Economic Forecast for 2026—From Dr. Allen Sinai

Don’t worry…be happy. That was a theme of the stock market in 2025 when it was mired in a barrage of economic chaos and drama that kept everyone on edge—tariffs…a government shutdown…transformative technology…soaring health-care prices…a new “state capitalism”…nosebleed stock valuations…and President Trump delivering daily existential shocks.

But despite all this tumult, the S&P 500 index hit a new all-time high more than 30 times. Can the bull market continue in 2026?

“Stocks will keep defying gravity,” says Allen Sinai, PhD. His stock market outlook and reasoning: He expects excellent profits and high margins for a fourth year in a row. The doomsday headlines have buffeted and, at times, overshadowed powerful tailwinds. These include steady economic growth, falling interest rates, tax cuts, stunning corporate earnings and profit margins, and a new role for the Trump government in the private sector, all stoked by the boom in artificial intelligence (AI).

Bottom Line Personal interviewed Dr. Sinai in early November about his outlook for the stock and bond markets as well as the global economy for 2026. Here are his eight predictions for the coming year….

Prediction #1: The S&P rises 11%…and the Dow Jones rises 8% (both with dividends included)

Why are we likely to see a fourth year of double-digit gains? Companies are firing on all ­cylinders to support higher earnings and higher stock prices. S&P 500 corporate earnings should grow 13% in 2026, and profit margins should stay at a spectacular high of 14%. Reason: Big “T” technology—companies in almost every industry are using AI and other digital technologies and apps to boost productivity, reduce costs, increase efficiency and sales, and keep unemployment and inflation relatively contained.

Prediction #2: Surprising areas of the stock market have big gains.

These include…

Financials, especially top-tier and investment banks. Profit margins on lending are rising due to looser monetary policy and a steep yield curve. (Banks can borrow at shrinking levels of short-term interest rates and loan out the money at higher long-term rates.) Credit quality at these financial institutions remains strong, and their stocks still trade at reasonable valuations.

Developed Asia. Last year, cheap European stocks nearly doubled the performance of their US counterparts. Now it’s Japan’s turn—its new Prime Minister recently introduced a $65 billion economic stimulus package and pledged to raise defense spending. Stock markets in South Korea and ­Vietnam also should do well.

Areas to avoid: Consumer discretionary such as upscale luxury goods and apparel and cruise ships. They are richly valued at this point and would suffer disproportionately if the economy stumbles.

Prediction #3: Big volatility with one or more stock market corrections of 10% or more

The bull market will continue to mount a wall of worry. Stock investors must hang in there to get stellar returns. Keep an eye on the following potential risk factors that could trigger corrections…

Valuations. In 2025, the S&P 500’s forward price-to-earnings ratio ran as high as 20 to 22. From an historical perspective, that’s quite expensive compared with its 10-year average of around 18.6.

Spike in unemployment. The unemployment rate likely will rise to 4.9%, up from the 4.3% reported in September 2025. That’s not historically high, but cracks are beginning to show, with consumer spending—which is 70% of real gross domestic product (GDP)—at risk. Amazon recently cut 30,000 corporate jobs to streamline operations and shift resources to increase the use of AI. UPS, Intel and Microsoft all announced tens of thousands more layoffs recently. Trouble with jobs, of course, will affect consumer spending.

Accelerating inflation. US inflation is forecast at 3.4%, up from 3% last year. This hurts income and consumption.

2026 Congressional elections will bring potential gridlock because of political uncertainties and an unhappy populace.

Geopolitical risks. If the US is pulled into conflicts in Gaza, Ukraine, Taiwan or Venezuela, energy prices and inflation could surge.

Areas I am not so concerned will disrupt the markets or the economy…

Tariffs and trade wars. Investor panic that tariffs would cause sky-high prices for consumers and a full-blown trade war cast a shadow that nearly ended the bull market in April 2025. There is less reason to worry in 2026. It is unclear how many tariffs will remain in place if the Supreme Court decides they are unconstitutional. Actual tariffs that companies pay are lower than headlines suggest because of loopholes and exemptions. And many US companies have passed on only some of these costs to consumers. Meanwhile, trade-war tensions between Washington and Beijing have eased, with China promising to relax export controls on rare-earth minerals for one year and agreeing to buy American soybeans for the next three years.

Prediction #4: Moderate risk for recession—something to watch but don’t panic

I predict the odds for recession at 25%. Real GDP is likely to grow at a healthy 2.6% rate in 2026, despite all the worries. Gains will be driven by stimulative reductions in short-term interest rates, tax cuts, tech spending, a productivity boom, and weaker but steady consumer spending. While lower-income households have felt the pinch of inflation, all households will benefit from last year’s tax-cut bill and continue to spend.

Prediction #5: President Trump gains influence over the Fed

The Federal Reserve likely will cut interest rates at least three times in 2026. By year-end, short-term interest rates will be in a range of 3%-plus and mortgage rates a little lower as well.

But the most consequential news should come by early 2026 when President Trump indicates a replacement for Fed Chair Powell starting in May 2026. The President has been replacing Federal Reserve Board Members with loyalists to keep interest rates low. Not only would a Trump-driven Fed be a seismic shift away from its longtime political independence, it also could pump up growth—at the cost of a chronically inflationary environment and weaker US dollar.

Prediction #6: AI still in a boom…not a bubble

Investors are right to be concerned about the nearly $1.5 trillion spent worldwide on AI last year to hyperscale data centers and develop AI models. There are legitimate worries about how to monetize all that infrastructure and how much revenue and profits transformative technology can produce in the near future.

My take: Richly valued AI stocks will, at some point, become too overvalued and pull back sharply. But now, we are only halfway through a five-to-seven-year innovation cycle. Plus, company stocks at the forefront of AI, such as Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia, will not melt down like so many Internet stocks did in the late 1990s. These tech giants remain immensely profitable and produce steady earnings because they have become essential to the economy.

Prediction #7: Gold keeps its glitter, although with great volatility

In 2025, gold had its biggest rally since 1979 and hit an all-time high of more than $4,000 per ounce. I expect gold prices to rise to $5,200 per ounce this year. Investors and central banks will continue to buy gold as a safe-haven investment to preserve wealth in the face of economic and political uncertainties, including higher inflation, geopolitical instability, a shrinking US dollar, Washington gyrations and a loss of confidence in long-term US Treasuries as the Federal deficit grows.

Prediction #8: The bond bear market is back

Bond investors got a brief respite in 2025 with the benchmark Bloomberg US Aggregate Bond Index rising to nearly 7% (through early November). But bonds look very unattractive compared with equities for 2026. Higher inflation and Congress’s inability to confront federal deficits should push the yield on 10-year Treasuries up toward 4.5%. I expect the total bond market to have negative returns. (Remember—bond prices move in the opposite direction from bond yields.) If you are a saver or senior on a fixed income: Expect deposit-account yields to fall to 3% or less. Finding ways to generate safe income that stays ahead of inflation will be challenging—you may want to explore annuity options and blue-chip corporate bond funds.

For Dr. Sinai’s forecasts from last year and beyond, click here.