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Investors are starting 2026 with high return expectations after a year of extraordinary performance. In 2025, U.S. equity markets delivered double-digit gains for the sixth time in seven years, yet still underperformed international equities. The U.S. bond market also posted solid gains, delivering its best performance since 2020.1
While the results were encouraging, the journey was uneven. In 2025, markets contended with tariff announcements, economic policy uncertainty, geopolitical tensions, and a shifting U.S. economy. These factors resulted in periods of significant volatility and several sharp pullbacks. By year-end, however, investors who remained focused on long-term goals and avoided reactionary decisions were rewarded with meaningful progress. As a result, many enter the new year in a stronger position, with greater financial flexibility.
Strong markets, however, can carry a hidden risk: rising expectations. After several years of above-trend growth, markets may be entering a more normalized phase that rewards patience, selectivity, and discipline, rather than momentum. The key question is not whether and how much markets will rise in 2026, but how investors can maintain perspective, manage risk thoughtfully, and continue moving forward amid change.
Source: YCharts
2026 Outlook: Seven Key Themes for Long-Term Investors
With the investment landscape potentially shifting, we believe the 2026 outlook is best approached through a set of guiding themes, rather than precise predictions. These themes, outlined below, help frame expectations, highlight risks, and reinforce the importance of discipline and planning.
1. Diversification Is In Favor Again
For much of the past decade, U.S. equities dominated returns and diversification often felt unnecessary. That dynamic shifted in 2025, when international equities and bonds outperformed their U.S. counterparts. The S&P 500 returned 17.9% while the MSCI EAFE delivered a notably stronger 31.2%. Likewise, international bonds, represented by the Bloomberg Global Agg ex U.S., gained 8.9% compared with a 7.3% return from the Bloomberg U.S. Agg.1
Source: YCharts
Market volatility during the year served as a reminder that diversification does not eliminate risk, but it can help smooth outcomes and reduce reliance on any single market or asset class. Leadership cycles are difficult to predict, but history shows that market leadership changes over time. Maintaining global diversification is not about chasing recent performance. Instead, it is about building resilience across different market environments.
2. Stock Valuations Are Elevated
Strong market performance has pushed equity valuations higher, particularly in the United States. The S&P 500 Index now trades at a forward price-to-earnings ratio of 22x near the upper end of its historical valuation range, reflecting optimism about earnings growth, innovation, and economic resilience.1
Source: YCharts
Elevated valuations are worth noting, but they do not signal an immediate market decline. Markets can remain expensive for extended periods, especially when earnings continue to grow. However, higher valuations tend to change the forward return profile, often leading to greater volatility and a more modest return outlook. In this environment, balance and selectivity matter more than momentum.
Source: YCharts
3. Artificial Intelligence Continues to Drive Growth, But Expectations Are Higher
Artificial intelligence (AI) remains one of the most influential forces shaping markets and the global economy. Investment in infrastructure and development continues at a rapid pace, and AI’s long-term potential remains significant.
As the AI market begins to mature, however, investors are seeking to differentiate among companies. Execution, profitability, and financial discipline are increasingly important. Moreover, because diversified portfolios already have meaningful exposure to the AI investment theme through broad market indices, it is critical to avoid excessive concentration in related stocks.
4. Economic Growth Remains Positive, But Uneven
Consumer spending held up better than many expected in 2025, supporting overall activity despite elevated interest rates and affordability pressures. At the same time, U.S. GDP growth is gradually reverting toward longer-term trend levels between 1.8–2.3% per year. This transition can feel uncomfortable, but it does not signal economic weakness. For investors, it reinforces the importance of separating broader economic signals from individual experiences and avoiding overreaction to short-term data points.1
5. Tariff and Trade Concerns Are More Nuanced Than Headlines Suggest
Trade policy and tariffs drew significant attention in 2025, raising concerns about inflation, growth, and supply chains. While these issues remain relevant, their economic impact has been more muted than many initially feared.
Despite tariff-related noise, inflation remained relatively stable and growth continued. Businesses and markets adapted over time by adjusting supply chains and pricing. It is also worth noting that if existing tariffs were overturned by the Supreme Court, such a development could prove to be an additional stimulus for equity markets overall. The key lesson for investors is to avoid reacting to policy announcements in isolation. Long-term investment outcomes are shaped by how markets respond, not by headlines alone.
6. Political Developments Will Create Headlines, Not a Market Roadmap
The year ahead will bring no shortage of political news, including midterm elections, ongoing discussions about government debt, and changes to tax policy. While these developments matter for planning, history shows that markets have advanced across a wide range of political environments.
Attempting to position portfolios around political outcomes has rarely proven effective. What investors can control is ensuring that financial plans remain flexible, tax-aware, and aligned with long-term objectives as policies evolve.
