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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.

Tom Hancock, a portfolio manager at GMO, favors companies that consistently earn a high return on capital and reinvest in the

Key Points

• GMO’s Tom Hancock manages funds that have consistently outperformed the S&P 500, with the GMO Quality III mutual fund returning 15.6% annually over the past decade.
• Hancock’s strategy involves significant allocations to technology, with 41% of assets in the sector, and contrarian bets in healthcare and consumer staples.
• The fund prioritizes companies with sustainable high returns on capital, seeking quality at a reasonable price, and avoids overvalued ‘great’ companies.

This hasn’t been a great market for so-called quality stocks, typically defined as blue chips with steady profits and low debt. That makes it all the more impressive that funds run by GMO’s Tom Hancock have consistently outperformed not just other “quality” portfolios but the broad market, too.

The $12 billion GMO Quality III mutual fund returned 15.6% annually over the past decade, compared with 14.4% for the S&P 500 index. The $3 billion GMO U.S. Quality exchange-traded fund doesn’t have as long a record, as the ETF launched in November 2023. But it has outpaced the index so far in 2025. Hancock oversees both funds with co-managers Anthony Hene and Ty Cobb.

Hancock’s team has succeeded, in part, by making bold calls. The team’s mutual fund has about 41% of its assets invested in technology, compared with 33% for the S&P 500. But Hancock isn’t just a trend follower. The fund has also made contrarian bets on out-of-fashion sectors such as healthcare and consumer staples.

Hancock recently talked with Barron’s about where he sees the biggest opportunities in today’s market. An edited version of the conversation follows.

Barron’s: Quality is often in the eye of the beholder. How do you define it?

Tom Hancock: What we’re trying to get at with quality is companies that can earn a high return on capital sustainably, and reinvest in the business. GMO in its early days was built around value managers. They were looking for low price-to-book-type stocks.

The idea of quality came from asking, what are the characteristics that make a stock trade at a premium multiple? We want to pay up for stocks that deserve it. That said, we still look for quality at a reasonable price. We are trying to avoid great companies that everyone knows are great and thus trade at superhigh multiples. Those don’t give us high returns.

GMO has a reputation not just for value, but also for bearishness. Co-founder Jerermy Grantham, in particular, is known for saying for years that the stock market is overvalued. Do you feel the same way?

That is the GMO brand for people who know the firm casually. They think of us as bearish. They sometimes think of us as quantitative, and strongly value-oriented. None of those descriptions quite applies.

I am not as bearish on the U.S. market right now as Jeremy or his successors, such as Ben Inker [GMO’s co-head of asset allocation and a portfolio manager]. We don’t have a chief investment officer at GMO. We operate as a bunch of different boutiques that sometimes have views that are different from one another.

A lot of people talk about market multiples, or the market’s price/earnings ratio, being nearly as high as it has ever been—as high as the tech bubble, or variants of that. A lot of that talk ignores the changing composition of the U.S. stock market. Many stocks aren’t trading at superhigh multiples. It’s just that there are a lot more high-quality growth stocks in the market than there were 20 or 30 years ago, so the overall market should trade at a higher multiple than it once did. I don’t think the valuation is insane.

You have a much higher weighting in tech stocks than the S&P 500, which has driven some of your recent strong returns. To put you on the spot, are we going to have an AI crash?

If you close your eyes and wake up in 10 years, AI will turn out to have been a good place to invest. At the same time, I’d be surprised if we don’t get some kind of significant downturn in AI-related stocks. Crash is a strong word. But I don’t have any great view about when that will be.

If you don’t invest in AI just because there might be a crash in the next five years, you run the risk that stocks will double before they pull back, say, 30%, and you will have missed the doubling. So, I’d rather be involved, as long as we’re buying stocks that can survive the pullback.

If you look at which AI stocks we own, they’re the ones we believe are safer. They have more-diversified businesses. They don’t have financial leverage. We sold our Oracle shares, which we had held for more than a decade, [due to] the kind of debt the company has taken on. [Oracle recently borrowed $18 billion to expand its AI infrastructure after agreeing to provide computer power to OpenAI.]

Even if Oracle’s revenue is guaranteed verbally by OpenAI, OpenAI is writing checks on which it doesn’t have the money to pay right now. Even if OpenAI’s technology is great, there is an existential risk to the company.

Your top holding now is Microsoft. Why do you favor the company?

