The Year in Review

Large caps are set for another double-digit gain. International stocks are up nearly 30%. Even smaller companies held their own. High-quality bonds have added more than 7% through November. On screen, it reads like a smooth ride.

The real-time experience, however, was much bumpier. The year opened with political fireworks. Tariffs and the DOGE program dominated headlines, and the market flirted with a bear market, before recovering and moving on to new highs. Once again, the attention shifted back to what actually matters: earnings. And as AI spending ramped up, it quickly drowned out the policy noise.

What to Expect in 2026

Looking ahead to next year, there is no shortage of things that could rattle the markets. Midterm election years are historically the choppier part of a presidential cycle, and this one brings debates over taxes, spending, trade, and AI regulation.

The history is encouraging, though. The drawdowns can be sharp, but the recoveries usually are, too. Long-term investors who can see through the fog tend to come out ahead.

One underappreciated bright spot is the consumer. The One Big Beautiful Bill Act is set to deliver an estimated $517 billion in tax refunds during the 2025 filing season1. That’s a 44% jump, and it could create a meaningful boost in the first quarter. Think of it as a well-timed sugar rush for the economy.

The Federal Reserve is also likely to continue generating headlines. Chair Powell’s term ends in May, and depending on how the appointments shake out, there could be an even more meaningful change in the voting membership.

All of this is happening while the committee is already split over how to balance cooling growth and still-elevated inflation. Those shifts might influence policy at a sensitive moment.

Private credit also gets a spotlight. After years of strong inflows, the tone around the market is changing. There are real concerns, but it helps to remember that the strategy is driven by income rather than capital appreciation.

Even during the financial crisis, income outweighed losses. Still, the ecosystem is larger and more varied today, which means manager selection and diversification matter more than ever.

And Then There is AI

Next year could be the first real show-me year. Investors will want more than demos. They will want proof. Can companies grow revenue with the same or fewer employees? Can margins expand in industries that have barely budged in decades? Will we see breakthroughs, like true full self-driving? The risk cuts both ways. Delays may frustrate markets, but upside surprises can be powerful.

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1. Source: Morningstar, Wells Fargo Investment Institute analysts. “Bigger tax refunds – up to $2,000 on average – could give stocks a boost next year.”