“Predicting rain doesn’t count, building the ark does.” – Warren Buffett
“Have an opinion on what the market should do but don’t decide what the market will do.” – Bernard Baruch
2025 turned out to be a strong year for investors. Both stocks and bonds delivered solid returns, supported by a long‑term bull market that continues to show remarkable durability. While broad commodities lagged, the metals complex stood out with meaningful gains, reflecting supply‑side constraints, continued purchases by sovereign governments, and renewed investor interest. It was the kind of year where diversified portfolios were finally rewarded again, and many of the structural trends that have powered markets for more than a decade remained firmly intact.
All data as of 01/02/2026, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
We must always remember the stock market and the economy are not the same thing. So, even as the markets chugged along, the economic backdrop was far more complicated. The U.S. economy was beaten and battered throughout 2025—and powered ahead despite it all. In our opinion, the real question for 2026 is whether the underlying sources of weakness will stay contained or begin to erode the resilience that has defined this expansion. Beneath buoyant GDP growth and rising asset prices are serious worries that can’t be ignored. The labor market is looking softer by the month. Elevated inflation continues to squeeze household budgets. And there’s a growing fear that the AI‑fueled productivity boom could leave many workers behind rather than lifting them up.
Those pain points have already pushed public sentiment on the economy sharply negative, even as headline data paints a more optimistic picture. But if 2025 taught us anything, it’s that the U.S. economy is extraordinarily adaptable. That resilience remains one of the defining strengths heading into 2026, even as the list of challenges grows longer.
Chart #1: www.stockcharts.com Data 01/01/11 – 12/31/25 as of 01/05/26. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Three Themes for 2026
As we say every year, we are not in the business of setting a price target on stock market indexes and making a guess about where bond yields will be a year from now. Too much happens over the course of 12 months to have a realistic chance of being correct based on the knowledge had when making the prediction. There are just too many unknowns. We believe the price target game is more about marketing for the major players, indicating the direction the firms see markets heading in the new year. For what it’s worth, we have seen S&P 500 year-end price targets ranging from a low of 7100 to a high of 8,100. Wells Fargo Investment Institute is calling for 7,800 at year-end.
What we do find useful, however, is to think through the big picture of how the world is working. The result is several themes we believe are useful guides to understanding what we believe will drive the markets over the short, intermediate, and long term. This year we have three.
Theme #1: Federal Reserve Policy Takes Center Stage
As we enter 2026, Federal Reserve policy is poised to take center stage. After a multi-year battle against inflation, the narrative appears to be shifting. While headline inflation has moderated, underlying labor market fragility is emerging as a more pressing concern. Wage growth is softening. Layoff notices have increased. At the same time, new job creation has slowed. We believe these signals suggest the Fed may pivot toward a more dovish posture, one that prioritizes employment stability over inflation containment.
Complicating this shift is the arrival of a new Fed Chair in May 2026. While leadership transitions often bring a fresh perspective, we believe this one carries political weight. From our perspective, it is possible that the incoming Chair could be perceived as too closely aligned with the White House. Such a situation could undermine their ability to build consensus within the FOMC. Credibility and independence — cornerstones of effective monetary policy — may be tested. Markets could react sharply if internal divisions or external pressures cloud the Fed’s messaging or decision-making.
Magellan’s Take: We believe the Fed’s likely pivot toward dovishness will be a defining theme in 2026 — but it won’t be smooth. Labor market weakness will likely outweigh lingering inflation fears, creating room for rate cuts and liquidity support, but there are no guarantees. Inflation has remained above the Fed’s stated goal of 2%. We’re watching the leadership transition closely. There is a real possibility that we have a Chair seen as politically compromised, and the hard data not clearly pointing to the lower interest rates the White House has been clear it wants to see. In such a situation, unifying the committee may be a struggle, leading to mixed signals and policy hesitancy. At Magellan, we’re currently positioning portfolios to benefit from easing policy while remaining agile in the face of potential credibility challenges.
Theme #2: Geopolitical Policy Stimulus, Geopolitical Risks
After years of mixed economic policy across the globe, we see 2026 as shaping up to be a year defined by broad global stimulus. In the US, the policy mix turns supportive as the Federal Reserve could deliver multiple rate cuts (see theme #1), and fiscal policy adds momentum early in the year. The One Big Beautiful Bill Act (OBBBA) is expected to reduce individual taxes by $144 billion for 2025 and outside estimates suggest up to $100 billion in enhanced tax refunds into households through higher SALT caps, overtime and tip write‑offs, senior deductions, and an expanded child tax credit.¹ Businesses should benefit from bonus depreciation and R&D expensing. The second half of the year becomes less certain as tariff outcomes hinge on the Supreme Court’s ruling on IEEPA and as some households face pressure from reduced Medicaid and SNAP benefits and resumed student loan collections. Globally, Europe is expected to continue to lean on fiscal expansion, China deploys both monetary and fiscal tools to counter deflation risks, and Japan pairs modest monetary tightening with an ambitious, growth‑focused spending agenda. The result could be a synchronized wave of policy support across major economies.
