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A ‘terrifying’ era of warfare arrives, forcing America to rethink how it prepares for great-power conflict with China

SCHOFIELD BARRACKS, Hawaii—A winged drone circled 2,000 feet above the jungle. “Three pax,” said U.S. Army Specialist Josiah Whitt, counting enemy troops on a laptop screen.

It has been an unusual year for soldiers like him.

“We get a drone, we train on it…then we get a new drone, train on it, test it out,” said the 20-year-old, who learned to fly the Stalker less than a month earlier.

Crouched under a green poncho, Sgt. Nicholas Cole Hagler lifted a C100 quadcopter—one of five drone systems the 22-year-old has been taught in quick succession. In 23-year-old Sgt. Brock Beckman’s vehicle: 3-D-printed drones that dive and explode with a nudge of the thumb.

These young American soldiers are preparing for the next war in the Pacific.

They brought out some of their newest gear for large-scale Army exercises in November that unfolded over two weeks across several Hawaiian islands. Such systems dominate the battlefield in Ukraine and Russia. The U.S.—long reliant on expensive fighting kit and extended processes—is trying to catch up, shifting to a starkly new era marked by nimble, relatively cheap and expendable equipment.

The timing is tricky. The world’s pre-eminent military power must rethink its tried-and-tested tools and tactics even as it girds for one of its most vexing challenges since World War II: potential great-power conflict with China.

For the U.S. Army in particular, which spent two decades fighting insurgencies in Iraq and Afghanistan, future conflicts may be different on fundamental counts—where, how and against whom.

China has one of the world’s largest missile arsenals and unrivaled industrial strength to buoy forces in a protracted war. Fighting it in the Pacific would involve a vast, watery battlespace speckled with jungle-swathed island chains—all within reach of those missiles. That means the U.S. can’t expect to rule the skies and would struggle to resupply scattered troops.

The Army is thinking boats, buggies and bombardment. Docked at Joint Base Pearl Harbor-Hickam during the exercises was a small new watercraft designed to move equipment straight to a beach. Soldiers zip around in light, maneuverable vehicles out of a Mad Max movie that one military official called the biggest game-changer since night vision. To prepare for a cross-island fight, clunkier cannon artillery has made way for shoot-and-scoot Himars missile platforms, 16 of which arrived in Hawaii this year.

Atop the maritime littorals is the 21st-century problem of “air littorals”—airspace between the earth and high skies where drones lurk, hunt and kill. Soldiers navigating Hawaiian terrain took great pains to blend into it, shrinking command posts to a handful of trucks, draping vehicles with camouflage nets and vegetation, and painting their faces with thick stripes of green.

“The truth of the modern battlefield is that everyone can be seen,” said Maj. Gen. James Bartholomees, commander of the Army’s 25th Infantry Division that focuses on the Indo-Pacific.

Soldiers must prepare to fight with drones, against drones and via electronic warfare. Looking up and dealing with “first contact” from the sky or the electromagnetic spectrum is the new reality, said Bartholomees.

Troops are experimenting with a smorgasbord of buzzing, flying machines—launching more than 600 flights over two weeks during the exercises—and layering them through the depth of the battlefield. They are learning that drones tested successfully elsewhere in the world can wobble in tropical heat. Cloud cover can mean defaulting to human senses over drone sensors.

They are also thinking of ways to stymie enemy drones without accidentally thwarting their own. Several dozen M4 assault rifles now have “smart shooter” add-ons that can lock onto a flying drone and fire a round when the target is aligned.

A higher-tech new arrival: a wearable drone blocker with two units roughly the size of iPhones. One, called Wingman, detects incoming drones and the other, Pitbull, disrupts or jams the drone with what amounts to an electromagnetic arrow.

Jamming, however, means showing oneself on the electromagnetic spectrum.

“It’s a bit of a cat-and-mouse game that we’re watching and learning from in Ukraine,” said Bartholomees. “There are vignettes that are easily seen on YouTube of how you see a drone that’s defeated in one way, that then there’s a counter that’s already planned.”

The two mobile brigades that make up Bartholomees’s division—each about 3,500 personnel strong—have both been through what the Army calls “transformation in contact,” the whirlwind shift toward new technology.

The difference is night and day, said Sgt. First Class Kamakaniokalani Mann Tomita, 31. In about a year, his infantry platoon went from having one kind of drone, a small quadcopter, to seven types to experiment with. “The amount of systems and different assets that we’ve had is just insane,” he said.

On a recent afternoon, he learned the art of kamikaze-style attacks using a flock of drones. The chassis of the quadcopters were 3-D-printed in-house, while the technology to move and attack as a swarm came from Auterion, a company that makes autonomous drone operating systems. The firm’s crew was in Hawaii’s jungles to troubleshoot.

Seven drones soared. With clicks on a screen, two peeled off to swoop down for the kill. Tracking the hit from a shrouded nook between towering trees, Tomita reflected on the new world of deadly drone wars. “It’s very, very terrifying to be frank,” he said.

Tomita’s brigade was playing the adversary in an exercise scenario that could someday become reality: A U.S. ally’s island territory is under attack, enemy forces have landed, and America joins the fight several weeks in. China and Taiwan weren’t mentioned, but the parallels are evident.

If Beijing invaded and the U.S. decided to come to the island democracy’s aid, American soldiers might find themselves fighting in the “first island chain” where Taiwan is located, between Japan and the Philippines.

To better prepare them for a war like that, a new combat training center called the Joint Pacific Multinational Readiness Center was created in 2022 in Hawaii. During last month’s exercises, it brought together more than 8,000 personnel largely from the U.S. but also from places including Taiwan, France and Malaysia. Soldiers executed air assaults, simulated missile shots across islands, navigated gulches and slept fitfully under trees.

It was the first year of exercises where both sides—American soldiers playing themselves and the enemy—were given the latest systems the Army is trying out. “We have new tech against new tech,” said Col. Matthew P. Leclair, who leads the training center. Evaluators were looking to see who used it better, how and why.

“The best way to do it then becomes the doctrine,” he said.

Next year, one of the two brigades will go out to the Philippines to stress-test its takeaways—part of a rotation that allows them to take turns training in forward locations.

“We can quickly turn lessons learned,” said Command Sgt. Maj. Shaun Curry of the 25th Infantry Division. “Did it work here in Hawaii and then does it work in the first island chain in 100 degrees heat, in 100% humidity.”

The Army wants to change not just what it buys but how it buys, since fast-paced technological shifts can render new equipment obsolete within months. It is trying to break out of a laborious acquisition process and give commanders some flexibility to curate their own shopping carts. Like Amazon, said Curry.

