arbitrage and private equity, which could benefit from the recent pickup in corporate dealmaking. Within private markets, we remain constructive on infrastructure and secondaries, both of which have demonstrated resilience and steady growth throughout the year
Bonds and Cash
Bonds continue to offer compelling income opportunities, with starting yields still elevated relative to historical norms. With 10-year Treasury yields anticipated to remain between 3.75–4.25% in 2026, investors should focus on income generation rather than price appreciation. As the Fed lowers short-term interest rates, returns on cash will continue to decline, making high-quality bonds with intermediate-term maturities more attractive for long-term investors.
Currencies
We remain respectful of the dollar’s long-term uptrend. The rebound in big tech leadership, pro-growth stimulus coming from the One Big Beautiful Bill Act, growing carry trade appeal in the dollar, and potential upside to economic and earnings expectations could keep the trend intact. However, the likelihood of additional monetary policy easing amid a slowing labor market, lingering trade policy uncertainty, and ongoing concerns over the sustainability of the deficit could limit upside to the upper end of the dollar’s consolidation range (107.50–110 area).
Commodities
We maintain a constructive view on commodities, while recognizing heightened uncertainty around global trade dynamics, monetary policy shifts, economic growth trajectories, and the durability of AI-driven infrastructure investment. We continue to favor precious metals, supported by our view that many of the same catalysts that drove outperformance in 2025 will continue. The administration’s shift to securing supply chains among a growing list of critical minerals should also be supportive of the broader metals market, especially for domestic producers.
Find the full Outlook here: go.lpl.com/outlook
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts may not develop as predicted. Please read the full 2026 Outlook: The Policy Engine for additional description and disclosure. This research material has been prepared by LPL Financial LLC. Tracking #831180 / LPLE #831182 (Exp. 12/26)
