The Certuity Q1 2026 Economic & Market Outlook

“Every picture tells a story, don’t it?”

By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner

Reviewed by Carter Mecham, CMA®, IACCP®

2025 was a remarkable year for global equities. Domestic markets were driven by the artificial intelligence (AI) phenomenon, while non-US markets were catalyzed by increased defense spending, technological advancements, and a declining dollar.

What will 2026 bring? The US economy seems to be in reasonable shape, the Fed is leaning toward continuing with rate cuts (albeit with caution), and earnings are expected to grow, driven by AI-fueled productivity gains.

Certainly, potential issues abound: the prospect of yet another government shutdown, residual uncertainties over trade and tariff policies, the specter of rising inflation, and ongoing geopolitical tensions, especially in light of President Trump’s recent regime change in Venezuela and arrest of its president Nicolas Maduro.

In addition, global equity valuations remain “stretched” as a seemingly complacent investor base shrugs off any bad news as temporary and continues to drive the market higher.

When reviewing the current state of the global economy and investment markets, we always recommend focusing on market signals and weeding out market noise. We believe the five primary economic and market signals that provide perspective on where we go from here are GDP growth, earnings, interest rates, inflation, and central bank policy. 

This is not to dismiss national, political, or geopolitical issues. But these are “known unknowns” – we are aware of them but have no way to forecast how they will turn out or what effects they will have (or not) on the economy and investment markets.

With this as the backdrop, let’s “drop in” on where we stand and where we might go from here.

Interest Rates

Let’s start with the yield curve (i.e., interest rates), specifically the shape of the curve as illustrated by the closely watched 10-year / 2-year spread (10s/2s).

What we see is a “bear steepening” trend, as the short-end of the curve floats downward as the Fed cuts rates, while the long-end of the curve floats upward due to investor concern about the state of the economy, inflation, and the federal level of debt.

This trend has the potential to be mitigated by ongoing geopolitical tensions (e.g., Venezuela) which may result in a generalized “flight to quality” that may put downward pressure on the long end of the US Treasury curve.

But, in general, we expect to see this curve steepening continue as we move through 2026.

Source: Ycharts, 3-year data as of January 5, 2026. You cannot invest in an index and past performance is no guarantee of future results.

Central Bank Policy

As expected, the Fed chose to cut rates by 25-bps in September, October, and December, though with decreasing consensus as the months went by. Some members focused on a cooling labor market as the rationale for cutting rates while others focused on upward creeping inflation as the rationale for holding rates steady.

Currently, the market is pricing in no rate cut at the next Fed meeting in March, but an additional 2-3 cuts over the course of 2026. This may change, or course, when Chairman Powell’s term expires in May. President Trump has already announced that anyone who disagrees with his desire for much lower rates has “no chance” of becoming the next Fed Chair.

Source: Polymarket, as of January 5, 2026. This is a betting market estimate and subject to change as additional data come in.

Source: The Atlanta Fed Market Probability Tracker, as of January 2, 2026. This is market-driven estimate and subject to change as additional data come in.

Unemployment

Though there is some “murkiness” in the employment numbers due to the extended government shutdown from October 1 through November 12, unemployment remains below 5% – historically, the level considered “full employment” for the US economy. Unemployment is showing signs of trending upward, however.

Source: St. Louis Fed (FRED), 5-year data through November 2025.

There are other signs of a “cooling” in the labor markets – job openings, hires, and quits are all trending downward. The quits rate is interesting because it is an indication of how confident employees are that they can find better work elsewhere if they leave their current positions (so a downward trend means less confidence).

Source: St. Louis Fed (FRED), 5-year data through October 2025.

In contrast, the jobless claims number remain resilient. We continue to see a slight trend upward in “continuing” jobless claims, but “initial” claims have proven to be remarkably stable at plus or minus 200,000.

The way to interpret this is that workers who have jobs are not losing them (initial claims) but people who have lost their jobs are finding it difficult to find new ones (continuing claims).

We use the 4-week moving averages of these numbers to smooth out the weekly volatility.

Source: St. Louis Fed (FRED), data through December 20, 2025.

Inflation

Inflation is trending in the wrong direction and remains above the Fed’s targeted rate of 2% annually.

Source: The St. Louis Fed (FRED), through September 2025. These levels will revise now that current date are again available.

Furthermore, note that the Producer Price Index (PPI) – the cost of inputs to manufacturers and other producers of goods – is rising and has now crept slightly above the consumer inflation metrics.

Through most of 2025, any inflationary effects from tariffs were muted by (a) producers stockpiling inventory prior to the April “Liberation Day” announcements, and (b) producers choosing to “eat” the rising costs of inputs and not pass them through to consumers in the form of higher prices.

One thing to watch in 2026 is if this phenomenon can continue as we move through the year, as this has the potential to put upward pressure on consumer inflation metrics.

