The Farther 2026 Outlook: Embrace Volatility

2025 was a volatile year for the U.S. economy and financial markets. As tariff and trade tensions in the first half of the year receded, economic and corporate earnings growth strengthened, resulting in another strong year for the U.S. stock market, and even stronger returns for investors in international stocks. We expect that 2026 will be another volatile year for the U.S. stock market and that clients should be prepared to “Embrace Volatility".  

This executive summary of our 2026 Outlook covers:

• Major themes we saw in 2025 and expect in 2026.
• Our financial market outlook.
• How to prepare your portfolio for the volatility we expect in 2026.

2025: Taco Tuesday & Artificial Intelligence

2025 reinforced the investor “buy-the-dip” mentality, as what proved to be the most compelling buying opportunity in the past two and a half years was met with a powerful and broad-based rally following the Spring stock market correction. The market’s response even gave rise to the “TACO” acronym—Trump Always Chickens Out—reflecting investor confidence that initial fears surrounding President Trump’s tariff policies would ultimately prove more severe than the policies themselves.

Artificial intelligence continued to dominate U.S. equity markets, with the S&P 500 increasingly functioning as a proxy for AI-driven growth. This dynamic has led to a historically elevated concentration in technology stocks relative to long-term norms. While AI-related optimism moderated toward year-end, we expect AI sentiment to remain a defining narrative for equity markets in 2026—either as a continued tailwind or as a source of volatility should expectations reset.  

It is often said that history does not repeat itself, but often rhymes. The Time Magazine 2025 Person of the Year was the Architects of AI. The magazine’s 1999 Person of the Year was Jeff Bezos, an announcement which came three months before the dot-com bubble burst. We do not yet know how the AI boom will end, but it is almost certain that not every company involved in it will be a winner.

Themes for 2026

We expect several themes to dominate the investment conversation in 2026:

Economic Growth: 2025’s economic growth was “K-shaped.” Asset owners benefited from stock market appreciation, while wage earners struggled to keep up with inflation. However, we expect tax relief from this year’s tax bill to be felt in 2026 and give a boost to economic growth.

Artificial Intelligence: AI is a transformative technology fueling a capital spending boom in the technology sector. Like past technological innovations, we expect that the benefits to society will be widespread, but that not all companies investing in AI will be winners. We expect the market will be more discerning about the companies investing in the AI space, rewarding a smaller group of companies both creating AI and using AI in their business to boost productivity.

The Federal Reserve: President Trump will appoint a new Fed Chair and at least one new member of its board.  Interest rates are expected to fall, but could fall more than expected if the President is able to exert political pressure on the Fed. Federal Reserve independence, or lack thereof, could have an impact in 2026 and beyond.

Stock Market Volatility: The second years of Presidential cycles have historically been the most volatile for the U.S. stock market, with sell-offs averaging nearly 20% (versus 14% across all years). If the U.S. market corrected 20% this year, we would recommend embracing that volatility and buying stocks.  Stocks’ valuation would be at their historic average, and we saw how President Trump responded to the 2025 market sell-off by changing course on policies that contributed to that correction. 

Financial Market Outlook

After three strong years of returns, we expect lower returns in the coming years due to high current valuations and 4% yields on U.S. Treasuries. With that backdrop, there are some areas of the markets which are relatively attractive at present:

Bonds: We find opportunities in the bond market for both taxable and tax-exempt investors:

• For taxable investors, municipal bonds currently represent an attractive bargain relative to taxable bonds.
• For tax-exempt investors, we recommend overweighting U.S. Treasuries over corporate bonds, given the historically small premium corporates offer.
• We continue to recommend inflation-protected TIPS bonds for both taxable and tax-exempt investors as a hedge against inflation risk.

U.S. Stocks:  If investors in AI become more discriminating in 2026, large-cap technology stocks may not lead the U.S. stock market. Defensive sectors such as healthcare and staples have historically outperformed in the 2nd years of Presidential cycles. Additionally, small- and mid-cap stocks have historically outperformed when large-cap valuations have contracted.

International Stocks: Foreign stocks are still cheaper than their U.S. counterparts after strong returns in 2025. We think opportunities exist in Japanese and South Korean stocks, where corporate governance reforms, share buybacks, and the potential for currency appreciation could provide a double-barreled source of returns.  In general, we prefer Asian stock markets to European ones. Still, we remain cautious on Chinese equities given the on-again, off-again nature of tariff negotiations and questions about Chinese economic growth.

