16 Jan Navigating 2026: What Strong Markets, New Risks, and Big Shifts Mean for Your Portfolio

In six of the past seven years, the S&P 500 has delivered double-digit returns. That kind of consistency speaks to the power of long-term investing, even in the face of frequent uncertainty. What made last year especially notable is that returns were not limited to U.S. stocks alone. International equities and bonds also contributed meaningfully to portfolio growth.

At the same time, strong performance creates its own challenges. Valuations are elevated, market leadership has become more concentrated, and uncertainty is building around interest rates, currencies, and global politics. As we move into 2026, this combination of strength and risk makes thoughtful planning more important than ever.

A Look Back at a Year Full of Concerns

The past year offered no shortage of reasons for investors to worry. Tariff announcements triggered sharp market swings. Questions about artificial intelligence raised comparisons to past bubbles (more about this here). The U.S. dollar fell at a pace not seen in decades. Despite all of this, markets moved higher, rewarding investors who stayed disciplined and avoided reacting to headlines.

This is where context matters. Looking at markets through a longer-term lens and using data to frame conversations can help separate signals from noise. Get your crystal balls out, because below are ten key themes that are likely to shape markets and portfolios throughout 2026, along with ten charts that help illustrate the bigger picture.

1. Artificial Intelligence Remains a Powerful Market Force

Artificial intelligence has moved quickly from innovation to large scale investment. Spending on data centers, computing power, and related infrastructure has surged, and AI is now contributing meaningfully to economic growth. Still, questions remain about how quickly these investments will translate into long-term profits.

History offers useful perspective. Transformational technologies, from railroads to the internet, tend to follow a familiar pattern. Early skepticism gives way to rapid adoption and enthusiasm, often followed by periods where expectations need to be reset. AI appears to be following a similar path.

Market leadership in 2025 was concentrated in areas most closely tied to AI, including Technology, Communication Services, and Industrials. That said, most sectors delivered positive returns, with Real Estate being a notable exception.

Key points to keep in mind:

• Large technology companies have committed hundreds of billions of dollars to AI related investments, creating both opportunity and concentration risk.
• Business adoption of AI is accelerating, but it is still early. Only a modest share of U.S. businesses report active AI use today.
• AI infrastructure spending is massive, often involving interconnected investments among the same major players.
• The largest technology companies now account for roughly one third of the S&P 500’s total market value.

Most investors already have exposure to AI through broad market investments. The goal is not to avoid innovation, but to ensure portfolios remain diversified and aligned with long term objectives.

2. The Midterm Election Brings Noise, Not Direction

The U.S. midterm elections in November 2026 are already drawing attention. Elections often raise concerns about regulation, taxes, and government spending, and they can increase short term volatility. Historically, however, election outcomes have had little lasting impact on market performance.

Since 1933, the S&P 500 has delivered solid average returns during midterm election years. While returns can vary year to year, markets have advanced under many different political environments.

The key takeaway is that markets are driven far more by earnings and economic fundamentals than by which party controls Congress (as much as some congressional egos would like to think otherwise). Elections are best viewed as events to plan around, not signals to change long term investment strategy. If you want a deeper dive on this topic, check out this webinar.

3. A Federal Reserve Transition Adds Uncertainty

Monetary policy is entering a new phase. Inflation pressures have eased, while labor market softness has become more relevant. At the same time, Federal Reserve Chair Jerome Powell’s term ends in May 2026, opening the door to new leadership for the first time since 2018.

The Fed has already begun cutting rates, and current projections suggest only modest additional cuts in 2026. While the Fed directly controls short term rates, longer term interest rates depend on growth, inflation expectations, and global demand for capital.

Important considerations:

• New Fed leadership may bring subtle shifts in emphasis, but history shows economic growth has persisted across different chairs and administrations.
• The Fed has slowed the runoff of its balance sheet, adjusting how it provides liquidity to the system.
• Short term speculation around Fed decisions rarely improves long term outcomes.

Rather than focusing on individual policy meetings, it is more productive to understand how interest rates fit into an overall financial plan.

4. A Weaker Dollar Highlights the Value of Global Investing

The U.S. dollar experienced one of its sharpest declines in decades, marking a potential turning point after a long period of strength. Currency cycles tend to last many years, and shifts can have meaningful effects on investment returns.

In 2025, the dollar fell roughly 9% against an index of developed market currencies. The euro and British pound gained significantly, while currency movements varied across other regions.

For investors, a weaker dollar can:

• Boost returns from international investments when foreign currency gains are converted back to dollars.
• Support U.S. companies with meaningful overseas revenue.
• Reinforce the benefits of maintaining exposure across regions and currencies.

Global diversification is not just about growth opportunities, but also about managing currency and economic risk over time.

5. Valuations Are High by Historical Standards

Strong market performance has pushed valuations higher. In 2025, the S&P 500 gained nearly 18% with dividends and reached dozens of record highs.