To be ready for a near-term conflict, however, the U.S. also needs to scale up. Ukraine and Russia are making millions of drones a year, and China can outproduce them both. The U.S. Army hopes to spur domestic drone production over the next few years.

“The one fear I have is that we develop an army of amazing prototypes but we don’t have a deep-enough magazine depth,” said Benjamin Jensen, a senior fellow at the Center for Strategic and International Studies.

The Army needs to move fast on attack drones in particular, military analysts and soldiers said. Russia routinely hits Ukraine with Iran-designed Shahed drones that explode on impact—a capability the U.S. has now copied. Cheap first-person-view, or FPV, drones steered using a live feed on a pilot’s goggles, have also proved highly destructive.

“Since the war between Russia and Ukraine broke out, everybody’s saying, ‘Oh, FPV, FPV,’ ” said Staff Sgt. Thanh Ho, a drone specialist. “We’re a little behind, we need to play the catch-up game.”

Ho used to pilot the RQ-7 Shadow, a surveillance drone used in Iraq and Afghanistan. After two decades, the Army decided last year to phase it out—among several bulky systems to go. The drones he now flies are compact and don’t need a runway.

Still, there’s a lot to figure out. One drone he pilots can throw up an effective cloak of invisibility against electronic onslaughts, but others he has trained on don’t hold up well in that domain, he said. That means a sophisticated adversary could knock them out.

Ho belongs to a new formation called the multifunctional reconnaissance company, which brings together human scouts with drone pilots and electronic-warfare specialists.

Some of their new drones fly high and long, seeking enemy coordinates. Others sit closer to the fight, guiding scouts and ground forces into the fray. Alongside these are a few loitering munitions that don’t just “see” and “sense” but also strike.

“We have all these commercial off-the-shelf drones, they month-after-month just build one on top of the other,” said First Sgt. Karissa Lopez. “They’re just coming out of the woodworks.”

But the soldiers know that what they have the enemy does, too. That is why electronic warfare, although not new, has become more important than ever. Soldiers fighting with invisible waves and signals who once stayed in the back are now coming forward “up close and personal with the enemy,” said First Lt. Andres Rodriguez, an expert in the field.

The goal: to find and kill drone operators by detecting the signals their devices emit. “We’re trying to find the controllers out there, and then we call for fires—we call for rounds, bombs coming down on the actual drone controller,” he said.

Moving close to the enemy means soldiers adept in electronic warfare are now also training hard on the physical fight, signing up for programs like the Army’s jungle school. “We get a lot more of the nerds,” Rodriguez said.

Despite decent performance, Armistice Capital plans to give clients shares in new investment vehicle in lieu of cash—again

Hedge fund Armistice Capital pulled off a remarkable rebound in 2025, turning a midyear loss of more than 30% into a double-digit gain in a few months.

Armistice’s clients aren’t exactly popping champagne, though.

For the fourth time in two years, Armistice told investors who want to cash out that much of their money would likely be returned in the form of what are essentially IOUs, people familiar with the matter said.

Few hedge funds have had as turbulent a ride as Armistice over the past few years. A fondness for owning thinly traded investments in volatile companies contributed to swings in performance and its struggles to cash out clients for the full amounts they are due.

The firm began this year by forcing clients into a holding pen that prevented them from redeeming any money until 2026 and limiting withdrawals thereafter. Several senior executives departed Armistice with little explanation given to investors, the people said. The firm has disclosed few details about the illiquid assets that appear to be the source of its issues, according to the people and investor documents reviewed by The Wall Street Journal.

Armistice declined to comment.

Steven Boyd, a former McKinsey consultant and hedge-fund analyst, launched Armistice in 2012. Its annualized return over the following dozen years topped 24%, with only one down year. It began 2025 with $2.1 billion under management that it amplified with borrowed money to trade mostly biotech and consumer stocks.

By June, it looked as though Armistice was headed for its second down year after it lost hundreds of millions of dollars over a five-month stretch. The firm blamed policy disruption of the Trump administration—from potential tariffs on drugs to layoffs at the Food and Drug Administration and budget cuts at the National Institutes of Health—for creating a “buying strike.”

The market punished three drugmakers in its portfolio—Travere Therapeutics, Cytokinetics and Biohaven—after they announced the FDA would take longer than expected to act on treatments seeking its approval. Armistice’s healthcare positions subtracted about 14% from the fund’s returns in the first half of 2025, according to a Sept. 4 letter to investors. Its consumer positions subtracted another 8% or so. Assets under management shrank to $1.4 billion.

“I want to acknowledge, candidly and unequivocally, how disappointed I am in our recent performance,” Boyd wrote in the letter.

As performance deteriorated, top consumer portfolio manager VJ Cerniglia took a job at Point72. Armistice also parted ways with its chief operating officer, its top trader, its head of marketing and investor relations and its head of data.

Things started to turn around in July. A pickup in merger activity and positive readouts from clinical trials helped spark rallies in beaten-down biotech companies. Shares in PTC Therapeutics, Armistice’s largest disclosed holding, traded as low as $36 earlier in the year; they reached $86 in late November.

“We believe we are now at an inflection point that allows us to capitalize on dislocations and inefficiencies,” Boyd continued in the letter.

By the end of November, Armistice was up nearly 12% for the year, according to people familiar with the matter.

What wasn’t clear to investors was how much of Armistice’s profit came from good stock picking and how much came from largely discretionary markups on illiquid investments. Armistice owned a large portfolio of warrants, or the right to buy shares in the future at a set price, in volatile biotech companies. Such assets are difficult to value and difficult to unload in times of stress.

At the end of 2024, Armistice’s book of warrants and similar investments stood at $1.1 billion, or about 54% of its net assets, according to the firm’s audited financial statements sent to investors and viewed by the Journal. A private-equity position accounted for another 7% of the fund’s net assets.

Armistice’s cost basis, or what it paid to acquire assets, for the warrants and privately held stock were $36 million and $18 million, respectively, suggesting significant markups over time.

The size of the illiquid portfolio was one reason Armistice ran into trouble last year. Armistice repeatedly couldn’t sell enough assets to raise cash needed to pay those who wanted out without adversely affecting those who would remain. Investors who requested redemptions in late 2024 received about two-thirds of their money in the form of shares in a liquidating investment vehicle known as a side pocket.

Armistice hasn’t told exiting investors how much money will be returned in side pockets next year or how long it would take to liquidate them. Boyd thinks some clients might change their mind and opt not to redeem after all, a person familiar with his thinking said.