The other big “known unknown”, of course, is the pending Supreme Court ruling on the legality of the Trump tariffs. If it rules against the administration, that will create a great deal of uncertainty in the markets.

Source: St. Louis Fed (FRED), 5-year data through September 2025.

On the other hand, roughly 33% of the overall CPI number is derived from “shelter” costs. But shelter costs are reported with a 6-9-month time lag.

What we see is that shelter costs are falling rapidly. As these inputs “catch up” to the CPI metric, that should put downward pressure on inflation.

This certainly presents the Fed with a conundrum.

Source: The Bureau of Labor Statistics, as of November 2025.

Economic Growth

The current median Q4 GDP forecast is 1.3%, with 2-3 outlier forecasts skewed to the upside. While lower than the 3.8% growth rate posted in Q3, the economy remains positive, with no recession in sight.

Likewise, the forecasted GDP growth for all of 2026 is roughly 2.0% – not sizzling but solid, nonetheless.

Source: The Capital Spectator, as January 6, 2026. These are estimates and will change as additional data come in.

Source: The Daily Shot, as of January 5, 2026. This is an estimate and will change as additional data come in.

Estimates for economic growth outside the US are muted but positive, and roughly in line with historical averages.

Source: BNP Paribas, as of January 6, 2026. There is no guarantee that any projection, forecast, or opinion will be realized. Actual results may vary.

Equity Market Performance, Earnings, and Valuations

As we mentioned above, 2025 was a remarkable year for global equities. Domestic markets were driven by the artificial intelligence (AI) phenomenon, while non-US markets were catalyzed by increased defense spending, technological advancements, and a declining dollar.

Source: Ycharts, Calendar year data for 2025. You cannot invest in an index and past performance is no guarantee of future results.

Despite the fanfare, most of the mega-cap stocks (ex-Nvidia) performed in line or worse than the broad market S&P 500 over the course of 2025 (first chart). Much of the air has escaped from the balloon over the past three months (second chart).

Source: Ycharts, calendar year data for 2025 (first chart) and 3-month data (second chart) as of January 4, 2025. You cannot invest in an index and past performance is no guarantee of future results.

Note that since the beginning of November, smaller cap stocks have outperformed large cap stocks.

Source: Ycharts, data from November 3 – December 31, 2025. You cannot invest in an index and past performance is no guarantee of future results.

We see comparable results in factor performance. Over the past three months, quality, value, and dividends have outperformed growth and momentum. Is this a case of fundamentals beginning to matter again, or are investors simply rotating into more attractively valued stocks?

Source: Ycharts, 3-month data through January 5, 2026. You cannot invest in an index and past performance is no guarantee of future results.

Estimates for global market returns are positive for 2026, though high valuations are expected to dampen the returns for US stocks and global commodities.

Source: Capital Spectator, as of January 5, 2026. You cannot invest in an index and past performance is no guarantee of future results “BB” stands for the Building Blocks model, “EQ” stands for the Equilibrium model, which is based on forecasts of the portfolio Sharpe ratio, volatility, and correlations,  and “ADJ” stands for the Adjusted model, which is the same as the EQ model but adjusted for short-term momentum and longer-term mean reversion factors. All approaches are projections based on defined inputs and so subject to revision and input assumption errors.

Q3 2025 earnings for the S&P 500 were solid, with a 13.9% year-over-year increase in earnings against a 7.8% year-over-year increase in revenues.

Q4 earnings are expected to remain positive but decline versus Q3 but then accelerate again as we move through 2026 – driven by anticipated AI-catalyzed productivity gains (i.e., revenues are expected to remain relatively flat).

Source: Zacks Investment Research, as of December 10, 2025. Green bars are earnings and orange bars are revenues. Solid bars are actual results, while hatched bars are estimates and, therefore, subject to change.

Source: The Daily Shot, as of January 6, 2025. This is an estimate and subject to change as additional data come in.

Outside the US, earnings growth estimates are positive, led by India.

Source: The JP Morgan “Guide to the Markets,” as of December 31, 2025. Earnings growth estimates are forecasts and subject to change. Past performance is no guarantee of future results.

Despite the outperformance of non-US stocks throughout 2025, global valuations remain more attractive outside the US (though the S&P 500 index valuation remains skewed upward by the mega-cap tech stocks). However, the global equity rally over most of the past 12-18 months has resulted in few, if any, “screaming buys” across the equity spectrum.

Source: The State Street Global Advisors ETF Chart Pack as of November 3, 2025. You cannot invest in an index and past performance is no guarantee of future results.

Within the US, the mega-cap tech stocks dominated performance in 2025, and correspondingly drove the valuations for large cap stocks upward overall.

Source: Yardeni Research, as of January 2, 2026. You cannot invest in an index and past performance is no guarantee of future results.