Despite this stimulus, geopolitical risks have not disappeared. US‑China economic decoupling continues to reshape supply chains, with suspended rare‑earth export controls accelerating Western diversification efforts and raising input costs as security takes precedence over efficiency. The global race for AI dominance intensifies competition for energy, infrastructure, and cybersecurity capabilities, while political polarization across Western democracies fuels unpredictable policymaking and shorter policy cycles. At the same time, rising debt burdens in the US, Europe, and Japan highlight long‑term fiscal vulnerabilities as governments prioritize growth and security over austerity. These forces create a backdrop where geopolitical tensions, structural realignments, and fiscal strain can quickly influence markets despite broad policy support.
Magellan’s Take: We see 2026 as a year where stimulus drives opportunity, but geopolitics drives volatility. Early‑year policy support — both in the US and abroad — should provide a constructive backdrop for growth and risk assets. The durability of that support, however, we believe will be tested by continued supply‑chain realignment, AI‑driven competition, political polarization, and rising debt loads across the globe. At Magellan, we’re positioning portfolios to benefit from easing economic policy while maintaining the flexibility to navigate geopolitical shocks. Resilience, selectivity, and disciplined risk management remain essential as markets balance powerful tailwinds with equally powerful uncertainties.
Theme #3: “Everybody” is Stock Market Positive – and That’s Exactly Why We Need to Pay Attention
One of the defining features of the 2026 landscape is how hard it is to find a true bear. The prevailing sentiment across Wall Street right now is one of optimism. It’s not hard to understand why. Corporate profitability remains strong, margins are holding up better than expected, and the market continues to reward companies with clear growth narratives. But when sentiment becomes this one‑sided, it’s worth pausing. While the optimism is based on reasonable assumptions, it also raises the stakes if something breaks the narrative.
Inflation is the first place where that narrative could wobble. We see at least four forces that could nudge inflation higher rather than lower. The OBBBA tax cuts—most of which take effect this year—represent meaningful fiscal stimulus, especially for lower‑ and middle‑income households. At the same time, the Fed is back expanding its balance sheet and leaving the door open for additional rate cuts. Add in strong corporate profits and a relatively low cost of capital, and you have the ingredients for a pickup in business investment. Finally, the wealth effect remains alive and well: rising equity prices and firm home values continue to support consumption amongst those in the top half of the income spectrum. None of these factors are problematic on their own, but together they create a backdrop where inflation could easily reaccelerate.
The labor market is the other potential pressure point. Beneath the headline numbers, we’re seeing softer manufacturing activity, fewer job openings, and early signs that AI‑driven productivity gains may reduce labor demand in certain sectors. A cooling jobs market doesn’t automatically derail the economy, but it does challenge the assumption that growth will glide forward uninterrupted. If employment weakens more than expected, consumer confidence and spending could follow.
Magellan’s Take: While the consensus may be overwhelmingly bullish, our view is more balanced. There are legitimate reasons for optimism, but also clear areas where the story could shift quickly. In an environment where “everyone” is positive, disciplined planning and thoughtful risk management matter even more.
Putting It All Together
Taken together, our three themes paint a picture of a market environment that remains constructive but far from risk‑free. We believe the long‑term bull market is still intact, supported by healthy earnings expectations. At the same time, the forces we’ve outlined—potential inflation pressures, a softening labor market, global risks, and a consensus that feels almost too optimistic—suggest that 2026 may not follow the smooth, upward path investors have grown accustomed to over the past three years.
Our base case is still positive: we expect markets to deliver gains in 2026. But we also anticipate a bumpier ride. After three consecutive years of strong stock market performance, a period of more modest returns and higher volatility isn’t necessarily a bad thing. In fact, it can help reset expectations, create healthier entry points, and reinforce the importance of staying disciplined rather than chasing momentum.
The resilience the U.S. economy demonstrated in 2025 shouldn’t be underestimated, and many of the structural drivers of growth remain in place. But this is a year where thoughtful positioning, risk awareness, and a long‑term perspective matter more than ever. Our goal is to help clients navigate that landscape with clarity and confidence—capturing the opportunities while staying grounded in the realities that could shape the path ahead.
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
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MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner
Rob.Cahill@wfafinet.com
Jonathan D. Soden, Managing Partner
Jon.Soden@wfafinet.com
Cassandra Queen, CFP®,ChFC®, Senior Wealth Planner
Cassandra.Queen@wfafinet.com
Susan C Schupp, MBA, Senior Wealth Planner
Susan.Shupp@wfafinet.com