Most of the underlying assets in a side pocket Armistice previously placed investors in were warrants, according to a midyear transparency report. Of those, about 87% were out-of-the-money, meaning the related stocks were trading below the warrant’s strike price.

Share of balances past due has doubled as Biden-era forbearance expires

More than 9mn US student loan holders have missed at least one payment this year, as delinquencies in the $1.7tn market soar following the end of the Biden administration’s post-pandemic payments holiday.

The government’s Financial Stability Oversight Council said this week that student loans were “a notable exception” to low default rates on other loans held by American households.

While defaults on student loans have been historically higher than those for other forms of consumer credit, the share of balances now more than 30 days past their due date had doubled since the payments holiday began in early 2020, the FSOC said.

The rise in delinquencies comes amid broader concerns that recent graduates are struggling to find work in a US labour market that has cooled over recent quarters.

“They just don’t have the money,” said Charlie Wise, senior vice-president and head of global research and consulting at credit bureau TransUnion. “That speaks more broadly to some of the weaknesses that we’ve seen in the jobs market for recent grads.”

A TransUnion poll over the summer of 196 respondents who were missing payments found almost half said they could not afford them, while a quarter said they were waiting for more information about forgiveness.

The credit bureau’s data shows the median monthly payment on a student loan is roughly $200 a month.

While the FSOC did not specify the scale of the balances in default, New York Fed data for the third quarter published last month found that 9.6 per cent of the $1.65tn of US student debt was more than 90 days past due. That is down slightly from the second quarter but a leap from the 0.5 per cent a year ago.

“Over 9mn student loan borrowers have transitioned to delinquency since credit reporting resumed,” the FSOC said, adding that delinquencies had “driven steep declines in credit scores”.

A lower credit score makes it significantly harder to secure the financing needed to fund big purchases, such as auto loans and mortgages.

The FSOC quoted VantageScore figures showing an average drop of 100 points, taking a borrower who fell into student loan delinquency this year from near-prime status above 600 to below 550, or subprime.

While a third of the 9mn borrowers had now returned to current status, the FSOC annual report noted that “adverse credit impacts can persist long-term, increasing borrowers’ costs for other credit lines and limiting their access to new loans”.

A New York Federal Reserve blog post published in May found that borrowers formerly considered prime or super prime, with a credit score above 720, had seen their credit score dip by an average of 177 points.

Most of those — 56.6 per cent — who were “newly delinquent” had a credit score below 620, losing an average of 74 points and taking them below the “near prime” category, the New York Fed said.

“You’re talking about a swath of individuals that are going to be closed out on getting credit at a time when overall credit conditions are still pretty easy,” said Diane Swonk, chief economist at KPMG US. “It inhibits the ability to get on the rungs of wealth building via home ownership, which are already challenged.”

Some blamed the initial rise on borrowers failing to realise that the repayments holiday had ended, but New York Fed figures and data from Equifax show rates have remained elevated into the third quarter.

The TransUnion poll, conducted in August, found that only 4 per cent of the 508 consumers surveyed were not aware of payments restarting. Just 16 per cent of those who had not paid said they did not realise payments had resumed.

The Biden administration placed federal student loans into forbearance during the early stages of the coronavirus pandemic. While payments resumed in October 2023, late payments only counted towards delinquency from September 2024.

While Wise said the payments holiday was “very necessary” at the time, there had also been an “unwillingness to restart the payment engine”.

“They pushed it off and pushed it off and pushed it off,” he said.

Swonk said: “We overshot the stimulus during the pandemic.

“There was a reason we did it, but there was an echo effect and this is one of many.”

Sales and trading businesses of banks have a structural problem in claiming share of incentive pool

“I didn’t see any of the shareholders putting in 80-hour weeks,” as the saying goes in investment banking. In the industry, there is always a delicate question of whether the money made ends up going to providers of human capital or financial capital. In a year in which profitability has been unexpectedly good, this might all turn on questions of internal politics.

Way back in April, it was possible to see that the unusual way that investment banking industry revenues were shaping up was likely to be a source of political tension in a lot of the big franchises. And now we can sit back and enjoy the action.

The consultants at Johnson Associates have estimated that the bankers who have most reason to be cheerful going into the compensation season would be those in equities sales and trading. They are on course to generate revenues up 15 per cent on last year according to Coalition Greenwich, compared with 8 per cent growth for advisory bankers (including capital market operations) and fixed income traders.

It has been a great year in the equity markets, as the “right kind of volatility” has been a constant presence, with few big market crashes to generate big losses and (so far) no embarrassing blow-ups in prime brokerage or derivatives. So the traders will have, for the most part, excellent personal profit and loss accounts, and will expect to be paid accordingly. Johnson Associates estimates that its bonus pools will be 15-25 per cent higher than in 2024.

But despite the industry’s reputation, bonuses are not wholly determined by individual performance. There are good reasons for this. Too direct a link between revenue and pay can create bad incentives; employees who have already made a lot will tend to “bank their risk”, while those who are underperforming might “gamble for redemption”. 

And a well managed bank will not want to risk a single bad year for a strong business unit turning into the start of a spiral if all the good people are disappointed with their bonuses and leave. So it’s accepted that there will be burden-sharing and income-smoothing between the divisions, including some annual transfers across the dividing line between the two great tribes of banking, the traders and the advisory bankers.

But sales and trading business units of all sorts have a structural problem when it comes to these negotiations. They lack a “pipeline”. Like retail or hospitality, many trading businesses start the day with an empty cash register and have to do their best to fill it, then start from zero all over again the next day. It means that they are quick to recover after a bad period, but the future is never certain.

M&A and capital markets business lines, on the other hand, work on transactions that could take weeks or even months from winning the mandate to “revenue close”. So they go into the meeting room at the end of the year prepared to either talk about all the revenue they’ve generated in the recent past, or all the revenue that they’re going to get in the near future. Whichever looks best. 

In the case of 2025, it seems unlikely that many advisory bankers outside capital market operations will feel satisfied with a bonus that’s only up 10 to 15 per cent on last year, as Johnson Associates was predicting. After all, they had a very strong third quarter, leaving year-to-date global M&A volumes up 41 per cent. Admittedly, this is because of an outsize contribution from the tech sector and from North America. And the mega deals which have driven up the headline numbers do not always carry the same generous fee margins as the private equity transactions that have driven profitability in previous years.

But the fact that things have accelerated allows the advisory bankers to claim they have a huge opportunity in 2026, if they are just allowed to pay their people properly. After all, wouldn’t it be galling to lose a load of your best bankers due to a disappointing bonus season, and then miss out as a result?

