Outlook 2026: The Policy Engine

Economy

The U.S. economy is expected to experience a modest slowdown in early 2026 before rebounding later in the year. Underlying resilience from AI-driven investment and fiscal spending should help offset weaker household activity and steer the economy clear of a recession. A cooling labor market and softer consumer demand will help ease inflation, though price pressures are expected to linger. We anticipate the Federal Reserve (Fed) will proceed with rate cuts gradually in 2026, balancing inflation concerns with a softening labor market.

Stocks

The bull market appears poised to extend its run in 2026, fueled by ongoing enthusiasm around AI and further easing of monetary policy from the Fed. However, with valuations running high and midterm election years often bringing more volatility, gains may be more tempered in 2026. Maintain current allocations and stay patient for pullbacks to selectively increase equity exposures. Our S&P 500 fair value target range for year-end 2026 is 7,300 to 7,400.

Bonds

Bonds continue to offer compelling income opportunities, with starting yields still elevated relative to historical norms. With 10-year Treasury yields anticipated to remain between 3.75–4.25% in 2026, investors should focus on income generation rather than price appreciation. As the Fed lowers short-term interest rates, returns on cash may continue to decline, making high-quality bonds with intermediate-term maturities more attractive for long-term investors.

Alternative Investments

Given the evolving market dynamics, we continue to favor strategies that offer enhanced diversification, downside risk mitigation, and the potential for excess returns less reliant on broad market direction — specifically equity market-neutral and nimble discretionary macro approaches. We are also more positive on merger arbitrage and private equity, which could benefit from the recent pickup in corporate dealmaking. Within private markets, we remain constructive on infrastructure and secondaries, both of which have demonstrated resilience and steady growth throughout the year.

Commodities

We maintain a constructive view on commodities, while recognizing heightened uncertainty around global trade dynamics, monetary policy shifts, economic growth trajectories, and the durability of AI-driven infrastructure investment. We continue to favor precious metals, supported by our view that many of the same catalysts that drove outperformance in 2025 will continue. The Trump administration’s shift to securing supply chains among a growing list of critical minerals should also be supportive of the broader metals market, especially for domestic producers.

Currencies

We remain respectful of the dollar’s long-term uptrend. The rebound in big tech leadership, pro-growth stimulus coming from the One Big Beautiful Bill Act (OBBBA), growing carry trade appeal in the dollar, and potential upside to economic and earnings expectations could keep the trend intact. However, the likelihood of additional monetary policy easing amid a slowing labor market, lingering trade policy uncertainty, and ongoing concerns over the sustainability of the deficit could limit upside to the upper end of the dollar’s consolidation range (107.50–110 area).

These are just some of the high-level takeaways from 2026 Outlook: The Policy Engine. For in-depth commentary and analysis, read the full report today. Or for insights and action steps investors and their financial professional may want to discuss, read the investor recap.

_{Important Disclosures}

_{This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.}

_{Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.}

_{Indexes are unmanaged 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.}

_{This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.}

_{Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.}

_{Asset Class Disclosures –}

_{International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.}

_{Bonds are subject to market and interest rate risk if sold prior to maturity.}

_{Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.}

_{Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.}

_{Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.}

_{Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.}

_{High yield/junk bonds (grade BB or below) are below 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.}

_{Precious metal investing involves greater fluctuation and potential for losses.}

_{The fast price swings of commodities will result in significant volatility in an investor's holdings.}

_{This research material has been prepared by LPL Financial LLC.}

_{Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value}