2026 Outlook Preview

1. Happy Holidays As the year winds down, we’d like to wish everyone a happy and healthy holiday season. This will be our final Market Note of 2025, and we’re excited about the opportunities that lie ahead in 2026. This week’s Market Note also serves as a preview of our upcoming Investment Solutions webinar, which will take place on January 5th at 4:00 PM ET, where advisors and clients will have the opportunity to join us for a deeper discussion on these themes and the outlook for the year ahead.

2. Economy Resilience Despite the “TGIF” Backdrop The U.S. economy continues to push forward in the face of considerable uncertainty, what we often shorthand as “TGIF”: tariffs, geopolitical risk, inflation, and the Fed. While none of these headwinds have fully disappeared, the economy has proven remarkably durable in navigating through them. Tariffs remain in place, geopolitical tensions persist, inflation is still above target, and the Federal Reserve, while now cutting rates, remains a source of uncertainty as markets look ahead to 2026 and a new Fed Chair expected to be announced early next year. Yet, growth has not meaningfully slowed.

According to the Atlanta Fed’s GDPNow tracker, growth is running at 3.5%, well above trend. That strength is being driven by two primary forces: the consumer and artificial intelligence. Importantly, AI is neither a fleeting trend nor a speculative bubble, it is a durable, multi-year driver of economic activity.

3. AI Is a Whole-Economy Story AI demand is not confined to the largest technology platforms. What makes this cycle different is the breadth of participation across the entire AI food chain. Companies involved in data center construction, power generation, grid modernization, automation, and industrial infrastructure are all seeing meaningful increases in spending and backlogs. These investments are creating powerful tailwinds for economic growth and productivity. The AI buildout is touching nearly every corner of the economy, reinforcing the view that this is a foundational shift rather than a narrow tech cycle.

4. Inflation Is Cooling Alongside solid growth, inflation is showing real progress. The most recent CPI report marked the lowest core CPI reading since March 2021. Core inflation now stands at 2.6% annually, below expectations of 3%.^[1] While inflation remains above target, the direction is improving.

Productivity gains, many of them tied to AI adoption, should continue to help absorb cost pressures over time. Even with some data distortions from government shutdown-related timing issues, the broader trend points toward gradual disinflation alongside continued growth.

5. A Healthier Market Structure Emerges In the near term, seasonal dynamics may also play a role. The ‘Santa Claus Rally’, which historically runs from the day after Christmas through the second day of January, could provide additional momentum. But more important than short-term seasonality is what’s happening beneath the surface.

The market is finally beginning to broaden out. Over the past two months, the top 25 performing stocks in the S&P 500 declined by roughly 120 basis points, while the rest of the market moved higher. That shift is healthy. Leadership is expanding beyond a narrow group of mega-cap technology stocks, and other sectors are starting to participate more meaningfully.

6. Insights Heading Into 2026 The consumer remains a critical pillar of the current expansion. While spending continues to follow a K-shaped pattern, where middle and higher-income households remain in a stronger position, the overall backdrop is supportive. Employment remains healthy, wage growth is running near 3.5%–4%, and the wealth effect from rising equity markets and home prices continues to bolster household balance sheets. Retail sales continue to surprise to the upside, the retail control group recently doubled expectations, and credit card data points to spending growth near 4%. Importantly, delinquencies and net charge-offs are beginning to improve.

Financials represent another area with an attractive setup into 2026. The outlook is supported by increasing deregulation, a steeper yield curve that should benefit net interest income, and continued strength in capital markets activity. Global M&A volumes are up 28% year over year to $4.2 trillion^[2], providing a meaningful tailwind for banks and financial services firms.

Hard assets are also responding to accelerating global growth. Gold, silver, copper, and other industrial metals have moved higher as economic activity expands. While copper remains the preferred exposure given its central role in electrification and infrastructure, the strength in silver is particularly notable as it signals improving industrial demand.

Finally, artificial intelligence remains a durable, long-term theme. AI investment is not confined to technology companies alone; it spans the entire ecosystem, from data centers and power infrastructure to automation and industrial applications. While periodic volatility and dislocations are inevitable, they are likely to create opportunities rather than undermine the broader trend. Backlogs across the AI supply chain are historically elevated, and CEO confidence remains high, underscoring the scale and durability of this investment cycle.

7. Fixed Income U.S. Treasury yields declined across the curve last week after November’s CPI report showed inflation easing more than expected. The softer inflation data strengthened expectations for potential Federal Reserve rate cuts, prompting markets to price in a more accommodative policy outlook and pushing yields lower. By the close of the week, the 2-, 10-, and 30-year yields were lower by 4, 4, and 2 basis points, respectively.^[3]

Credit markets continued to firm last week, supported by a cooler than expected November CPI print. Investment grade spreads tightened by 2 basis points to +111, while high yield spreads narrowed by 1 basis point to +340. Year to date, investment grade spreads are 9 basis points tighter, whereas high yield spreads remain 17 basis points wider despite the year’s elevated volatility. Concurrently, U.S. credit quality deteriorated last week as the main rating agencies issued 49 downgrades versus 21 upgrades. The Industrial sector led in upgrades, whereas the Consumer Discretionary Sector saw the highest number of downgrades. The Municipal yield curve continued to steepen last week. Short and Intermediate-term yields fell 1-2 basis points, while long-term yields ended the week unchanged.^[4]

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Return for Selected Indices^[5]

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, as a member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.