Unfortunately for sales and trading divisions, arguments like this tend to carry a lot of weight. This is why equities people tend to be used to disappointment — in the good years, they are always asked to share the wealth, but in the bad years there’s rarely any reciprocation. The best that the divisional managers can usually do is spread rumours that they have to match the hedge funds or risk losing their best traders. 

It’s a tactic which usually fails, but when it does the only people left to pick up the bill are the shareholders. So banking sector investors ought to be hoping that, once more, the perpetual Cinderellas of the investment banking industry don’t go to the ball this year.

Private capital giant shorted loans and cut exposure to sector amid concerns over threat from AI

Apollo Global has grown increasingly bearish about technology companies vulnerable to artificial intelligence, betting against several large loans to software makers and cutting its exposure to the sector.

Apollo, with more than $900bn in assets, made bets against the loans of companies including Internet Brands, SonicWall and Perforce, which are owned by large private investment groups KKR, Francisco Partners and Clearlake, respectively, according to sources briefed on the matter,

Apollo’s short bets in the software sector, which lasted through a large part of 2025, have been closed, one of the people said.

Apollo believes AI may be a threat to many enterprise software companies, the largest area of investment for the $13tn private capital industry over the past decade. While AI poses a challenge to many industries, private lenders view the software sector as particularly vulnerable because AI can automate many products for coders, customer service representatives and workers doing rote financial tasks.

Apollo’s short bets amounted to less than 1 per cent of its overall $700bn in credit assets, said one person briefed on the matter. They added that some shorts had been used as market hedges for their various funds and capital pools. The precise size of the short positions and their returns was unclear.

The software loans Apollo shorted have sold off at times this year, but all are now trading above 80 cents on the dollar, indicating little fear of imminent distress.

Apollo, KKR, Clearlake and Francisco Partners declined to comment.

Software borrowings were practically non-existent on Wall Street because the companies did not have substantial physical assets or profits under standard accounting principles. But since the early 2010s, specialist buyout firms borrowed hundreds of billions of dollars to buy software companies as private lenders warmed to the idea of lending against their recurring subscriptions and high operating margins.

While Apollo has also judged AI as a potential opportunity for software companies, the group’s top leadership has decided to actively cut its exposure, believing that it should not be making directional industry bets.

“Technology change is going to cause massive dislocation in the credit market,” said Marc Rowan at a recent conference. “I don’t know whether that’s going to be enterprise software, which could […] benefit or be destroyed by this. As a lender, I’m not sure I want to be there to find out.”

Apollo has been rapidly cutting its lending commitments to the sector as a means of trimming risk through the course of the year.

Apollo entered 2025 with many of its private credit funds holding roughly 20 per cent exposure to software groups, but has cut that concentration by almost half, Rowan told some investors in private meetings at a Goldman Sachs conference on Wednesday, said a source who attended.

Apollo’s goal is to soon have its overall software exposure in its credit funds dip below 10 per cent of their net assets, Rowan told the investors. Internally, it has reviewed software companies to assess their potential risks from AI.

Apollo isn’t alone in seeing the potential for AI to disrupt many software business models. Jonathan Gray, president of Blackstone, said at an FT conference in October that investors were underestimating the potential disruption coming from the breakthrough technology.

Gray said he had challenged dealmakers to quantify AI risks at the top of every investment memo and highlighted certain types of companies as particularly vulnerable.

“We’ve told our credit and equity teams: address AI on the first pages of your investment memos,” Gray said at the October FT conference. “If you think about rules-based businesses — legal, accounting, transaction and claims processing — this is going to be profound,” he added.

Adding to investors’ fear over AI risks to software companies is the overall private capital industry exposure to the sector.

Leveraged buyouts of software companies surged in 2020 and 2021, commanding valuations that many now see as too high given a subsequent rise in interest rates and the looming technological change. Many of the largest private credit funds now hold a quarter to a third of their overall assets in software companies.

Key Points

AI was the hottest investment theme in a hot stock market in 2025. Next year could be a very different one for stockpickers.

Investors have piled into a range of companies with exposure to artificial intelligence this year, helping spawn a boom in a range of speculative stocks in areas like robotics, nuclear power, and space. Barron’s capitalized on the trends with Alibaba Group Holding, Alphabet, and ASML Holding, as well as other winners, including Citigroup and Uber Technologies, in our top 10 picks for 2025.

Moderna was the big loser among our 10 selections, falling about 30%, but that didn’t prevent our picks from returning an average of nearly 28%, including dividends, against 15% for the S&P 500. (We measure the annual performance from the time we publish in mid-December.)

We don’t expect the stock market to be as strong in 2026. After three years of outsize returns—roughly 25% in both 2023 and 2024, and nearly 20% in 2025—the S&P 500 could take a breather. The market valuation is stretched, with the index trading for 22 times projected 2026 earnings.

Barron’s takes a value-oriented tack in our favorite stocks for 2026. Most of them trailed the S&P 500 in 2025 and are ready to play catch-up. Walt Disney and Exxon Mobil are industry leaders trading for around 16 times projected 2026 earnings, while Comcast is a better company than its price/earnings ratio of six suggests.

Even our growth stocks were laggards this year. Our list includes one of the Magnificent Seven, Amazon.com, which has returned just 5.7% in 2025. We’re also partial to Visa and Flutter Entertainment, two other growth stocks that have trailed the market.

Berkshire Hathaway has been on the list for many years, but this year we went with Fairfax Financial Holdings, a smaller, faster-growing Canadian insurer and investor with Berkshire-like attributes. There is also SL Green Realty, the leading commercial landlord in Manhattan, and Madison Square Garden Sports, the owner of the New York Knicks and Rangers, which offers a cheap way to play the booming sports industry. Rounding out the list is pharmaceutical turnaround candidate Bristol Myers Squibb, which yields almost 5%.

This can be a humbling exercise, as we found out in 2024, when our picks were well behind the market. We’re hopeful for another solid year in 2026.

Meta Platforms stock surged in 2023. Nvidia soared in 2024. This year belonged to Alphabet. It could be Amazon’s turn among the Mag Seven in 2026.

Amazon, at around $232, has gained just 6% this year and trades for about 29 times projected 2026 earnings of $8 a share—we’re using a conservative estimate that includes stock compensation—a discount to a slower-growing Walmart at 38 times earnings.

Investors are worried about Amazon’s $125 billion of capital spending this year, a slowdown at its industry-leading Amazon Web Services cloud platform, and whether it’s harnessing AI as well as some Mag Seven peers.