Tech is part of the reason why we have outperformed our quality peers. At the same time, our tech holdings are less volatile than the tech you will find in an index. We own the tech stocks that are most defensive in terms of diversified revenue and customer lock-in—like Microsoft.

Microsoft is an AI beneficiary but gets a lot of revenue from other things. It has been relatively conservative about its capital spending. If there is a pullback on AI, it isn’t going to be great for Microsoft. The stock will go down, but it will go down less than some of its peers, and the company won’t be impaired in any long-term way as a business.

Other tech stocks we own include Lam Research and Broadcom. These are more high beta. They tend to be our best or worst performers on any given day, but both companies have a lot of diversification beyond AI. We don’t own Nvidia, in some ways a competitor to Broadcom.

Broadcom specializes in custom chips; it makes chips for a handful of the biggest companies, such as Google. Those big companies have already figured out a way to monetize AI. They use AI for search and to deliver content for YouTube. These are proven use cases.

I would contrast that with Nvidia, which will probably be great in the long run. But right now, everyone in the world is trying something with AI. They are just throwing stuff against the wall, and using generic chips from Nvidia. That’s a lot more risky than having the hyperscalers as your customers, which Broadcom has.

Your other big bet is on healthcare, not a standout sector this year. What is the attraction?

We see healthcare spending growing faster than gross domestic product. Sometimes, people show us charts with healthcare spending rising as a percentage of GDP, and that looks unsustainable, but we think it is sustainable. We are a rich country, and it is a richer and richer world. We are getting older, and there is a lot of innovation in healthcare. And it isn’t like we are paying more for the same things. We have cancer treatments and GLP-1s and Covid vaccines and all these things we didn’t have 10 years ago.

At the same time, thanks in part to Covid, there has been a lot of short-term disruption, and this is still working itself out. The area where we are exposed—the area with maybe the biggest profitability issues right now—is health insurance. We own three of the stocks in that group: UnitedHealth Group, Elevance Health, and Cigna.

What has hurt profitability?

One example of what happened relates to Medicaid, the government program to cover lower-income people. During Covid, eligibility was expanded to meet the state of emergency. Usually, there is an income-verification process to make sure you’re eligible. That was suspended, so the number of people on Medicaid expanded, which was good.

After Covid ended, the verification resumed. Most people who had jobs were no longer eligible, so membership went down. The people who were ineligible were healthier, and they hadn’t been using the benefits as much, so they were cheaper for the system to cover. When those people left the system, the Medicaid population shrank and the cost of insuring the people who remained increased. This will correct itself. The states that administer Medicare reimburse the insurance companies, but there is a catch-up phase.

You also own drug companies such as Eli Lilly, Johnson & Johnson, and Merck. What is the outlook for pharma?

Large-cap pharma is an interesting area. Investors tend to be very negative about it because they always see patent cliffs. Any patented drug will go off patent at some point. That is true of almost any patented product in any industry—patent protection doesn’t last forever. But it is so much more explicit in pharma, so people focus on it.

At the same time, many pharma companies have been around a long time. They have a proven ability to reinvent themselves. They engage in research and development, and acquire it, too. In many cases, you need to be a big pharma company to get treatments through the regulatory approval process, which is complicated. A small biotech coming out of a university can invent a new drug, but often can’t commercialize it. You need large-cap pharma.

Eli Lilly has created blockbuster GLP-1 drugs [diabetes and weight-loss treatments] and made a lot of money on them. Prices are coming down, and the traditional pharma investor will see that as a bad sign. But GLP-1s are also more of a consumer product, a traditional “revenue equals price times volume” product. If we lower the price, we can increase the volume. This is a rational economic tradeoff. People are reacting because they see that prices have started to come down, but they are underestimating just how big this market can be.

Johnson & Johnson and Merck don’t have that kind of exciting growth engine right now. Some of their patents are slated to expire. There is a line of sight to the expiration of Merck’s patent on Keytruda, its big cancer drug. Earnings will probably fall when that happens. But that is OK if the stock is cheap enough relative to expected earnings, and we think that is the case. [Merck is trading for 11 times next year’s expected earnings of $8.82 share.]

J&J’s immunology drug Stelara went off patent earlier this year, but the company is highly diversified. It’s showing an ability to grow even through a meaningful patent cliff. The patent fear is overdone.

