Outlook 2026

2026 Outlook: The Policy Engine

As we move into 2026, investors should anticipate a continuation of many of the key themes that defined 2025. The broader environment is likely to remain characterized by an equity market showing underlying resilience but also prone to occasional bouts of volatility, a fragmented economic backdrop that keeps the bond market from trending meaningfully in either direction, and a policy landscape in Washington that continues to exert a dominant influence on both sentiment and market direction. Though the calendar is changing, these same core forces, we believe, will continue to broadly shape things.

The post-pandemic economic cycle remains distorted, with traditional indicators now offering only limited guidance. More specifically, the economy is being impacted by the lingering effects of years of wartime-level fiscal spending, a powerful capital investment boom driven by artificial intelligence (AI), and the still-unfolding impacts of a generational shift toward higher tariffs. The result is a macroeconomic environment that defies conventional patterns: growth is steady but uneven; consumer spending proves resilient but only among higher-income households; inflation remains persistently above target yet contained; and labor markets are tight though gradually softening. We expect these dynamics to mostly persist in 2026. While certain areas of the economy stand to gain from the wealth effect and the ongoing AI infrastructure buildout, others may face real challenges as capital continues to get redirected away. Monetary policy adds another layer of complexity. As the Federal Reserve (Fed) moves further toward normalization, the effects of lower interest rates may prove uneven — much as they did when rates were rising. While continued easing should bring much needed relief to debt-burdened lower-income households, the implications for higher[1]income consumers, who drive much of total spending, are less clear. There is also the potential for a change in the makeup of the Federal Open Market Committee (FOMC), which could alter the future path of interest rates.

Investors also need to remain prepared for periodic episodes of market volatility. The market’s sensitivity to headline risk is no doubt being amplified by a policy-driven environment in which government actions play an increasingly pivotal role. While supportive government measures can bolster stability and complement private-sector momentum and trends, they also introduce a duality where even minor policy shifts can quickly become headwinds. Compounding this is the growing concentration within the major equity indexes themselves. The strong performance and innovation of a small group of mega cap technology companies have played a vital role in driving returns over the last three years. However, their rapid growth and their now outsized weight in the indexes also brings with it an increased sensitivity to company-specific risks at the broad market level. While this change in underlying market structure has clearly contributed to impressive gains, it also raises the potential for higher degrees of market volatility moving forward.

Given the rapidly changing investment landscape, we advocate for a disciplined, diversified strategy — especially when diversification feels out of favor, as that’s historically when it proves most valuable. This means spreading your portfolio across a broad range of asset classes, market segments, and global regions to manage risk and find new sources of return. We also continue to believe in enhancing portfolio resilience with stabilizers like alternative investments. Moreover, investors should remain agile and attentive; transitional market phases often create the most favorable entry points into equities. Given the strong potential for continued equity performance into 2026, treat these moments as clear opportunities for long-term positioning.

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Disclosures

The opinions, statements, and forecasts presented herein are general information only and are not intended to provide specific investment advice or recommendations for any individual. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. There is no assurance that the strategies or techniques discussed are suitable for all investors or will be successful. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Any forward-looking statements, including the economic forecasts herein may not develop as predicted and are subject to change based on future market and other conditions. All performance referenced is historical and is no guarantee of future results. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Precious metal investing involves greater fluctuation and the potential for losses. Any company names noted herein are for educational purposes only and are not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All index data from FactSet or Bloomberg as of July 8, 2025. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

GENERAL RISK DISCLOSURES

Investing involves risks, including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing in foreign and emerging markets debt or securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Investors can get exposure to crypto assets through exchange-traded products (ETPs) and publicly traded companies that are involved in crypto asset-related activities. Crypto assets can be exceptionally risky and are often extremely volatile. They may lack the robust regulatory protections and market oversight that traditional investments have and lack the key information that investors need to make informed decisions. Information provided might not be accurate. Crypto assets are less liquid than more traditional financial instruments, like stocks and bonds, which can exacerbate price volatility and make it more difficult to sell. In addition, fraud and scams involving crypto assets are common. The risk of losing all of an investment is significant.