Alternative Investments: After several years of strong returns in private credit, cracks have begun to appear among certain issuers, such as Tricolor and First Brands. More loans will likely have problems in the coming years. As the famous investor Howard Marks says, “The worst of loans are made in the best of times.”  

We believe that investors should approach alternatives with selectivity.  

• In both private credit and private real estate, we recommend avoiding the largest asset gatherers and using more niche managers.  
• We like infrastructure investments for the portfolio exposure they give to real assets.  
• In private equity and venture capital, we continue to like managers with proven records of investing their portfolios via the secondary market.

How to Prepare for 2026

We want to highlight several actions that our clients can take in 2026 to improve their portfolio returns.

Prepare in Advance:  The theme of our 2026 Outlook is to “Embrace Volatility.” While it is not a foregone conclusion that we will see a 20% sell-off in stock markets this year, we note that:

1. Global stock markets are trading near all-time highs.
2. We recently saw a near 20% decline in the S&P 500 from mid-February through early-April of 2025, and most investors have had recent experience on how that impacted their financial well-being. 

If you could not weather another 20% fall in stocks this year, now would be an appropriate time to take a few gains, rebalance your portfolio, and lower your overall portfolio risk level. A diversified portfolio is designed to help investors weather a storm in the financial markets and avoid panicking during sell-offs.

Diversify Your Investments:  We do not expect investing to be as simple as “Buy Large Cap U.S. Tech Stocks” in 2026, the theme that has worked the last 3 years. Instead, focus on diversification across asset classes, within them, and being prepared to shift tactically in 2026.

1. Asset Class Diversification: We expect increased volatility to raise the correlation between stocks and bonds, underscoring the importance of owning diversified assets. Investors should own multiple asset classes that have low or negative correlation with each other and not just stocks and bonds to adequately diversify away excess risk.
2. Stock Sector Diversification: We anticipate that defensive sectors, such as Healthcare and Consumer Staples, should outperform if volatility increases.
3. Tactical Opportunities: A correction would create another opportunity to purchase large-cap equities at levels in line with historical valuations.  
4. Big Picture:  Expect economic strength.  Higher tax refunds should reinvigorate the consumer, and AI capital spending should provide an uplift to GDP growth, making a recession a lower probability event.

Improve Your Portfolio Tax Efficiency: After several years of above average returns, we expect lower returns in the coming years.  With that backdrop, overall tax efficiency in a portfolio can improve your after-tax return meaningfully.

1. Tax-loss harvesting: By actively realizing losses on securities in taxable accounts and replacing them with very similar securities, a portfolio can build up tax losses. These losses can be used against gains elsewhere in the portfolio or carried forward to offset future gains. Studies have shown that active tax-loss harvesting can improve returns by 1-2% per annum.
2. Asset Location: For clients with a mix of taxable and tax-deferred assets, asset location can play an important role in improving returns. Tax-efficient assets, such as stocks or municipal bonds, can be owned in taxable accounts. Conversely, tax-inefficient assets such as high-yield bonds, private credit, and other investments that generate taxable income can be held in tax-deferred accounts. 

For example, if returns over the next decade were 5% pre-tax, but tax efficiency could increase that to 7%, the difference in compounded returns would be 34% more of today’s starting portfolio.

Ready to Embrace Volatility? The insights in this outlook—from navigating AI concentration and stock market volatility to optimizing tax efficiency—are designed to help you prepare your portfolio for 2026.

Don't navigate the coming year alone. We encourage you to reach out to your Farther advisor to discuss how to implement these ideas. If you are not yet working with us, contact Farther today to find an advisor who can help you prepare for and embrace the opportunities ahead.

---

Advisory services are provided by Farther Finance Advisors LLC, an SEC-registered investment advisor. Investing in securities involves risk, including the potential loss of principal. Before investing, consider your investment objectives, as well as FartherFinance Advisors LLC’s fees and expenses. Farther Finance Advisors LLC does not provide tax or legal advice; please consult your tax and legal professionals for guidance on these matters. For more details, see our disclosures in Form ADV Part 2. Information being presented is provided for informational purposes only. Terms of Use and Privacy Policy.