Consumer-goods companies have also struggled. Do you see bargains in the sector?

The U.S. consumer, a longtime source of strength for these companies, has had a tough time lately, particularly lower-income households. We are a little more picky in the category, because we want to find companies where there is still a certain amount of growth.

Going back to GLP-1s, they have curbed the public’s appetite for some snack foods. We like Coca-Cola better than PepsiCo, which gets about half of its revenue from salty snacks. We expect the beverage category to be stronger than the food category, and think Coke can expect reasonably good growth.

One of our most contrarian positions is alcohol companies such as Constellation Brands, which makes Modelo and Corona beer. While alcohol hasn’t been a great category, those brands were doing well until about a year ago, when sales declined due to the Trump administration’s immigration crackdown.

People are developing narratives around changing behaviors, saying, among other things, that young people don’t drink anymore. In reality, these types of trends are much more tied to the economic cycle.

Your portfolio has no basic materials, real estate, energy, or utility stocks. Why are you skipping whole sectors of the stock market?

The way you beat a benchmark over time is to run a fund that doesn’t try to look like the benchmark. You try to find areas of the market that you think will be winners, and invest there. You don’t want to put all of your eggs in one basket, but as long as you have several baskets, you don’t need to have every single basket.

We focus on having a portfolio that might lag in rising markets, but won’t lose to the benchmark in down markets. We think that is what people who invest in a quality strategy are looking for.

Thanks, Tom.

Big Blue has been working on the next-gen technology for decades, and now has major breakthroughs in its sights. We get a look behind the scenes.

Key Points

• IBM’s Quantum System Two is its most advanced quantum computer, utilizing quantum mechanics for complex computations beyond conventional systems.
• IBM has deployed 85 quantum systems to over 300 organizations, including 25 systems with more than 100 logical qubits, outpacing competitors like Google.
• IBM aims for a fault-tolerant supercomputer, IBM Quantum Starling, by 2029, targeting 100 million quantum operations with 200 logical qubits.

Inside IBM’s main research center rises a maze of silver towers, each 22 feet tall. Through their vented flanks, you catch glimpses of blinking lights and the shadows of wires. The machine’s three-chambered heart—comprised of three processors, each no larger than a fingernail—is hidden from view.

Step closer and you hear the contraption appearing to breathe, a tinkling sound like wind chimes emanating from the cooling mechanism that keeps its innards colder than outer space. It’s the sound of the future.

This mysterious machine is the IBM Quantum System Two, the company’s most advanced quantum computer. Powerful systems like the System Two operate based on the principles of quantum mechanics, the science behind atoms, molecules, and subatomic particles. Quantum technology theoretically allows computers to do things beyond the reach of conventional digital computers, from rapidly processing vast swaths of data to simulating highly complex chemical reactions to tackling the most difficult of mathematical problems. In Japan, a recently installed Quantum System Two is modeling the electronic structure of chemical compounds found widely in nature, a utility that has broad applications in chemistry.

Investor interest in quantum computing has exploded over the past year. Soon after the United Nations dubbed 2025 the International Year of Quantum, Alphabet’s Google unit unveiled a dazzlingly fast quantum chip. Then the quantum pure plays took off. Stocks like Rigetti Computing, IonQ, and D-Wave Quantum went on wild rides, and some of the gains stuck. D-Wave is up 237% for the year, far outstripping a 22% gain for the tech-heavy Nasdaq Composite.

If the pure plays are the current belles of the ball, IBM could be the long-term keeper for investors.

Big Blue has been working on quantum technology for decades. It has shipped more quantum computers than any other company, and it now has major breakthroughs in its sights. Equally important, its array of other businesses—cloud computing, IT consulting, artificial intelligence, and various hardware and software products—provides valuable ballast that can keep the company on course even if quantum doesn’t pan out.

Eventually, quantum computers could supplement conventional computers to make processes such as drug discovery and materials design faster and easier. But, scientists say, large-scale commercialization may still be five or 10 years away. Any serious competitor has to be ready to go the distance. IBM looks ready.

“We want to be at the foundation of quantum computing,” Jay Gambetta, the head of IBM Research, tells Barron’s over the hum of the Quantum System Two. “We want to win.”

The Thomas J. Watson Research Center sits on a sprawling campus in Yorktown Heights, N.Y., some 40 miles from Manhattan. The center is the hub of IBM Research, the company’s research and development unit, and it is engaged in exploring emerging technologies such as artificial intelligence, semiconductors, and quantum computing. As a clear sign of quantum’s importance, the System Two sits at the heart of the center, partially surrounded by a glass wall.