Amazon is spending, but it’s getting results. It has a 40%-plus share of U.S. e-commerce, while third-quarter AWS revenue growth of 20% was its fastest in 11 quarters. Its lucrative ad platform is generating $75 billion in revenue, and it has a portfolio of promising newer businesses like pharmaceuticals, satellite service Amazon Leo, Alexa+, and Zoox, its robo-taxi service.

Evercore ISI analyst Mark Mahaney, who has a $335 price target on Amazon, calls it his “No. 1 large-cap Internet long” idea. He made similar—and correct—calls on Uber a year ago and on Alphabet in the spring, when both were out of favor.

Bristol Myers Squibb could become the pharmaceutical industry’s turnaround story for 2026.

The stock, now around $51, is one of the worst performers in a group that has rallied off midyear lows. Shares are off 9% in 2025 after a series of drug pipeline disappointments, while major patent expirations, like one for cancer drug Revlimid, could cause earnings to fall 5% in 2026 and another 5% in 2027.

Bristol, though, trades for just eight times projected 2026 earnings, giving it the lowest P/E ratio in the drug sector, along with Pfizer. It carries a safe dividend yield of 4.9%.

At the current price, investors are paying little for Bristol Myers’ pipeline, led by Cobenfy, a schizophrenia drug being tested as a treatment for psychosis among Alzheimer’s patients, and Milvexian, a treatment of atrial fibrillation and strokes.

CEO Chris Boerner said on the third-quarter earnings call that he feels “even better” about the outlook given a sales shift away from drugs with patent expirations, the pipeline, and company’s financial discipline.

And if that doesn’t work, Bristol Myers, with a market cap of just over $100 billion, is small enough that it could become a buyout target.

Comcast is among the S&P 500’s 10 cheapest stocks based on projected 2026 earnings. It has a safe dividend yield of almost 5%, trades for six times estimated 2026 earnings, and has bought back 5% of its stock over the past 12 months.

Shares, however, are down almost 30%, and at $27 trade below where they did a decade ago because Comcast’s cable and broadband business, the largest in the country, has been shrinking slowly. Next year’s earnings are expected to fall 3% to $4.13 amid competitive pressure in broadband from telecom companies like AT&T.

CEO and controlling shareholder Brian Roberts has been viewed as an empire builder, but that could be changing. Comcast lost out in the bidding war for Warner Bros. Discovery, but could still separate its valuable media, entertainment, and parks business, which could create $30 billion of value, or $8 a share, argues Wolfe Research’s Peter Supino. A smaller spinoff of some cable properties, including CNBC, into a new company, Versant, will occur in early January.

MoffettNathanson analyst Craig Moffett thinks investors are overly pessimistic on broadband. He has a Buy rating and an admittedly optimistic price target of $53 on the stock. Even if the stock gets back to its 52-week high of $40, investors would be happy.

Exxon Mobil is the gold standard in the global energy business—and an update to the company’s five-year corporate plan this past week highlighted its strengths. Exxon now sees 13%-plus compound annual growth in earnings per share through 2030—up from the prior target of about 10%.

This assumes Brent crude averages $65 a barrel in real terms. That could be difficult if oil prices stay weak—Brent is now around $61—but oil has been an outlier as commodities like gold, silver, and copper have rallied. The long-term oil and gas supply picture looks positive, and global demand is still rising despite growth in renewable energy.

CEO Darren Woods is positioning the company to operate profitably for “decades to come.” The stock, now around $120, trades for 16 times projected 2026 earnings and yields 3.4%. Exxon Mobil has raised its dividend for 43 consecutive years, and the payout looks safe even if crude falls to $40 a barrel.

Morgan Stanley analyst Devin McDermott is bullish with a $137 target, citing “peer-leading cash flow and earnings growth” and the company’s diversified model, including refining and chemicals.

Fairfax Financial may be the closest thing to a mini Berkshire Hathaway —and it may be a better bet at this point.

The Toronto-based property and casualty insurer has strong insurance operations, an excellent investment record, and phenomenal long-term performance under founder and chairman Prem Watsa, 75. The company targets 15% annual growth in book value, against what’s probably high-single-digit growth at Berkshire. It has a market value of about $40 billion, against Berkshire’s $1.1 trillion, which makes it easier to grow.

“This is like investing in Berkshire in 1993,” says investor Charlie Frischer.

Its current price/book ratio of 1.5 is in line with Berkshire’s, but Frischer says the true figure for Fairfax is closer to a cheaper 1.25 times because some investments are carried below market value. It has an excellent portfolio of Indian investments such as a controlling stake in the Bangalore airport.

Fairfax even partners with a Berkshire alumnus, David Sokol, who was once viewed as a successor to Warren Buffett. Sokol runs a containership business in which Fairfax owns a 43% stake. The stock trades mainly in Canada, and has thinly traded U.S. shares now around $1,750.

Flutter Entertainment is the global leader in online sports betting, but its stock, at around $215, is down by a third since its August peak amid concerns that Kalshi and Polymarket will undermine FanDuel, Flutter’s most valuable asset.

Most Wall Street analysts think prediction markets don’t threaten the business model of FanDuel, the top U.S. site with a 40%-plus market share. FanDuel could capitalize on that trend with a 50/50 prediction markets joint venture with financial-exchange leader CME Group that rolls out by year end.

For sports betting, prediction markets aren’t competitive with FanDuel in live betting, prop bets—such as bets on individual players in football or basketball—and parlays, which are single bets involving multiple outcomes with potentially big payoffs. Parlays are particularly profitable for FanDuel.

Bullish Macquarie analyst Chad Beynon wrote recently that the selloff is overdone for what he views as a “best in class” operator. He has a price target of $330 on Flutter shares, noting the current valuation is well below historic levels. The stock trades for about 22 times projected 2026 earnings—a reasonable multiple given 40% projected earnings growth in 2026 and 2027.

Sports investing is hotter than ever, with record prices being paid for professional teams. Not so Madison Square Garden Sports, the owner of the New York Knicks and New York Rangers.

The combined value of the Knicks and Rangers is probably over $13 billion. The NBA’s Los Angeles Lakers were sold in 2025 at a valuation of $10 billion, and the Knicks are probably worth at least that. The Rangers’ estimated value is more than $3 billion. MSG Sports, whose shares trade around $225, is valued at $5.4 billion. The stock is up 30% over the past five years, way behind the market and the increase in private team values.

