2026 Market Outlook: Strategic Insights for Sophisticated Investors

After a long few years marked by rising rates, geopolitical tension, and volatility, investors are hoping that 2026 brings more stability to global markets. We’re sharing strategic insights straight from our investment committee and other dedicated financial professionals—all to help you feel prepared and confident for the year ahead.

Active ETFs Remain on the Rise

Actively managed ETFs are becoming increasingly common, offering an accessible and flexible solution for investors seeking sophisticated investment selection and strategies. In the past, these strategies have been only available in a traditional mutual fund format, which tends to be less tax-efficient and may impose a higher barrier to entry.

While the cost and convenience make active ETFs enticing, investors should still evaluate a fund’s details before determining if it belongs in their portfolio. Not all ETFs are created equal, and you should consider performance factors, including the fund’s internal rebalancing methodology and underlying investment process. Active ETFs, especially, incur more costs than passively managed ones, meaning you may want to weigh the higher fees against the fund’s expected returns.

Interest Rates Expected to Stabilize

The Federal Reserve is expected to continue making only modest rate cuts throughout 2026 (barring any unexpected events). Considering that this knowledge is already common among financial professionals and investors, it’s unlikely that we’ll see much impact or movement on the markets as a result. Broadly speaking, stock and bond prices already appear to reflect the expected interest rate environment.

However, there are a few potential scenarios that could increase the odds of market volatility. First, we could experience slower economic growth than expected. If that happens, the Federal Reserve may be compelled to cut rates rapidly leading to a decline in long-term interest rates. In this scenario, bond prices would likely rise, but stocks may fumble under persistent pressure for growth.

Alternatively, the opposite scenario is also possible. We could see a stronger-than-expected economy, leading to a resurgence in inflation—ultimately resulting in a rise in long-term interest rates (like 2022, though unlikely to that extreme). If this scenario happens, bond prices may feel downward pressure. Stocks could also be impacted, depending on how high interest rates rise. A modest rate hike is indicative of a strong economy, but a rapid rise in response to inflation is troublesome.

Global Markets Continue to Create Opportunity for Investors

Moving into 2026, we view international stocks as an opportunity for investors, particularly as the U.S. dollar continues to weaken. Maintaining international stock allocations within your portfolio is one way to hedge against currency risk and maintain diversification. While the exact ratio varies by individual investor, a general rule of thumb is to dedicate at least 30% of your portfolio to international assets.

International stocks often trade at a lower price-to-earnings ratio than U.S.-based stocks, but they also boast higher dividend yields. As a result, less future growth is required for many international stocks to deliver acceptable returns.

Looking ahead to the new year, AI presents another case for investing in international stocks. Countries including South Korea, Taiwan, and Japan are home to some major players in the AI supply chain, making them attractive areas of focus for those interested in capturing AI-related market growth.

Maintain Proper Diversification

Diversification will always be a critical piece of any well-rounded portfolio. With the recent stretch of above-average stock market performance, investors might feel comfortable overweighting growth-focused (and riskier) assets within their portfolio. But the markets move cyclically, and eventually, investor sentiment will shift, and values will drop, though it’s impossible to predict when, why, or by how much.

Over the past year, the fixed-income market (i.e., bonds) has begun normalizing, with many fixed-income securities offering competitive risk-adjusted returns. If your portfolio has become misaligned with your longer-term objectives, you may want to reallocate some capital from stocks to bonds.

Midterms Could Impact Markets

As a reminder, 2026 is a midterm election year. Significant market changes occur based on investor sentiment, and election years tend to heighten emotions, both positively and negatively. It’s not unusual for the markets to experience some election-related volatility, particularly in the weeks leading up to election day.¹

Volatility can come with steeper market corrections, though. However, it’s important for investors to remember that election-related volatility is short-lived—meaning long-term investment strategies are built to withstand these expected movements. It’s generally ill-advised to pull out of the markets or otherwise adjust your portfolio during these periods of volatility, especially since corrections have historically followed soon after.

Is Your Portfolio Prepared for 2026?

The markets rarely behave exactly as expected. While we can share our insights into potential outcomes, please note that your portfolio should be prepared for any market movement.

If you’d like to discuss our market insights, or you have questions about your investment strategy going into the new year, we encourage you to reach out to a Linscomb advisor. We’re always happy to sit down, review your portfolio, and ensure your asset allocation aligns with your long-term goals.

^Sources:

^{1 Market volatility across asset classes during U.S. presidential and mid-term elections}