- 2025 had narrow leadership; 2026 may broaden. In 2025, artificial intelligence and large-cap U.S. stocks were notable performers. In 2026, global markets, different sectors, and non-mega capitalization stocks may increasingly participate, making diversification more worthwhile.
- No recession, but not a boom. U.S. economic growth in 2026 faces headwinds (housing, the jobs market), but U.S. GDP should still be around two percent.
- All this bubble talk about AI is good. Real bubbles usually form when nobody worries. Right now, there is a bubble in bubble talk.
- Economic boosts. The Fed is expected to cut rates by 50 or 75 basis points next year. The OBBBA will be stimulative in 2026.
- More AI. AI will remain the single most important factor for the economy and markets.
In recent years, the stock market and the economy have faced inflation, higher interest rates, pundits forecasting a recession, monetary policy uncertainty, war, elections, tariffs, massive layoffs, and a technological revolution. These last few years, including 2025, have not been normal, and I do not expect we will return to normal in 2026. That is the bad news.
The good news is that 2026 is shaping up less like a “brace for impact” year and more like a “keep your balance” year. Not tranquil, but investable. And the single biggest storyline, whether you love it, hate it, or cannot escape it, is the artificial intelligence bubble. Or is it an AI boom?
The AI boom is real, but it is not the entire economy.
According to Gartner, the ongoing demand for AI will drive investments in information technology infrastructure, increasing from $1.4 trillion globally to $2 trillion. However, the spending is not all on service and software; it is on data center construction.
Data centers. Chips. Power infrastructure. Cooling systems. Transmission lines. It’s the kind of spending that indicates that AI is not just the next big meme-stock craze; AI is becoming part of the economic landscape.
Still, AI spending has substantially benefited the U.S. economy. According to Bank of America, nearly half of the growth in U.S. GDP in the first six months of 2025 was attributable to AI spending. To be clear, that is half of the growth, not half of the entire economy. People still buy groceries, take vacations, replace roofs, go to the doctor, and pay for childcare.
The trajectory of the global economy and the stock market in 2026 depends largely on AI spending and its utilization. Nonetheless, the broader economy remains solid (albeit with some notable exceptions).
Why the “AI bubble” talk is good news
Many investment cycles have a moment where investors start whispering the word “bubble.” This time, people have been practically shouting it. Counterintuitively, that is not a bearish signal.
A true bubble is typically characterized by the absence of concern about it. When skepticism disappears and everyone starts acting like prices cannot go down, that is when the trapdoor falls out beneath investors. We are not there yet. In fact, the constant worrying is one of the more reassuring features of this market.
Even better: The conversation has matured. We are not just hypnotized by shiny demos anymore. We are asking the grown-up questions:
- Will companies see enough return from AI to justify the investment?
- Will AI improve margins across the economy?
- Are the biggest AI winners about to face the most competition?
A market that asks hard questions is a market that keeps itself in check and out of a bubble.
Competition is the underrated force that keeps this boom healthy.
The most bullish thing about AI in 2026 might not be Nvidia or a chatbot. It might be competition. The AI landscape is starting to look like a never-ending horse race. A leader emerges, then another one leapfrogs, then partnerships shift, then pricing changes, then capabilities jump again. On the one hand, it feels chaotic; on the other, it feels like innovation.
When competition heats up among the giants, the beneficiaries are often their customers. That is also why the “Magnificent Seven” story (the phenomenon of the largest U.S. stock being practically the only investments that seem to work) may gradually morph into something healthier, with the rest of the stock market getting a chance to participate. The giants do not need to collapse for other stocks to perform well. But because the rest of corporate America can finally buy more capability for less money (i.e., AI compute costs drop), automate more tasks, and increase productivity without becoming a tech company, a broader rally makes sense.
2025 was about leaning into U.S. large caps and AI; 2026 looks like it wants to broaden.
At Berkshire Money Management, 2025 was about embracing what was working: AI-linked leadership and large-cap U.S. stocks. That was not a contrarian call; it was simply a reflection of the weight of the evidence and the trend.