The stock trades cheaply because CEO James Dolan has ruled out a sale of the company, which is controlled by his family. His attitude is bad corporate governance, but Jon Boyar, president of the Boyar Value Group, says it could spin off one of the teams into a separate company, or sell a partial stake in one or both of the teams to private investors and use the proceeds to repurchase stock. A tax-law change in 2027 will penalize owners of public sports teams, which could pressure the company to consider a sale.

“MSGS is one of the best risk/reward setups in the market today,” says Boyar, who values the company at nearly $500 a share.

The New York City office market is improving, but you wouldn’t know it from looking at shares of SL Green Realty, New York’s biggest commercial landlord in Manhattan: The company’s stock, at around $44, is down 35% in 2025 and trades near a 52-week low.

The depressed stock price reflects weaker-than-expected guidance for 2026 made recently, as well as ample leverage, but also the impact of Democratic socialist Zohran Mamdani, New York’s incoming mayor, who isn’t exactly business-friendly. His impact has been negative, but he probably won’t destroy the real estate tax base of the city that will fund his social programs.

At its recent investor day, the company highlighted the disconnect between its stock price and asset value, which it puts at more than $70 per share. CEO Marc Holliday termed the situation “absurd” and said the company is priced at no more than the value of the land underneath its buildings.

Evercore ISI analyst Steve Sakwa recently called the valuation “compelling” and pegs SL Green’s net asset value at $85 a share, although his price target is $54. If SL Green stays this cheap, activists or private-equity investors could target the company.

Stablecoins. Buy now, pay later. Pushback on fees. Concerns about these issues—and more—have made Visa stock a laggard in 2025, gaining just 5%.

But no matter the worry, Visa has dodged those challenges and continues to generate some of the most consistent double-digit earnings growth among megacap companies. It has even become a leader in stablecoins, a dollar-backed cryptocurrency that some feared would disrupt it.

“I can count on all my fingers and toes the number of times there have been concerns about the strength of the moat,” Matt Stucky, chief equities portfolio manager at Northwestern Mutual Wealth Management, told Barron’s in November.

The stock, now around $325, trades for 26 times projected earnings in its fiscal year ending in September 2026, down from an average of 31 times over the past five years. It also has Nvidia-like net margins of about 55%.

Visa sees low-double-digit gains in revenue and earnings in the coming year, and it returns most of its profits to shareholders in stock buybacks—3% of its shares in the latest fiscal year—and a nearly 1% dividend.

Visa continues to have a long runway for growth as the world moves away from cash to plastic and beyond.

While Netflix and Paramount Skydance are prepared to pay a stiff price for Warner’s movie, TV and streaming business, Disney shares languish despite controlling some of the industry’s best assets.

Disney stock, at around $107, was hit after its September-quarter results due to a disappointing experiences segment, which is dominated by Disney World and other parks. The profit outlook, however, looks better, with Disney projecting double-digit earnings growth in the 2026 and 2027 fiscal years, helped by its cruise ship expansion.

The stock is valued at 16 times projected earnings in the fiscal year ending in September. That’s too cheap given its “valuable intellectual property and durable demand,” according to Wolfe Research analyst Peter Supino, who has a price target of $133.

What’s more, Disney has similar total earnings as Netflix, but only half the market value. With Netflix potentially becoming more of a traditional media company if it buys Warner, why buy Netflix at double the valuation to Disney?

Don’t overlook CEO Bob Iger, who is due to retire at the end of 2026 after his second tour as Disney’s leader. He likely wants to go out on a high note—and that’s bullish for the stock.

The economy is looking resilient and there are bargains below the AI surface. Where to invest in the new year.

Key Points

• The S&P 500 index is headed for a 17% gain in 2025, following two years of returns exceeding 20%.
• Analysts have increased S&P 500 profit estimates, with fourth-quarter year-over-year growth rising from 7.7% to 8.2%.
• Global AI spending is forecast to surpass $2 trillion in 2026, up from nearly $1.5 trillion in 2025.

The big debate for 2026 is whether artificial intelligence will keep the markets happy. We can’t settle that question, but we do see bargains below the AI surface and building blocks for another good year for stocks and bonds.

Adding to 2025’s market performance might seem like a tall order. The S&P 500 index is on track to gain more than 17%, following up on two years of returns above 20%. International markets like Europe and China are cruising, up 30%. Even more dazzling have been gold and silver, up 60% and 100%, respectively.

What’s next for markets hinges on a confluence of factors, including U.S. economic growth, Federal Reserve interest-rate cuts, and the mercurial policies of President Donald Trump. None are sure bets. And there’s a bear case that valuations are stretched, leaving scant margin for error if companies don’t hit Wall Street’s forecasts for profit growth—estimated at 14% for the S&P 500 in 2026, according to consensus estimates.

The bearish narrative has holes, though. Fiscal and monetary policy is becoming more supportive, including slightly lower interest rates and an economic tailwind from the Republicans’ One Big Beautiful Bill Act. Federal Reserve officials see inflation easing a bit and economic growth picking up next year to 2.3% from an estimated 1.7% in 2025.

Analysts have raised S&P 500 profit estimates lately—bumping year-over-year growth for the fourth quarter from 7.7% to 8.2%, according to strategist Ed Yardeni. That’s a sign of confidence that companies are working through tariffs and other economic headwinds.

Another positive: The bull market is spreading beyond Big Tech. While tech is still the standout, sectors like industrials, financials, and healthcare are putting in solid gains of 10% to 20%. Small-caps and value are up a respectable 14%.

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“I know there are some concerns about valuations, but the macro backdrop is supportive of equities. The U.S. economy is showing resilience,” says Brian Levitt, chief global market strategist with Invesco. “Oil prices are still low, bond yields are low, and the Fed is looking to lower rates. That’s favorable for stocks.”

Economic Outlook for 2026

The U.S. Economy Looks Stable for 2026—and You’ll Feel Better About It, Too

Much of Wall Street sees the S&P 500 notching another good year. Stocks tend to follow the path of corporate profits. If companies can meet or beat Wall Street’s target for 14% earnings growth, stocks can keep rising. Goldman Sachs strategists see the S&P 500 at 7600 by the end of next year. Morgan Stanley has a 7800 target.

Yardeni, a longtime bull and head of Yardeni Research, sees 7700 within reach. He expects earnings for the S&P 500 to rise 15% and stocks to trade for nearly 25 times year-ahead profits forecasts, up from 22 now. “Our base-case outlook calls for a continuation of the Roaring 2020s scenario next year, with ongoing productivity gains that fuel a robust economy, which propels earnings and the stock market higher,” Yardeni wrote in his 2026 outlook.

