2026 EdgeRock Outlook

Time marches on. Along with it? Markets and the economy.

As another year draws to a close, we take a moment to reflect on the last 12 months—where we thought we would be and how we thought we were doing just a few months ago. 2025 wasn’t a quiet year by any stretch, and 2026 isn’t setting up to be any less notable. Let’s dive into some of the key details.

Here’s what’s inside:

• 2025 Retrospective
• The Year Ahead: A 2026 Outlook
  • Public Equities
  • Inflation
  • Labor Market
  • The Weaker Dollar
  • Geopolitics
  • What to Expect
• In Summary

A 2025 Retrospective

At the end of 2024, many predicted that the Federal Reserve would cut rates by an additional 125 bps in 2025. As of this writing, the Fed has only cut twice—totaling 50 bps—and Fed Funds futures show just a 40% probability of another 25 bps cut in December. The reasons are straightforward: Inflation remains stubborn, and while the labor market has been resilient, cracks are beginning to appear. 

The government shutdown has delayed access to fresh data, but the August PCE release—the Fed’s preferred inflation gauge—showed headline inflation up 2.7% year-over-year, with Core PCE even hotter at 2.9%.

The S&P 500 is up 16% year to date, but the headline number hides the drama. After tariffs were announced in April, domestic markets plunged into correction territory before roaring back once policy guidance softened. 

Since the April 8th bottom, markets are up more than 30%. For context, a typical move over this period is closer to 4%. While not as explosive as the post-GFC or post-COVID recoveries, it still sits comfortably in “serious bull‑run” territory. As one advisor observed, “You don’t have to worry about the arson if the arsonist is also the firefighter.”

We expected market breadth to expand in 2025, led by domestic small and mid‑caps. That didn’t happen. Small caps are up 6.2% YTD—mostly from flows rather than fundamentals—while mid‑caps are up just 2%. 

Surprisingly, international developed equities have rallied more than 26% YTD. When adjusting for dollar weakness—responsible for roughly half the return—international developed markets are performing on par with U.S. large caps. Not what we forecast, but a welcome reminder that diversification can work.

Gold is stealing the show. GLD is up 54% this year, extending a powerful rally that began in early 2024. Gold has now outperformed the S&P 500 over the past 5‑ and 10‑year periods. The drivers: a weaker dollar, inflation concerns, foreign central bank buying, and geopolitical anxiety. Gold often shines over specific windows, but over 30 years its 8% annualized return still trails both real estate and the S&P 500.

What’s in store for 2026?

Public Equities

The S&P 500 trades at 24x next year’s earnings—well above the 10‑year average of 18.6x. Meanwhile, just four companies (Nvidia, Apple, Microsoft, and Amazon) make up 26% of the index. While valuation and concentration are unreliable predictors of future returns, it’s unlikely that investors will continue to benefit from further multiple expansion. That leaves earnings growth to carry the load. Consensus expects mid‑teens EPS growth in 2026, with earnings rising to roughly $300–315 per share vs. the high $260s in 2025. 

Roughly half of the expected earnings growth comes from technology—driven heavily by AI‑platform and AI‑infrastructure leaders. In practice, about half of the S&P’s expected earnings gains in 2026 hinge on continued outperformance from a very small group of AI companies.

Is this a bubble? Hard to say. On one hand, hyperscalers funding AI infrastructure are well‑capitalized, cash‑generating, and far from the sky‑high valuations seen in the dot‑com era. On the other hand, the sheer volume of capital pouring into AI—some of it circular—invites inefficiencies. 

Markets are famously impatient, and returns on this massive investment may not arrive in the neat, linear manner investors hope for. Transformational technologies tend to be overstated early and understated later. In that sense, the collective anxiety in tech is understandable—and given index concentration, it will continue to drive near‑term returns.

Inflation

Inflation remains above the Fed’s 2% target, though this target has always been somewhat arbitrary (borrowed from New Zealand’s central bank in the early 1990s). Historically, inflation has averaged 3.2% since 1959, except in the post‑GFC period. In that context, today’s inflation looks like a return to normal—especially with the Fed ending quantitative tightening and money supply expanding again.

If inflation is ultimately a monetary phenomenon, this matters.

The Labor Market

Labor market data is showing real softening. The headline U3 unemployment rate only counts people actively looking for work and excludes discouraged workers and involuntary part‑timers. The broader U6 measure—which includes discouraged workers, marginally attached workers, and involuntary part‑timers—now stands at 8.0%, up nearly a full percentage point since early 2024. 

U3 has risen more modestly, from 3.7% to 4.4%. There’s also a less‑discussed risk: If large numbers of non‑citizen workers leave the U.S. and are not immediately replaced (or aren’t quickly adjusted for in population controls), even U6 could be temporarily understated.
Corporate anecdotes also show a K‑shaped environment: high‑income consumers and older Americans are doing well, while lower‑wage and younger workers are pulling back. The risk here is the wealth effect—when assets rise, spending rises; if markets decline meaningfully, higher‑earning consumers may reduce spending, pressuring GDP.

The Weaker Dollar

The dollar has fallen 7.8% YTD against a basket of foreign currencies and declined more than 10% in the first half of 2025—one of the sharpest six‑month drops since the 1970s. 

The drivers? The Fed pivot, improving global growth, falling real yields, fiscal concerns, rising risk appetite, and relative outperformance abroad. These forces could persist, but not in a straight line. We believe the major depreciation phase is behind us. 

From here, currency moves should be more two‑sided and driven by actual Fed cuts and the strength (or disappointment) of non‑U.S. growth. Current dollar weakness is a reason to diversify internationally, not a high‑conviction bet that the USD will continue falling at the same pace.

Geopolitics

Geopolitics remain noisy heading into 2026. U.S.–China tensions over advanced technology, semiconductor supply chains, and Taiwan create a persistent background risk that could erupt into short‑term volatility or remain a simmering stalemate. Middle Eastern tensions continue to threaten energy flows, though markets are not concerned. Russia’s ongoing war in Ukraine and Europe’s uneven defense and energy posture add further uncertainty. 

These risks can pull markets in both directions: escalating tensions could trigger safe‑haven flows and pressure valuations, while steady‑state uncertainty may simply extend the “wall of worry” that markets have been climbing. The net effect is ambiguous: geopolitics could cause short‑lived volatility or, in a true shock, a meaningful repricing of global risk assets.

What can we expect?

Looking ahead, we expect some combination of inflation running around 3% and lower interest rates. That reality raises the hurdle rate for investors. Our three basic rules still apply: (1) Don’t lose money, (2) keep pace with inflation, and (3) earn a real return. With credit spreads extremely tight—meaning fixed income investors aren’t being compensated appropriately for credit risk—traditional public fixed income cannot play as large a role in portfolios as it has in the past. This naturally pushes investors further out the risk spectrum, toward equities and select private assets.

In Summary

We enter 2026 with cautious optimism. It’s more enjoyable to be bullish—and the data still warrant a constructive stance. But this environment requires discipline. Thematic diversification matters. It’s entirely reasonable to lean into AI (which is increasingly synonymous with the S&P 500), but that exposure should be balanced with assets tied to “atoms,” not algorithms: real estate, industrials, infrastructure, materials, and targeted private investments, potentially even those outside USD. The data are good, the anxiety is real, and the party continues—for now. The goal is to enjoy it while keeping risk management front and center.