In a classic scene from the “Peanuts” fall TV special “It’s the Great Pumpkin, Charlie Brown,” Charlie meticulously rakes leaves in the yard, only for Linus to cannonball into his tall pile, undoing all Charlie’s hard work in an instant. That mix of fleeting accomplishment, frustration and looming uncertainty feels familiar to many investors today. After battling 2022’s inflation shock and the rapid rate hikes that followed, markets have enjoyed a stretch of calm. But the question now is whether 2026 could bring another unexpected flurry of volatility.
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A 2026 Natixis Institutional Outlook Survey revealed nearly two-thirds (65%) of institutional investors across the globe believe artificial intelligence will supercharge an uptick in equities next year, even though 46% are concerned about a bubble. Even so, the same survey cautioned that inflation (45%), valuations (45%) and interest rates (45%) are tied as the top portfolio threats heading into 2026.
Geopolitics are also a top concern of investors highlighted in the Natixis survey, and as a result, 81% of North American institutions are bullish on defense stocks. Many believe AI’s growth will open investors to new geopolitical risks.
Here are the major factors impacting financial markets that you’ll want to watch going into the new year:
— Inflation: Down but maybe not out.
— Valuations: How much good news is already baked in?
— Interest rates: The path down won’t be straight.
— Positive surprises investors may not anticipate now.
Inflation: Down but Maybe Not Out
In his speech at the Central Bank of Chile on Nov. 21, New York Fed President John C. Williams referenced how inflation has declined from around 7.25% in mid-2022 to its current level of close to 2.75%. He added that the Fed’s monetary policy is “very focused on balancing the downside risks
to our maximum employment goal and the upside risks to price stability. My assessment is that the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat.”
Still, the Federal Open Market Committee minutes for October exposed mixed, divided assessments among officials on whether a slowdown in labor growth or stubborn inflation were the biggest threats to the economy.
Joe Davis, global chief economist for Vanguard, maintains, “Economic growth is expected to keep U.S. inflation somewhat persistent, remaining above 2% by the close of 2026.”
Valuations: How Much Good News Is Already Baked In?
The S&P 500 delivered a strong 16.45% year-to-date return through Nov. 28, driven in large part by excitement around AI and the “Magnificent Seven,” which account for roughly 35% of the index’s gains.
The pressing question now is whether the broader market, beyond just the largest U.S. companies, has room to run.
“AI is the obvious long-term trend that is having a major impact in the shorter term. AI capex spending was a key driver of economic growth this year, and now AI is starting to drive layoffs,” says Kristina Hooper, chief market strategist for alternative investment management firm Man Group. Hooper compares today’s AI hyperscaler boom to the late-1990s tech expansion and suggests that the biggest opportunities may lie not only within tech but in adjacent industries poised to benefit from AI’s broad adoption.
Davis agrees that AI could shape earnings in profound ways: “The ongoing wave of AI-driven physical investment is expected to be a powerful force, reminiscent of past periods of major capital expansion such as the development of railroads in the mid-19th century and the late-1990s information and telecommunications surge.”
Vanguard estimates up to a 60% chance that the U.S. economy will reach 3% real gross domestic product growth in coming years, well above most professional forecasts.
Interest Rates: The Path Down Won’t Be Straight
After peaking at a range of 5.25% to 5.5% in July 2023, the Fed’s benchmark rate range has fallen to 3.75% to 4%. The road ahead for additional cuts, however, is uncertain.
As of early Dec. 1, the CME FedWatch tool shows interest rate traders pricing in about a 39% probability that rates will fall a full percentage point or more by the Oct. 28, 2026 meeting, lower than the Fed’s own median projection of 3.4% for 2026 (released in September 2025).
“I think there is an enormous amount of uncertainty around what the Fed will do next year. We do know that by May, the composition of the Fed will be more dovish. And I do believe the economy will fall into at least a modest recession next year, which would mean the Fed is likely to ease monetary policy meaningfully. My expectation would be three to four rate cuts in 2026,” comments Hooper.
Steve Dean, chief investment officer for Compound Planning, who once conducted economic research for the Fed, also anticipates a few rate cuts next year: “I expect two to three cuts in 2026, but that could change if inflation appears more stubborn beyond one-time tariff impacts and employment and growth remain solid overall.”
Positive Surprises Investors May Not Anticipate Now
For all the worries about another gust of inflation or volatility blowing through the markets, 2026 may also bring a few welcome surprises. Dean comments, “Real estate has been a lagging sector the past several years and could present an opportunity for a rebound.”
Hooper adds, “European equities are an opportunity that most investors have ignored. Valuations are far more attractive for European stocks than they are for U.S. stocks, and dividend yields are higher on average.”
Looking out further on the horizon, Vanguard sees the strongest risk-return profiles across public investments over the coming five to 10 years are (in order): high-quality U.S. fixed income, U.S. value-oriented equities and non-U.S. developed markets equities.
Just as Charlie Brown can’t subdue the leaves in his yard, investors can’t control when the next batch of volatility and uncertainty will manifest in the market. What investors can control is preparation: thoughtful diversification, disciplined risk management and a plan built for all seasons.
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2026 Investment Outlook: Plan for All Seasons originally appeared on usnews.com
Update 12/01/25: This story was published at an earlier date and has been updated with new information.
