So What Does 2026 Have in Store for the Economy and the Stock Market?

Normally, at this time of year, I write an economic/stock market blog, with both a backward analysis of the year behind us and a forecast of what might be facing us in the incoming year. The invasion of Iran last weekend by the combined military forces of the United States and Israel and the now ongoing conflict obstruct the geopolitical picture and cast a pall over what the impact might be on economies around the world, in particular here in the U.S. The picture may be different in a couple of days. Note: I am finishing this column in the wee hours of the morning on Wednesday, March 4.

It’s wise to keep in mind that Black Swan events are often lurking on the periphery of any assessment of the outlook for the economy and the stock markets. If and when they arrive, havoc is often wreaked, but in varying degrees. Remember September 2008 and the demise of Lehman Brothers, the straw that broke the camel’s back of the global financial markets? It took an act of Congress, with the creation of TARP, to prevent a full-blown global financial implosion. A far less virulent example came just last year when President Trump announced his plan for tariffs in early April. He had been proclaiming his intent to raise tariffs, and the market was expecting something, but it was the breadth and magnitude of what came from the White House that caused the shock and awe. In the span of two days, following Trump’s announcement, global markets plummeted, and the S&P500 declined over 11%. The reaction was short-lived, however, in large measure because Scott Bessent, the Treasury Secretary, made a well-founded plea to the President to take a more measured approach. That news turned the stock market around and by year-end, the S&P500 produced a total annual return of 17.9%, on the heels of the two prior years of stellar stock market performance (25% in 2024 and 26% in 2023). Earnings growth in those three years was also very healthy.

The Magnificent Seven, as they have come to be called, (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) after several years of significant outperformance, lost some of their luster in 2025 with Nvidia remaining the star of the group. The result was a broader based stock market performance in response to declining interest rates and relatively modest inflation. Continued productivity gains, in large measure the result of expanding use of AI, produced strong earnings growth in the U.S.

Now early in 2026, geopolitical stress is at a high pitch, with the news from the White House that the war against Iran will likely carry on longer than had been anticipated and may even require “boots on the ground.” As threats from Iran brought shipping to a virtual standstill in the Strait of Hormuz, the price of oil has soared to $81/barrel. Then it quickly began to retreat when the White House provided reassurance that the U.S. Navy will, if necessary, guarantee safe passage for all shipping—oil, LNG, and derivative products produced by the Gulf States—through the strait. The stock market has been on a roller coaster ride, responding to news and to rumor of news. We need to brace ourselves for the likelihood that market volatility will be with us for some time. We’ve seen this script before and rather than get caught up in the maelstrom of short term stock market responses to fact, rumor and innuendo, it is best to keep an eye on the underlying economic picture which is healthy. Investing is by definition a long-term activity and its success is measured over years and decades, not over days, weeks or months. It requires being willing to sail through rough seas and keeping an eye on the destination. It is a far cry from trading which might best be called a “blood sport.” High risk in nature, its success requires making the right calls over and over again, a superhuman activity. For those who wish to build a nest egg for a retirement that is years away—I’m thinking about 401(k) investors—trading and market timing are a hindrance to long term returns. When the markets are falling, that becomes the opportunity to “average down.” And if there is an employee match, there is almost no investment-based reason to panic out of the plan.

The U.S. economy is stable. Undoubtedly, there will be industries that face temporary challenges as a result of the war—consumer travel and shipping come to mind, as well as industrial products that need to be imported. While the soaring price of oil will lead to a rise in the rate of inflation, it is important to keep two things in mind. Firstly, the U.S. has been a net exporter of oil since 2020, so while prices may rise, the supply is safe; secondly, base inflation is measured in two ways: both with and without the inclusion of food and energy prices. The logic behind that is that, as commodities, both food and energy prices (oil, natural gas and the products that come from them) have a tendency to be volatile. Keep an eye on the “non-food, non-energy” inflation numbers that will undoubtedly be reported for the next few quarters. The base inflation rate (without food and energy) is the one to watch most closely. Productivity gains will continue to be a force for improving earnings, in large measure because the use of AI is expanding across industries. The concerns about AI eliminating massive numbers of jobs over time is not unfounded, but that has been the case with every emerging technology over the course of history. A recent article in The Economist (perhaps the best business magazine in the world) had a thoughtful article entitled: “Stop panicking about AI. Start Preparing.” And its subtitle was: “There is time to adapt and it can be used.”

All in all, despite the sturm und drang of the moment, I remain optimistic about the prospects for the U.S. economy and the stock market and have been adding to investments,  For those who might fear that the bloom is off the rose with regard to the Magnificent Seven, one option is to buy the equi-weighted S&P500 index, rather than the capitalization weighted index which is usually what is quoted.

Belated Happy New Year!