One question at the forefront of many investors’ minds, particularly at the start of a new year is: how might things unfold in the year ahead?
There are cognitive, cultural, and practical reasons why this question is more relevant to us in January than at other times of the year.
From a cognitive perspective, most people find it easier to simplify continuous time into “mental containers”. Chunking time into blocks (like one year) gives the brain manageable units for memory, planning, and comparison.
Culturally, society reinforces annual cycles. Many institutions – from government and schools to private sector employers – organize life around yearly cycles, so we tend to internalize these rhythms and learn to think in this format automatically.
From a practical perspective, year-long blocks match human-scale planning. A year is short enough to imagine, plan for, and track, but long enough to realize meaningful change.
It is important to recognize that, for planning purposes, what happens in the financial markets over the long term is far more important than what occurs tomorrow, next month, or in any one particular year.
Return Expectations
- Stocks: given three very strong years of stock market returns (nearly 23% annualized from 2023 – 2025), it’s prudent to expect lower returns for stocks going forward: a 7% – 10% return range is a reasonable expectation for 2026. Note that over the very long term (past 100 years) stocks have returned an annualized 10.5%, according to Siblis Research. Also note that JP Morgan Asset Management’s well-regarded research team projects stocks will return a bit under 7% over the next 10-15 years. These are two important reference points to consider when forming an expectation for stock returns in the year ahead.
- Bonds: return prospects for intermediate-term bond funds are sound:10-Year Treasury bond yields remain above 4%; the Bloomberg US Aggregate Bond Market Index’s yield to maturity is close to 4.5%; and JP Morgan expects 5.2% return for investment grade bonds in the years ahead. So, targeting a 4% – 5% return range for high-quality bonds is a reasonable expectation for 2026.
- Cash: 3-Month Treasury bill yields are a good reference point for forming a return expectation on cash invested in very short-term, high-quality securities or money market funds. T-Bills currently have an annualized yield of 3.6%, and yields are likely to decline if the Federal Reserve continues to bring down short-term interest rates. So a 2.5% – 3.5% return range on invested cash is a reasonable expectation for 2026.
Risks
- Policy Risk: Surprise economic policies from the Trump administration, including the potential for imposition of higher tariffs for political purposes, pose a major potential risk for financial markets in 2026.
- AI Risk: Investors are optimistic that the vast resources that technology-focused companies are plowing into Artificial Intelligence will pay off quickly; if positive AI-related sentiment cools (for whatever reason) it likely would mean downward adjustments for tech company shares and probably a broader-based slump for the stock market a whole.
- Labor Market Risk: Many households and workers feel that the jobs market is not working particularly well. In 2025, there was a sizable increase in the unemployment rate. It wouldn’t take that much more labor market deterioration for economists to start worrying about the increased possibility of recession.
- Financial Market Risk: The risk of a steep and extended stock market decline in any given year resulting from problems in the financial markets should never be ruled out. However, current economic conditions are more likely to support growth and positive financial market returns. Instead of girding for the next crash, it’s more constructive to mentally prepare for episodes of stock selling and price fluctuations which typically happen over the course of a year.
The previous bullet point is worth expanding upon. The chart below, courtesy of JP Morgan Asset Management, is one to keep in mind. It shows that annual returns for US stocks are usually positive and often satisfactory, but that intra-year downdrafts are part of the investment landscape.
Annual Returns and Intra-Year Declines for the S&P 500, 1980 – 2025
Source: JP Morgan Asset Management
The key take-aways from the above chart are:
- During the course of any given year, the S&P 500 Index of large-company US stocks falls, on average, by 14.2% (red dots show intra-year declines)
- Going back to 1980, annual stock market returns have been positive in 35 of 46 years, or three-quarters of the time
- The average annual return for large-company US stocks over the past 46 years has been 10.7% (grey bars show full-year returns)
-RK