Much will depend on AI continuing to fuel trillions in capital expenditures. Despite some jitters in the market over whether a slowdown is coming, bulls argue the cycle is still far from peaking. Research firm Gartner predicted in a report in September that global AI spending will top $2 trillion in 2026 following expenditures of nearly $1.5 trillion this year.

That doesn’t mean it will be smooth sailing for AI, as Oracle’s results demonstrated. As companies like Meta Platforms, Alphabet, and Microsoft

plow billions into AI development—building data centers, apps, and new products—investors may start to cast doubt on whether all that capital investment will yield tangible results.

Lofty multiples make the stocks susceptible to sharp reversals. The Magnificent Seven stocks—a proxy for AI and tech—go for an average 31 times earnings, about 40% above the S&P 500’s multiple of 22.

Some strategists say it would be wise to branch out from the tech-heavy S&P 500, which is roughly 40% in the Magnificent Seven and Broadcom. “While we continue to believe in the AI story, investors should avoid overconcentration on AI risk,” says Stephen Dover, chief market strategist with Franklin Templeton.

Looking Beyond AI

One way to hedge your bets: Shift from the AI arms dealers to the adopters—companies in retail, financial services, and other parts of the economy. “The AI rally is going to evolve as more companies see productivity enhancements and efficiencies,” says Joseph Amato, president and chief investment officer with Neuberger Berman.

Large companies like Walmart say they’re getting an AI bump. “We’re using AI across the organization to manage cost effectively and to accelerate our growth,” said Walmart Chief Financial Officer John David Rainey on the company’s earnings call in November.

Beyond AI, other tailwinds could keep the market aloft. Earnings estimates have been rising in areas like financials, utilities, and communication services. Estimates are also improving down the food chain to small- and mid-cap stocks. Earnings for the equal-weight S&P 500 are forecast to rise 11% in 2026 following 7% growth in 2025.

“The earnings backdrop should improve for a broader set of industries. There could be a pretty healthy move, for not just the megacaps,” says Kevin Gordon, head of macro research and strategy for the Schwab Center for Financial Research.

The market isn’t as pricey below the megacap surface. The Invesco S&P 500 Equal Weight exchange-traded fund goes for 17 times earnings. The S&P SPDR Small Cap 600 ETF has a forward price/earnings ratio of 15. Both ETFs have trailed behind the S&P 500 for years but can help diversify exposure to the tech-heavy megacap index.

Small-caps, in particular, look healthier. Consensus estimates call for nearly 17% earnings growth for the S&P SmallCap 600 in 2026, up from 13.5% in 2025.

Small-caps tend to get a tailwind from Fed rate cuts. The Russell 2000 index of small companies is beating the S&P 500 over the past six months as investors anticipate lower rates. We would suggest investing in the S&P 600 ETF, since it has higher profit criteria than funds tracking the Russell 2000.

“There is a lot of rhetoric about small-caps being dead. But it’s not the case that the sequoias always outgrow the saplings,” says Chris Tessin, founder of Acuitas Investments, a firm specializing in small-caps.

Three other sectors to consider are financials, utilities, and healthcare. David Bianco, chief investment officer for the Americas at DWS, favors those sectors partly as a bulwark against a slowdown in AI spending. “Concerns about China and others catching up or leapfrogging the U.S. in AI is something to keep in mind,” he says.

For value investors, there are also plenty of stocks with reasonable multiples. Max Wasserman, co-founder and senior portfolio manager at Miramar Capital, favors companies like Home Depot and McDonald’s on the consumer side, as well as industrial firm Waste Management, pipeline operator Oneok, and financials Visa and CME.

“Investors will rotate back to value sectors and look for steady earnings. We’re looking for companies that haven’t participated as much in the rally,” he says.

A simple way to capture the value theme is with an exchange-traded fund targeting the market’s cheaper stocks. The Vanguard Value ETF, for instance, holds stocks such as JPMorgan Chase, Berkshire Hathaway, Exxon Mobil, and Johnson & Johnson. It’s up 15% this year and trades more cheaply than the S&P 500 at about 20 times earnings, with a 2.1% dividend yield.

Does all of this mean it will be clear sailing for stocks in 2026? Hardly.

Bears argue that Trump’s tariffs are just beginning to bite while U.S. consumers look stretched on housing and other affordability issues. Stalling economic growth would make it tougher for companies to hit earnings targets. Bulls say stocks can overcome this “wall of worry,” but with the S&P 500 up a cumulative 75% over the past three years, it’s getting tougher to push ever higher.

Perhaps the biggest risk for stocks is simply that they’re pricey. The U.S. market is trading above the 90th percentile historically on measures like the cyclically adjusted P/E ratio. Steep valuations in tech account for today’s high valuations, and bulls say they’re warranted by the sector’s tremendous growth and margins.

Yet rarely in history has the market been able to maintain such valuations, and rarely have bull markets extended as long as this one without a 10% correction or deeper pullback (excluding the panic over Trump’s tariffs in early 2025).

Valuations are a major concern, says Chris Hyzy, chief investment officer at Merrill and Bank of America Private Bank. BofA is one of the few Wall Street firms that doesn’t see much juice in the market. The bank’s target for the S&P is 7100 by the end of 2026, up just 4% from recent levels.

“The biggest risk is a negative growth shock that could hit the labor market,” he says. “There could be big buying opportunities when volatility picks up,” he adds.

International Stocks, Gold, and Bonds

If 2025 taught investors anything, it’s that the American stock market isn’t the only option. After a strong year for international stocks, Franklin Templeton’s Dover favors Japan and emerging markets as relatively inexpensive bets.

Kristina Hooper, chief market strategist with investment firm Man Group, favors European equities. European economies are getting a boost from military spending and fiscal stimulus, she says. European stocks also have high dividend yields and are still cheaper than U.S. counterparts.

A low-cost way to get exposure would be the iShares Core MSCI Europe ETF. It trades around 14.5 times 2026 earnings estimates and yields just under 3%.

Gold is tougher now that it has gained so much. “Gold has moved from a classic risk-off position to more of a momentum FOMO [fear of missing out] trade. It’s a mini version of large-cap tech,” says Julia Hermann, global market strategist with New York Life Investments. She says it’s difficult to make the case for buying more gold at these prices.

Other experts argue that gold and other precious metals still deserve a place in investors’ portfolios. Rick Ratkowski, director of investment strategies with NISA Investment Advisors, recommends a roughly 5% position. The SPDR Gold Shares ETF is a good option.