GENERAL DEFINITIONS

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory. The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with a lower PE ratio. Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio. The Standard & Poor’s 500 Index is a capitalization[1]weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds. The Bloomberg Commodity Index is made up of 24 exchange-traded futures on physical commodities, representing 22 commodities which are weighted to account for economic significance and market liquidity. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. A company’s market capitalization is the market value of its outstanding shares. Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. Classifications such as large cap, mid cap, and small cap are only approximations and may change over time.

EQUITY RISK

Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. The prices of small and mid-cap stocks are generally more volatile than large cap stocks.

EQUITY DEFINITIONS

Cyclical stocks typically relate to equity securities of companies whose prices are affected by ups and downs in the overall economy and that sell discretionary items that consumers may buy more of during an economic expansion but cut back on during a recession. Counter-cyclical stocks tend to move in the opposite direction from the overall economy and with consumer staples, which people continue to demand even during a downturn. Growth stocks are shares in a company that are anticipated to grow at a rate significantly above the average for the market due to capital appreciation. A value stock is anticipated to grow above the average for the market due to trading at a lower price relative to its fundamentals, such as dividends, earnings, or sales. Value stocks are anticipated to grow above the average for the market due to trading at a lower price relative to its fundamentals, such as dividends, earnings, or sales. Large cap stocks are issued by corporations with a market capitalization of $10 billion or more, and small cap stocks are issued by corporations with a market capitalization between $250 million and $2 billion.

FIXED INCOME RISKS

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and changes in price. Bond yields are subject to change. Certain call or special redemption features may exist, which could impact yield. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate, and credit risk, as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features. Mortgage-backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

FIXED INCOME DEFINITIONS

Credit quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. As the term implies, credit quality informs investors of a bond or bond portfolio’s credit worthiness, or risk of default. Credit ratings are published rankings based on detailed financial analyses by a credit bureau, specifically as it relates to the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade. The credit spread is the yield the corporate bonds less the yield on comparable maturity Treasury debt. This is a market-based estimate of the amount of fear in the bond market. Base-rated bonds are the lowest-quality bonds that are considered investment-grade, rather than high[1]yield. They best reflect the stresses across the quality spectrum. Bloomberg U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment[1]grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

FIXED INCOME ASSET CLASSES

Mortgage-backed Securities (MBS) are secured by a collection of mortgages, referred to as a pool. The mortgages are “securitized”, or packaged, together and can be sold to investors. In this structure, interest and principal payments from the borrower pass through to the MBS securities holder. Mortgage[1]backed securities are subject to credit, default, prepayment, extension, market and interest rate risk. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. As interest rates rise, the price of the preferred falls (and vice versa). They may be subject to a call feature with changing interest rates or credit ratings. Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free, but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors. The fast price swings in commodities will result in significant volatility in an investor’s holdings.

CRYPTOCURRENCY RISKS

Investors can get exposure to crypto assets through exchange-traded products (ETPs) and publicly traded companies that are involved in crypto asset-related activities. Crypto assets can be exceptionally risky and are often extremely volatile. They may lack the robust regulatory protections and market oversight that traditional investments have and lack the key information that investors need to make informed decisions. Information provided might not be accurate. Crypto assets are less liquid than more traditional financial instruments, like stocks and bonds, which can exacerbate price volatility and make it more difficult to sell. In addition, fraud and scams involving crypto assets are common. The risk of losing all of an investment is significant.

ALTERNATIVE INVESTMENT RISKS AND ASSET CLASSES

Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Hedge funds are private investment partnerships that pool funds. Hedge funds use varied and complex proprietary strategies and invest or trade in complex products, including listed and unlisted derivatives. Managed futures are speculative, use significant leverage, may carry substantial charges, and should only be considered suitable for the risk capital portion of an investor’s portfolio. Private credit is non-publicly traded debt instruments created by non-bank entities, such as private credit funds or business development companies (BDCs), to fund private businesses. Event-driven strategies, such as merger arbitrage, consist of buying shares of the target company in a proposed merger and fully or partially hedging the exposure to the acquirer by shorting the stock of the acquiring company or other means. This strategy involves significant risk as events may not occur as planned and disruptions to a planned merger may result in significant loss to a hedged position.

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