Quantum technology, like quantum mechanics itself, is both complex and elusive. Digital computers operate on bits, with values of 0 or 1. Quantum computers work from quantum bits, or qubits, that can be 1, 0, or any value between those two. The manipulation of those qubits is challenging, but the end result is that the qubits can contain far more information on matters of uncertainty and probability than their digital counterparts.

Down a winding hallway at the center, researchers test quantum algorithms in a small lab that resembles a garage. An eyeball scan is required to enter, and no photographs are permitted. The room is full of quantum systems in various stages of assembly. Pieces of hardware are scattered about. Researchers quietly work away, fiddling with parts of the machine.

“Thanks to the culture that we have, the scientists are very passionate about what they do,” Gambetta says. “They happily disagree with me all the time.” Gambetta knows this culture well: He headed the quantum effort for six years before rising to IBM Research’s top post in August.

IBM has long put a premium on research, starting in 1911 with the founding of the Computing-Tabulating-Recording Company. That became International Business Machines in 1924 under the leadership of Thomas J. Watson Sr., the research center’s namesake. In time, the company’s three initials stood alone, a widely recognized symbol of technological innovation.

IBM has pivoted several times in its life span. In the 1940s, it shifted from mechanical accounting machines and punch-card systems to electronic, stored-program computers and mainframes. It was an early entrant in personal computers, but in 2005, facing slim profit margins and shrinking market share, it sold its PC division to China’s Lenovo. It began a major push into IT consulting in the 1990s.

Building the Computers of the Future

At the turn of the 21st century, IBM and Stanford University jointly demonstrated the first implementation of Shor’s Algorithm, a quantum algorithm that can factor large numbers into their prime components. That raised some big risks: The ability to execute the algorithm underpins the fears that quantum computers will be able to crack the encryption that has protected much of the world’s data for decades. But more broadly, the breakthrough proved that quantum computing is more than just theory. It was a massive milestone for the industry.

“We’ve had a long, proud history of mathematics here,” Gambetta says. “Think of algorithms as the foundation.”

IBM then began pushing quantum out of the lab and into the world. To date, the company has deployed 85 quantum systems, for use by more than 300 organizations, typically laboratories and educational institutions. That is up from last year’s tally of 75 deployments for 250 organizations.

The figures include both computers, which the company defines as systems with over 100 qubits, and devices with fewer than that amount. IBM has deployed 25 systems with more than 100 qubits. Google, perhaps IBM’s closest quantum rival, has deployed just two systems of that size.

IBM aims to lead on the quantum software front as well as in hardware. Gambetta says Qiskit, an open-source software stack for quantum computers that is based on the popular coding language Python, is one of its most popular offerings. At last check, Qiskit had been downloaded 13 million times and used to run over 3.8 trillion circuits on IBM Quantum systems.

Despite the progress, there are still plenty of puzzles for Gambetta’s team to solve. The biggest challenge for IBM and the industry is devising a quantum computer that can maintain normal operations even in the presence of errors, a concept known as fault tolerance. Today’s machines are too error-riddled for broad commercialization. The problem is in the qubits, whose quantum states are particularly sensitive to changes in the physical environment, meaning anything from electromagnetic fields to heat. That, in turn, causes computational errors.

It’s unrealistic to imagine a future where quantum machines are completely error-free, but creating a computer that can maintain normal operations even in the presence of these disturbances would be a big step forward. IBM looks to be making real progress: In October, IBM scientists showed how they could use relatively inexpensive classical hardware from Advanced Micro Devices to interpret the results of a quantum error-correction algorithm. IBM called it a step toward building “practical and realistic” hybrid systems.

What’s more, IBM has vowed to deliver a fault-tolerant supercomputer called IBM Quantum Starling by 2029. The company aims for the machine to be able to conduct 100 million quantum operations using 200 logical qubits, which IBM says will give Starling 20,000 times more processing power than today’s leading quantum systems. Starling will be built by connecting multiple, smaller chips, which lays the foundation for even larger scalable systems in the future.

“We’re really looking forward to them getting Starling out because the consensus in the industry is that it could cross a chasm in terms of usability,” says Melius Research analyst Ben Reitzes.