The Shiller price to earnings ratio, which smooths earnings over a ten-year period, is now near its second highest level in more than a century. The only higher reading occurred during the peak of the dot-com era.

Context matters:

• Earnings growth remains solid, and current valuations are supported by real profits rather than speculation alone.
• Valuations vary widely across markets. International stocks and U.S. small caps trade at much lower multiples.
• Some AI related assets reflect extremely optimistic assumptions.

High valuations do not predict an immediate downturn, but they do increase the importance of diversification and risk management.

6. Growth Remains Solid, Even as the Job Market Softens

Economic growth has proven more resilient than many expected. After a brief slowdown early in 2025, activity rebounded strongly and is expected to remain healthy into 2026.

Quarterly GDP growth exceeded expectations in the second and third quarters of 2025. Productivity gains, mostly supported by AI, remain a key factor for long-term growth.

At the same time:

• The labor market has cooled, with unemployment rising modestly.
• Economic gains have been uneven across income groups and industries.
• Productivity improvements often take time to fully show up in the data.

For investors, steady growth supports earnings and long-term returns, even as short term data fluctuates.

7. Tariff Effects May Take Time to Appear

Tariffs were a major source of market volatility last year, yet their impact on inflation has been limited so far. This lag reflects how companies adjust supply chains and pricing over time. We may also see additional impacts as time passes.

Core inflation has continued to moderate, even as goods inflation has picked up modestly and services inflation has slowed. Core inflation measures price changes across the economy excluding food and energy, which tend to be volatile, while goods inflation focuses specifically on physical items such as vehicles, appliances, and clothing. Goods inflation is more sensitive to supply chains, tariffs, and manufacturing costs, whereas core inflation is broader and more influenced by wages and service sector pricing.

Why the impact has been muted:

• Some tariffs were delayed or reduced through negotiations.
• Businesses absorbed costs or adjusted inventories.
• Strong demand helped offset higher prices.

Tariffs are better viewed as policy tools rather than permanent economic shifts. Markets and businesses tend to adapt.

8. Government Debt Remains a Long-Term Issue

Federal debt continues to rise, now exceeding $38 trillion. While these figures can sound alarming, high debt levels have persisted for long periods without triggering immediate crises. It’s more important to consider the servicing of our federal debt as it relates to our GDP.

Debt relative to the size of the economy has climbed steadily across multiple cycles. The concern is less about short-term risk and more about how debt influences future policy and interest rates.

Recent developments include:

• New legislation that clarified tax rules but added to projected deficits.
• Ongoing political debates around funding and fiscal priorities.

Historically, investors who exited markets due to debt concerns missed significant growth. Instead, investors should focus on two practical actions: First, maintain diversified portfolios that can perform across different economic and policy environments. Second, review their tax strategies and take full advantage of the new provisions in the OBBBA, since these changes create immediate planning opportunities that can meaningfully impact after-tax returns and wealth transfer strategies.

9. Private Credit Growth Deserves Careful Attention

Private credit has expanded rapidly as lending has shifted outside traditional banks. This market offers higher yields and flexibility, but also comes with less transparency and liquidity.

While private credit can enhance income, traditional bonds currently offer historically attractive yields as well and remain the foundation of balanced portfolios.

Key risks to understand:

• Limited liquidity and delayed pricing.
• Concentrated maturities in the coming years.
• Sensitivity to economic downturns.

Appropriate sizing and careful selection are essential when incorporating private credit. Like any higher-risk asset, exposure should remain limited to what you are willing to lose.

10. Many Asset Classes are Performing Well

One of the most encouraging developments is the broadening of returns across asset classes. After years of U.S. dominance, international stocks and bonds played a larger role in 2025.

International equities led returns, while fixed income provided income and stability. Most major asset classes delivered positive results.

This reinforces a core principle of investing: diversification matters. While it may be tempting to make sudden portfolio changes based on recent performance or headlines, investors who maintain balance and stay on track with their financial plans are likely to be rewarded. The current environment demonstrates why holding a mix of U.S. stocks, international equities, and fixed income can help portfolios weather different market conditions and capitalize on opportunities.

Looking Ahead

As we move into 2026, uncertainty remains a constant. Innovation, policy changes, shifting currencies, and evolving markets are not new challenges. What continues to matter most is maintaining a disciplined approach that aligns investments with YOUR long-term goals, not the hot investment of the moment.

Strong markets can be just as challenging to navigate as weak ones. This is where planning, perspective, and patience make the difference.

Information is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products, or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this post (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of Angela Wright, an Investment Adviser Representative of Gemmer Asset Management LLC (“GAM”) and should not be regarded as the views of GAM, or a description of advisory services provided by GAM or performance returns of any GAM client.  References to securities or market-related performance data are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.  

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