If we dive a little deeper into valuations, we notice several things.

1. The mega-cap tech stocks dramatically distorted the overall valuation of the S&P 500 index.

2. Smaller cap, value, and non-US stocks appear to be more reasonably priced than large cap US stocks.

Source for the previous three charts: Yardeni Research, data from October 2025 through January 5, 2026. You cannot invest in an index and past performance is no guarantee of future results.

Interest Rates and Spreads

We discussed the level and shape of the curve above, but what about credit spreads?

Public credit spreads remain historically tight – investors seem comfortable with credit risk despite a cooling economy. The bank syndicated loan activity is coming back, which will put competitive pressure on the traditional private credit space.

Source: Ycharts, as of January 5, 2026. You cannot invest in an index and past performance is no guarantee of future results.

Rather than diving into public high yield, we believe investors seeking higher yield are better served by accessing the private credit space.

Alternatives and Private Markets

Hedge funds and other diversifying strategies have been largely dormant for most of the past ten years, and for good reason. These strategies historically have performed best in market regimes characterized by rising interest rates and elevated volatility – which we haven’t seen in many years.

But we believe the market landscape is changing, and diversifying strategies are poised for a comeback. We believe the inclusion of lower-correlated strategies will benefit investors as we move through the next phase of the market cycle.

To date, diversifying strategies are performing “as advertised” – delivering consistent performance with lower volatility than the equity markets.

Source: FEG Market Summary, through September 2025. You cannot invest in an index and past performance is no guarantee of future results.

Within the private markets, we highlight two noticeable trends.

1. Traditional private equity distributions have been disappointing over the past several years, with the result that the secondaries market has thrived as both general and limited partners seek alternative sources of liquidity.

Despite the increased activity within the secondaries space, investors still have access to attractive discounts in a variety of underlying strategies.

Source for the previous three charts: The Franklin Templeton 2026 Private Markets Outlook. You cannot invest in an index and past performance is no guarantee of future results.

Another primary theme within the private equity space is digital infrastructure. The global demand for energy is going hyperbolic, driven by the growth in digital data centers, which will result in massive energy infrastructure spending, mostly in natural gas and renewables. We believe this represents an interesting investment opportunity in the energy production and transmission spaces.

Source: The Franklin Templeton 2026 Private Markets Outlook. You cannot invest in an index and past performance is no guarantee of future results.

Summary and Interpretation

When focusing on what we believe are the primary economic and market signals, the “condition our condition is in” is generally positive, with uncertainty regarding trade and tariff policies, inflation trends, unclear future Fed policy, whether or not the AI phenomenon proves to be real, and continuing geopolitical tensions.

To summarize our investment views as we head into 2026:

• We believe global equity markets can maintain their positive sentiment, but we do not expect a repeat of the incredible 2025 market returns. Valuations are elevated, especially in the mega-cap tech stocks, despite their recent “normalization.” Market valuations seem dependent on a continuation of robust earnings growth. This is the consensus forecast, but if it proves to be wrong, we will see a market correction.
• We believe the total return potential for public fixed income is muted. We prefer investment grade versus high yield bonds at this point in the economic cycle. Investors seeking higher yields should consider the private credit market versus bank loans or public high yield bonds.
• Fundamental and strategic asset class rotation investors should look at the relative value attractiveness of US value, size, and non-US allocations. We may be seeing the beginning of an investor rotation into these asset classes and styles.
• Active management and intelligent risk factor tilts should be rewarded versus passive management, especially in fixed income. 
• We continue to prefer the private markets for those investors who can access them. Larger cap direct middle market private credit lending may be getting “crowded” due to heavy investor inflows, but more opportunistic market niches continue to present interesting opportunities.

• Specific private equity segments – secondaries, energy infrastructure, sports investing, real estate, and GP stakes – seem to be offering more interesting opportunities than the traditional spaces of growth equity and M&A.

• We maintain an active search for multi-strategy hedge fund solutions, as we believe the market regime going forward is favorable for lower correlated and more diversifying strategies.

• As always with alternative and private market investments, manager selection is critical to longer-term success.

Our overall asset allocation guidelines can be summarized as follows – we are in a fairly “neutral” frame of mind right now.

Source: Certuity, as of December 31, 2025 . Evaluations are subject to change as market conditions change. This is for illustration purposes only and does not represent investment advice. All evaluations are on a relative and not absolute basis. Red = a negative relative evaluation; gray = a neutral relative evaluation; green = a positive relative evaluation. You cannot invest in an index, and past performance is no guarantee of future results.

As philosophically strategic investors, we continue to recommend focusing on a longer-term time horizon and the construction of “all-weather” portfolios, diversified at both the asset class and risk factor levels.

We hope you find this helpful and, as always, we welcome your feedback and questions.

---