Bonds are in a tricky spot. Fed rate cuts should be a tailwind for yields to come down at the short end of the curve. But long-term bonds trade on inflation expectations, which remain above the Fed’s 2% target, and yields have increased slightly as the Fed has cut rates by 0.75 percentage points since September. Unless inflation falls sharply or the economy goes into a tailspin, the 10-year Treasury yield could stay in a range of 4.25% to 4.5%, according to Invesco’s Levitt.

Investors can still pick up attractive yields, especially in corporate credit, where yields tend to be higher than in Treasuries and other government debt. “There are solid investment-grade credits yielding 5.25%,” says Elliot Dornbusch, CEO and chief investment officer with CV Advisors.

Two low-cost bond ETFs to consider: The iShares 5-10 Year Investment Grade Corporate Bond focuses on intermediate-term debt. It yields 4.2% and is up 9% this year on a total return basis. Vanguard Short-Term Corporate Bond sticks with short-term debt, posing less risk if interest rates move up again. It yields 4.3% and is ahead 6% this year.

Bonds can help cushion your portfolio if stocks take a dive. There’s also a good case for money-market funds, which should yield more than 3% in 2026 even if the Fed cuts rates mildly. Keeping some dry powder may come in handy if the markets pull back temporarily while continuing to push higher in the long term.

Economists expect GDP to benefit from numerous tailwinds, including lower interest rates, AI spending, and hefty tax refunds.

Key Points

The U.S. economy is expected to grow by 1.8% this year, notwithstanding policy shifts that have flummoxed economists and business leaders. Next year could look much the same, with growth in gross domestic product ticking up by 1.9%, adjusted for inflation. But things may feel better due to less policy uncertainty and more stimulus in the form of tax breaks and deregulation.

Consumer spending accounts for roughly 70% of U.S. GDP, and the wealth effect created by rising asset prices helped support consumption for much of 2025, particularly among higher-income households. That’s despite weak job growth and confusion about the size and impact of tariffs on imported goods. Most investment firms expect stocks to keep rising in 2026, which could spur more consumption. Some current estimates put the S&P 500 index above 8000 by the end of next year, implying a gain of about 15%.

Spending even by low- and middle-income households will also get a boost in the year’s first half from larger-than-normal income-tax refunds. The One Big Beautiful Bill Act, signed into law in July, included several provisions that could lead to bigger refunds, including deductions of overtime and tip payments from taxable income for qualified employees. Additionally, Americans will be able to deduct interest paid on loans used to purchase a qualified vehicle, and many seniors ages 65 or older may claim an additional $6,000 deduction.

UBS chief economist Jonathan Pingle estimates that there will be an additional $50 billion to $55 billion in refund checks to support spending. On average, Piper Sandler estimates that tax refunds are expected to be $1,000 higher than last year.

“We are going to have additional fiscal support,” Pingle said, although he noted it may not kick in until the second quarter.

Continued capital investment, particularly for artificial-intelligence infrastructure, is expected to continue throughout 2026 and will also provide a tailwind for economic growth. “The push to build the infrastructure for artificial intelligence, including a more robust energy grid, will be the primary driver of growth for at least another year,” said Joseph Brusuelas, chief economist at RSM U.S.

But residential investment, which contracted in this year’s first half, will probably do so again in the first part of 2026, as will government spending and investment. “You’ve got big chunks of the economy that aren’t doing that well,” Pingle said.

A 1.9% growth rate is marginally below the 2% rate considered healthy for advanced economies. Growth could be restrained next year partly due to persistent weakness in the labor market, particularly in the first half of the year. Michael Feroli, J.P. Morgan’s chief U.S. economist, anticipates “uncomfortably slow” employment growth in the next three to six months.

Payrolls averaged just 76,000 gains a month for the first nine months of 2025, but that figure masks deterioration since April’s “Liberation Day” tariff announcement. Average monthly payroll growth dropped to just 38,600 thereafter, according to Barron’s analysis of Bureau of Labor Statistics data through September. Before the onset of the Covid-19 pandemic, payroll gains averaged 177,000 a month.

Employment growth trends in 2026 won’t be much different from this year. Slower net job growth will be driven, in part, by lower labor supply, said David Tinsley, chief economist at Bank of America Institute.

Expect the unemployment rate to peak around 4.6% in the first quarter. Sectors including professional services, technology, and manufacturing could see diminished growth, or even less employment. The Trump administration’s restrictive immigration policies are expected to hold down the supply side of the labor market.

But weak labor conditions won’t spur a recession, and the job market is likely to strengthen during the year’s second half as policy uncertainty eases, corporate profit margins grow, and companies start passing tariff costs on to consumers. Easier financial conditions should also help, following a string of interest-rate cuts since early September.

Despite the Trump administration’s push for affordability, look for inflation to remain well above the Federal Reserve’s 2% annual target in 2026, with price growth probably peaking at about 3.3%, based on the consumer price index.

U.S.-based companies, particularly retailers, noted in recent earnings calls that they are feeling the effects of higher tariffs, but have delayed passing higher costs on to consumers. But “that isn’t an unlimited sort of situation,” said Mike Skordeles, head of U.S. economics at Truist.

Tax refunds could be mildly inflationary, as well, particularly in lifting used-car prices, Skordeles said. Some tax relief is aimed at lower-income workers, who tend to be used-car buyers.

While inflation looks to be heading higher next year, much will depend on policy. If the Trump administration proceeds with plans to hand out $2,000 “tariff dividend” checks, for example, inflation growth could accelerate even more across a number of goods categories. Yet the looming midterm elections will probably keep both political parties focused on policies that spur growth and enhance affordability.

With weak labor conditions and persistent inflation on tap, the Fed is likely to lower rates only modestly in 2026. The Fed cut its federal-funds rate target range by three-fourths of a percentage point this year, to a current 3.5% to 3.75%, and signaled on Wednesday just one rate cut for 2026. Most economists expect two more rate cuts by next September, however, which would put the target range at 3.00% to 3.25%, or close to the so-called neutral rate that neither spurs nor restricts economic growth.

The Fed could see significant personnel changes next year, with Chair Jerome Powell’s term set to end in May. President Donald Trump is thought to be leaning toward nominating Kevin Hassett, currently director of the National Economic Council, as Powell’s replacement. While a new and presumably dovish Fed chair could try to drive more rate cuts, a substantial rate reduction would be difficult to justify, given above-trend inflation and steadier employment conditions expected in the second half of the year.

To be sure, more policy upheaval, a stock market selloff, or unforeseen developments could upend the economy and warrant easier financial conditions in 2026. But by the end of next year, economists believe that the U.S. economy will be on firmer ground, with many drivers of weakness fading and the stage set for more growth in 2027.