2025 was a good year for investors, whether in stocks, bonds or just about anything else. And while analysts have highlighted a number of uncertainties in 2026, the median prediction is another positive year. The stock market is predicted to return 10.8%1 and economist surveys estimate chances of recession remain at a low 14%. The table below shows a summary of the forecasts:
| 2025 Prediction | 2025 Actual | 2026 Prediction | |
|---|---|---|---|
| S&P 500 Returns | 11.6% | 17.9% | 10.8% |
| Bond Returns | 8.5% | 8.2% | 3.9% |
| GDP Growth | 2.2% | 2.2% | 2.0% |
| Inflation | 2.5% | 2.7% | 2.7% |
| Chance of Recession | 18% | None | 14% |
2025 In Review
Given the range of scenarios analysts described as possible for 2025, last year’s results were solidly on the positive end. Bonds, as measured by 10-year Treasuries, matched their optimistic forecast, and the stock market almost doubled the median prediction.
The tone for 2025 was set by tariffs and AI. Trump’s campaign proposal was 60% tariffs on China and 10% tariffs elsewhere, and markets priced in that half of that would ultimately go through. There was a brief shock in April as the markets came to worry that the U.S. would actually levy the full, promised tariffs, but 2025 ended with effective tariff rates coming in almost exactly in line with the original estimates. The Wharton Budget model calculates the current rates at 37.4% and 8.6% on China and the rest of the world respectively.
Given that the final tariff were in line with predictions, it makes sense that GDP came in near original estimates. Corporate earnings, which are a more direct driver of stock returns, came in slightly below expectations, and inflation also came in slightly worse than predicted. Given just these factors, we should have seen something like 12% stock returns and 5% bond returns. There is active debate over what drove the actual 18% stock returns and 8% bond returns of last year, but most commentators attribute a portion of this outperformance to hopes that AI will be both disinflationary and a driver of economic growth.
2026 Themes
If the story of 2025 was moving from a landscape driven by monetary policy to one driven by fiscal policy, 2026 is about transitioning to a more traditional economic cycle driven by consumer spending and business productivity, with fiscal policy playing the spoiler.
The predicted stock returns of 10.8% reflect an optimistic view given that it is four points above the long-term assumption of 7%. The bond prediction of 3.9% is slightly below average. These forecasts have priced in a labor market that is slightly weaker than normal, and expectations that AI-based productivity will drive high earnings growth.
These are balanced with uncertainty over unemployment over the 12 months and the understanding that any additional budget deficit will reignite an already uncertain inflation environment. Fewer than expected cuts to the Fed Funds rate will help inflation, but they will lower returns for both stocks and bonds. The specific assumptions for each of these factors are shown in the table below. If these underlying factors turn out worse than expected we should see lower than predicted returns.3
| Factor | Base Case |
|---|---|
| Earnings Growth (AI productivity-driven) | 14.4% |
| Unemployment Rate | 4.5% |
| Consumer Spending Growth | 1.8% |
| Tariff Rates | 37.4% China 10.9% Overall |
| Budget Deficit as % of GDP | 6.0% |
| Fed Funds Rate Cuts | 2 |
Given all that, here is a rough illustration of some possible outcomes for the year:
What To Do With These Forecasts
The goal of this overview is not to drive any changes to your investments. Instead, the hope is that laying out the full breadth of predictions provides some peace of mind. When a headline comes across talking about some “high risk of recession”, or you hear someone claim how “obvious it was that X was going to earn 50% returns,” you can put that in the context of what the consensus actually was going into the year.
The returns of any 12-month period have high variance, so we shouldn’t expect the final numbers to come in right at these estimates. The chance of the stock market losing money or doubling its average return in any given year are both within one standard deviation. And on average, every year will see one period where the stock market declines ten percent.
My hope is that understanding this variance and the range of factors that affect investment outcomes keeps you from second-guessing yourself when things start looking bad.
Footnotes:
- S&P 500 forecast is the median of nine analyst estimates. It is based on a final value of 6932, a median target of 7600, and include an estimated 1.15% dividend yield. See S&P 500 Analyst Estimates below. ↩︎
- See Sources: Table 1. Headline predictions ↩︎
- The unemployment rate is several steps removed from its impact on stocks and bonds prices. If higher unemployment drives lower consumer spending and this results in lower earnings than are priced in, stocks should underperform. If this happens in a stable inflation environment, it could lead to additional rate cuts and higher bond returns. Separately, the base case for tariffs and budget deficit is to remain unchanged in 2026; lower tariffs would help stocks and a lower deficit would help bonds. ↩︎
- See Sources: Table 2. Underlying factors ↩︎
S&P 500 Analyst Estimates:
Sources: Table 1. Headline predictions
Sources: Table 2. Underlying factors
| Earnings Growth | https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_021326.pdf |
| Unemployment Rate | Average of Philadelphia Fed and SIFMA predictions: https://www.philadelphiafed.org/-/media/FRBP/Assets/Surveys-And-Data/survey-of-professional-forecasters/2025/spfQ425.pdf, p. 1 https://www.sifma.org/wp-content/uploads/2025/07/Economic-Survey-Report-2H25.pdf, p. 13 |
| Consumer Spending Growth | Average of Philadelphia Fed and SIFMA predictions: https://www.philadelphiafed.org/-/media/FRBP/Assets/Surveys-And-Data/survey-of-professional-forecasters/2025/spfQ425.pdf, p. 11 https://www.sifma.org/wp-content/uploads/2025/07/Economic-Survey-Report-2H25.pdf, p. 13 |
| Budget Deficit | https://www.sifma.org/wp-content/uploads/2025/07/Economic-Survey-Report-2H25.pdf, p. 9 |
| Fed Funds Rate Cuts | https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html |
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