But markets do not reward the same narrow play forever. By late 2025, we began to see that global capital markets were finally expanding again and that those trends could endure. And if that is true, it argues for something that feels almost old-fashioned: diversification. Not because we are abandoning AI or U.S. leadership. But because a world in which U.S. mega-cap tech already represents an enormous share of major indexes means the rest of the world is no longer dead money, and the dollar’s moves matter again, it is a world where balance becomes more valuable.
If the next leg of this cycle is broader, investors who own only what they already hold may still do well, but they may be more vulnerable to extended periods of underperformance.
The U.S. economy in 2026: not booming, not breaking, but pretty darn OK
The most likely 2026 economic backdrop, in my view, is a U.S. economy that continues to expand, albeit more slowly than in 2025. We are a mile away from getting final numbers, but the GDP growth rate for 2025 should clock in close to three percent. Assuming continued and similar AI oomph and headwinds from a weak job market and the affordability crisis, something closer to 1.5 percent to 2.5 percent is more likely. That is not a boom, but it is also not a recession.
Consumer spending has been holding up better than the mood on social media would suggest, albeit still very flat. Businesses have been cautious about hiring, which is bad for households but potentially helpful for earnings.
Productivity has been improving, suggesting that firms are producing more output per worker (thank you, AI), which affects how the economy can grow.
However, there is a downside risk. Federal Reserve Chairman Jerome Powell recently made a point that deserves more attention than it got: Job gains might be overstated by as much as 60,000 per month since April 2025. It is a signal that the labor market could be cooler than the headlines imply. Make no mistake, that is bad news. But if I were to search for the silver lining, it would be a) that it is deflationary and b) it gives the Fed cover to cut interest rates more aggressively in 2026.
This is one of those moments when bad news can become less restrictive policy (i.e., good news), leading to better market conditions and a stronger landing than feared.
Inflation, tariffs, and the Fed’s “one-time bump” argument
Fed Chair Powell has also been relatively straightforward on his inflation framing. Powell argues that tariffs have raised prices in some categories, but the base case is that the inflationary impact is more temporary than permanent.
If inflationary pressures are viewed as a one-time shift that fades, then rates do not need to remain restrictive indefinitely. This consideration also gives the Fed cover to cut interest rates.
Interest rates in 2026: lower, but not magically low
Interest rates can fall and still feel high—at least the rates that matter. Even if the Federal Reserve cuts its benchmark federal funds rate, longer-term yields and mortgage rates do not always move in concert. Bond markets have their own personality, driven by variables just different enough that it can feel unpredictable, or even backwards.
We have already seen how this can play out: The Fed eases, but the yield curve steepens (i.e., long-term rates rise), eroding some of the benefits for borrowers. That is why mortgage rates can remain stubborn even as the Fed cuts.
So my base case is:
- The Fed funds rate drifts lower in 2026, especially if the labor market data continues to soften or get revised down.
- Longer-term rates fall more slowly because deficits, global bond dynamics, and inflation expectations can keep pressure on the long end.
- Mortgage rates likely improve, but not back to what you might hope for or even expect. More like a gradual normalization toward a new range people can live with.
The average 30-year fixed mortgage rate is typically 1.5 to 3 percentage points higher than the 10-year Treasury yield. With the 10-year Treasury trading at roughly 4.2 percent and the 30-year mortgage two percentage points higher (at 6.2 percent), the best-case scenario could be a 5.5 percent mortgage. That would translate to something like a four percent 10-year Treasury yield, coupled with a 1.5 percentage point spread.
I do not expect mortgage rates to go lower than that unless the housing market cracks (which it might!). I expect 5.8 percent or 5.9 percent to be more reasonable.
The Powell-to-new-chair transition: potentially dovish, definitely noisy
We also have a political overlay that markets will obsess over: President Donald Trump is expected to replace Chair Powell when Powell’s term as chair ends in May 2026, and the chatter about the shortlist is already intense.