IBM is already looking beyond Starling—to a much larger system called Blue Jay. Scientists say quantum computers have to get larger to become more useful. Scaling, however, requires more qubits, and a higher number of qubits typically correlates with more errors, which gets back to the need for fault tolerance. IBM has resolved to overcome these obstacles and launch Blue Jay sometime after 2033.

In addition to making quantum computers larger, IBM is looking to connect them. In November, IBM and Cisco Systems announced a partnership to build a prototype for a quantum network. While classical computers routinely communicate by networks—the most basic being the internet—quantum computers don’t have this ability. Connectivity thus looms as another necessary milestone before commercialization.

Eventually, IBM’s quantum computing division “could be a company maker,” says Melius’ Reitzes. “Right now, it’s not big enough to matter, but it has the potential to be a multiple-billion-dollar business.” IBM, which booked $62.8 billion in revenue last year, hasn’t yet broken out its quantum revenue.

Since the industry is at such an early stage, it’s difficult to calculate just how big the revenue opportunity could be—not just for IBM, but as a whole. A widely cited McKinsey report released earlier this year forecasts industrywide sales of anywhere from $45 billion to $131 billion by 2040. Boston Consulting Group forecasts an even higher range, between $90 billion and $170 billion.

Morgan Stanley analyst Erik Woodring sees a $50 billion market by 2040 and expects IBM to capture about 20% of that. “In speaking with management, they feel relatively confident in that number,” Woodring says.

He thinks IBM’s history bodes well for its chances in quantum. “IBM has effectively exacted change across every major technology computing cycle over the last century,” Woodring explains. “You have a history of technology innovation—even if you aren’t the sustainable winner in those end markets, you can deliver a system that is clearly differentiated versus others.”

He likens IBM’s role in the quantum computing industry to that of Apple in smartphones. Apple has created what Woodring calls an “indestructible ecosystem” by controlling its own hardware, software, and services. IBM appears to be doing much the same in quantum. The 20% figure, which IBM declines to discuss, is similar to what Apple has managed to capture in the global smartphone market.

A lot still has to go right for IBM to fulfill its promise: fault tolerance, scaling, and all the challenges that come with creating a new industry. However, it isn’t a do-or-die proposition for IBM, Woodring points out. If the quantum division were to fall short of its targets, IBM’s other businesses would keep chugging along and help pick up the slack.

“If quantum ultimately faces some form of demise,” he adds, “it’s going to be hard for any company that’s involved, but IBM is in a much better position relative to a lot of the start-ups.”

For now, IBM’s quantum research is clearly benefiting from its parent’s deep pockets. The company spent some $7.5 billion on R&D last year, or 12% of total revenue. IBM doesn’t break out quantum’s share of that, but in all, it’s more than what Microsoft spent as a percentage of total revenue in its most recent fiscal year. The same goes for Nvidia, which diverted just 7.2% of total revenue to research.

The pure plays, for their part, are racing to get the technology to market to offset continued losses and keep their businesses moving ahead. Quantum Computing, for instance, posted just $384,000 in revenue in its third quarter, while operating expenses more than doubled to $10.5 million from the prior year.

While their stocks can see big jumps from enthusiasm for quantum, the pure plays also experience major drops. The volatility is evident in their beta, or volatility, numbers. With a beta of 2.54, IonQ’s price is more than twice as volatile as the market, which has a beta of 1. Rigetti has a beta of 2.12; D-Wave, 1.24.

IBM’s diversification helps keep IBM’s stock relatively stable. Its beta stands at 0.62, indicating that it’s less volatile than the market itself. And lately it has been showing real strength. After years as a laggard, the stock gained about 41% this year, thanks not only to advances in quantum but also strength in AI and the cloud. The rise has topped those of the three major indexes as well as IonQ, which has gained 30%.

The pure plays, of course, aren’t IBM’s only competitors. Alphabet, Amazon.com, and Microsoft all have quantum agendas. Even Nvidia has aspirations in the space, where it aims to contribute to the development of hybrid systems. IBM, for its part, won’t so much as name any of its rivals.

“I think there’s enough space for many winners, with the end goal of making sure that quantum is an industry,” Gambetta says. “If we don’t have people creating their own algorithms, creating their own technical services, creating their own software, I think this industry will fail.”

He may be right. But if one company does end up as No. 1, don’t be surprised if it’s IBM.