7. The Federal Reserve Will Continue to Support The Economy
Monetary policy will remain an important focus in 2026, particularly as markets adjust to a more stable interest-rate outlook. As inflation pressures ease, interest rates are becoming less of a headline risk and more of a portfolio input.
Later this year, the Federal Reserve (Fed) is expected to transition to new leadership. While any change at the Fed draws attention, history shows that economic growth and market progress have persisted across multiple chairs and policy regimes. The institution’s broader mandate, rather than any single individual, has typically mattered far more for long-term outcomes.
This environment has improved the opportunity set across both equities and fixed income. After years when price appreciation dominated returns, portfolio income is likely to contribute a larger share of total returns going forward.
Maintaining Perspective and a Focus on Long-Term Goals
One of the most consistent lessons from market history is that the risks investors fear most often fail to materialize as expected. This does not mean risks should be ignored. Elevated valuations, global uncertainty, and uneven growth all warrant attention.
After a strong run in markets, this is an appropriate time to step back, review financial plans, and ensure portfolios remain aligned with goals, risk tolerance, and time horizon. For many investors, this includes reviewing asset allocation, rebalancing portfolios that have drifted, and reassessing the role of income within portfolios. These steps are often most effective when taken proactively rather than during periods of market stress.
After last year’s strong returns, markets in 2026 face a higher bar than in previous years. Expectations are elevated, leadership may continue to rotate, and uncertainty will remain a constant feature of the investment landscape. Even so, the principles that support long-term success remain unchanged. Diversification, discipline, and a focus on long-term goals continue to matter.
As always, we are grateful for your trust and remain focused on helping you navigate the year ahead with clarity and confidence.
1 YCharts
Cary Street Partners is the trade name used by Cary Street Partners LLC, Member FINRA/SIPC; Cary Street Partners Investment Advisory LLC and Cary Street Partners Asset Management LLC, registered investment advisers. Registration does not imply a certain level of skill or training.
Any opinions expressed here are those of the authors, and such statements or opinions do not necessarily represent the opinions of Cary Street Partners. These are statements of judgment as of a certain date and are subject to future change without notice. Future predictions are subject to certain risks and uncertainties, which could cause actual results to differ from those currently anticipated or projected.
These materials are furnished for informational and illustrative purposes only, to provide investors with an update on financial market conditions. The description of certain aspects of the market herein is a condensed summary only. Materials have been compiled from sources believed to be reliable; however, Cary Street Partners does not guarantee the accuracy or completeness of the information presented. Such information is not intended to be complete or to constitute all the information necessary to evaluate adequately the consequences of investing in any securities, financial instruments, or strategies described herein.
Cary Street Partners and its affiliates are broker-dealers and registered investment advisers and do not provide tax or legal advice; no one should act upon any tax or legal information contained herein without consulting a tax professional or an attorney.
We undertake no duty or obligation to publicly update or revise the information contained in these materials. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of securities, or information about the market, as indicative of future results.
International and foreign securities are subject to additional risks such as currency fluctuations, political instability, differing financial standards, and the potential for illiquid markets.
Fixed income investments have several other asset-class specific risks. Inflation risk reduces the real value of such investments, as purchasing power declines on nominal dollars that are received as principal and interest. Interest rate risk comes from a rise in interest rates that causes a fixed income security to decline in price in order to make the market price-based yield competitive with the prevailing interest rate climate. Fixed income securities are also at risk of issuer default or the markets’ perception that default risk has increased.
Comparative Index Descriptions: Historical performance results for investment indices have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings do or will correspond directly to any comparative indices. An investor cannot invest directly in the indices shown, and accurate mirroring of the indices is not possible.
The Standard & Poor’s (S&P) 500 Index is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market.
The MSCI EAFE Index is a stock market index that measures the performance of large- and mid-cap companies across 21 developed markets countries around the world. Canada and the USA are not included. EAFE is an acronym that stands for Europe, Australasia, and the Far East.
The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market.
The MSCI Emerging Markets is a global stock market index that tracks the performance of large and mid-cap companies across 24 emerging markets. It is maintained by MSCI, formerly Morgan Stanley Capital International, and is used as a common benchmark for global emerging market stock funds.
Dow Jones Industrial Average® (Dow Jones or DJIA) is a stock market index representing the price weighted average of 30 large, publicly owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The component stocks are accorded relative importance based on the prices, unlike other indices which weight by market capitalization. The companies in the DJIA are leaders in their industries, and their stocks are widely held by individuals and institutional investors.
The “Magnificent Seven” refers to a group of seven high-performing, influential stocks in the technology sector. Alphabet (GOOGL; GOOG), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), NVIDIA (NVDA), and Broadcom (AVGO).
The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond) is a market capitalization weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most US traded investment grade bonds are represented. Municipal bonds and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, mortgage-backed bonds, corporate bonds, and a small number of foreign bonds traded in the US. CSP2026003