Could the next chair be more dovish? Absolutely! But even a dovish chair does not control the bond market, and they do not control the Federal Open Market Committee (FOMC) unilaterally. (The FOMC is the group within the Federal Reserve that has its own votes on setting monetary policy.)
My greater concern is not the noise; it is that the Fed might cut less than the market expects. Currently, the federal funds rate (the rate set by the Fed) is in the range of 3.5 percent to 3.75 percent. The futures market has a majority expectation of at least two cuts in 2026, which is a reasonable assumption. However, the “whisper number,” given President Trump’s push toward lower rates, is closer to four cuts. I expect a split (three cuts); I am just hoping the stock market can digest fewer cuts than it is hoping for.
Housing: the first real exhale in a long time
Now, let us discuss the most emotional asset class in America: housing. According to Parcl Labs, house prices are down 1.4 percent over the last three months compared with the same period the previous year. According to Mortgage News Daily, that is the first time prices have gone negative since 2023, a year after the Fed jacked up interest rates and mortgage rates spiked.
(That is scary, but for comparison, home prices dropped 27 percent from their peaks in 2006 to their trough in 2012, according to the S&P Case-Shiller National Home Price Index.)
The decline in house prices also reduced borrowers’ equity by 2.1 percent year over year in the third quarter of 2025, according to Cotality. That matters even if you do not own a home. When homeowners perceive themselves as wealthier, they spend more freely. When equity stops rising or slides, spending becomes more careful. This is not automatically recessionary, but it is a cooling mechanism.
Housing is unlikely to be a significant growth engine in 2026. But a calmer housing market can actually be a feature, not a bug, if it means more affordable housing.
The 2026 economic boost: the One Big Beautiful Bill Act
One of the more underappreciated supports for 2026 is fiscal, not monetary.
The One Big Beautiful Bill Act, signed into law on July 4, 2025, created and expanded tax deductions and adjusted key tax thresholds that can leave more money in consumers’ pockets and improve after-tax incentives.
Whether you love the bill or hate it, the macro impulse is fairly straightforward: More disposable income tends to support spending, and certain incentives can support business investment decisions.
There is also a timing quirk that matters: Some provisions were implemented retroactively, so the 2026 tax filing season can translate those changes into real cash flow for households, such as rebates and smaller estimated payments.
Could this irritate the bond market (bigger deficits, more issuance)? Yes. That is part of the “rates don’t fall as fast as you want” storyline. But in terms of near-term growth, 2026 is likely to get a tailwind from the law.
Global markets
For most of the last decade plus, “stay home” (overweight the U.S.) was the right trade. It worked spectacularly.
But the world changes. And in 2025, non-U.S. markets reminded investors that global leadership rotates. Part of this is valuation. Part of it is currency. From a portfolio perspective, here is the simplest point: When the U.S. is already an outsized share of global benchmarks, you do not need to make heroic bets to have a lot of U.S. exposure because you already do. Next year, 2026, could be the year to take diversification more seriously, not as a defensive posture, but to participate if leadership broadens. And not only in foreign stocks but also in domestic sectors, asset classes, and capitalizations beyond the aforementioned Magnificent Seven storyline.
Bonds: boring is back, and that is good.
After years of bonds being either useless or painful, higher yields have restored their role in generating income and dampening volatility. The key is being disciplined about credit risk and duration. When spreads are tight and yield curves are flat, you do not get paid much to reach for yield.
Bottom line: 2026 is a year for taking risks, but with guardrails.
My outlook for 2026 is not “everything is fine.” It is “we can work with this.”
- AI is a real investment cycle, not a mirage, but it will have competition, volatility, and occasional narrative shocks.
- The U.S. economy looks more resilient than the mood suggests, but the labor and housing markets are struggling.
- Fiscal incentives in 2026 add a tangible boost, even if they complicate the bond market.
- Global diversification and investing beyond the biggest stocks may be a practical edge.
If you are an investor, you do not need perfect forecasts. I could not give you one if you wanted one. I may need to make changes and adapt throughout next year. But, hey, that’s my job. I will let you know if I do.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $1 billion of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representation that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
