Looking back, 2025 was a dynamic year for investors defined by many market-moving events, including U.S. trade and geopolitical policies culminating in President Trump’s ‘Liberation Day’ tariff announcement, the resumption of the Federal Reserve interest rate cutting regime, and the advancement of artificial intelligence (AI) alongside the subsequent digital infrastructure buildout. Despite notable volatility in April, major U.S. Equity indices continued to power ahead, with the S&P 500 Index rallying over 16% for the year, its third consecutive year of double-digit gains.

In 2026, the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank believes this equity market uptrend will expand further, bolstered by four key catalysts: above-average capital spending, double-digit S&P 500 Index earnings growth, significant productivity gains, and resilient consumer spending. These tailwinds, some of which are already in place, may rev-up more than expected as the year unfolds. The CIO sees this as a powerful backdrop to start the year. This edition of The Horizon highlights some of our core, longer-term views for 2026 and our overarching perspectives on Equities and Fixed Income asset classes.

Top 10 CIO Expectations for 2026¹

1. Economic and profit growth surprises to the upside in the U.S. and worldwide
2. Equity market performance should match earnings growth but premium valuations are vulnerable to any growth shock
3. 10-year U.S. Treasury yields remain in a range between 4.0% and 4.5% for much of the year
4. Gold and Silver prices remain in an uptrend as fiscal deficits remain wide and industrial usage rises
5. Business activity ramps up and surprises to the upside supporting Financials, Small- and Mid-cap shares
6. The U.S. dollar should slightly weaken on a relative basis
7. Capital investment in digital infrastructure remains robust supporting the AI build-out
8. Mid-term election years tend to include higher than average volatility, but tend to be potential buying opportunity in Equities
9. Emerging markets (EMs) continue their outperformance in worldwide equity indexes
10. Job growth remains a mixed bag, which keeps the Federal Reserve (Fed) leaning toward cutting rates a couple of times 

Seven Insights Shaping Above-Average Growth and Productivity in 2026

In “Seven Quips for 2026,”² from our Equity Spotlight series, we examine seven core insights that are likely to drive above-average economic growth and rising productivity in 2026. The CIO believes U.S. economic growth to remain healthy, with real GDP forecast at 2.8%. This strength is supported by increased capital investment tied to AI hyperscaling, data‑center buildouts, reshoring activity, rising discretionary spending from retiring baby boomers, and additional fiscal and deregulation tailwinds that could benefit both households and corporations. At the same time, productivity is projected to move another level higher due to efficiencies from AI adoption and ongoing deregulation and underpin corporate margin expansion. Conversely, global GDP growth appears to be broad-based regionally and mostly driven by fiscal spending, reaching approximately 3.4% for 2026.³

Financial conditions are likely to ease further following the Federal Reserve’s decision to end quantitative tightening and the resumption of their interest rate cutting regime. A flat to slightly weaker U.S. dollar and improved capital market liquidity should foster an environment more conducive to risk taking and investment. Against this more accommodative backdrop, the AI-infrastructure buildout remains in its early stages, which will not only require investment in the Telecommunications industry, but also Industrials, Utilities, Real Estate, and Energy.

Why do we expect the equity market uptrend to extend further? We anticipate double-digit corporate earnings growth in 2026, which is supported by rising productivity, strong margins, and increasingly broad participation across sectors—rather than reliance on a narrow group of Large Cap leaders as we have seen in earlier phases of the current bull market. Given this, our U.S. equity valuation premiums should remain in 2026 given our double-digit earnings growth outlook and other tailwinds that offer further potential upside, but we would not be surprised by bouts of downward volatility due to negative growth shocks. Overall, the CIO suggests broadening equity exposure to capture the growing participation across company size and sector. Portfolio diversification should prove its worth in risk management, while core growth themes could help boost returns.

Positioning for 2026: Navigating Fed Easing with an Actively Neutral Fixed Income Approach

In Fixed Income Spotlight report, “2026 Year Ahead Outlook: Actively Neutral,”⁴ we emphasize that we are constructive on Fixed Income, but our underweight is necessary to fund our Equity overweight. Going into this year, the landscape is shaped by a Federal Reserve that is anticipated to continue cutting interest rates, focused on the cooling employment market rather than quickly reducing inflation to 2%, which should be a risk-positive for 2026. Additionally, the Fed stopped draining liquidity by ending quantitative tightening and immediately started purchasing Treasury bills to alleviate strains in short-term markets. Our base case remains that rates will be lower overall in 2026, although there could be high volatility, especially as leadership of the FOMC will likely change with a new Fed chair appointment and it is a midterm election year.

Against this backdrop of lower expected rates, tighter valuations, and higher uncertainty, we advocate for ‘actively neutral’ positioning. We encourage investors to move excess cash into risk assets and into Fixed Income of reasonable duration, but to remain neutral across sectors and interest risk until valuation opportunities afford themselves. Long duration, in particular, remains out of favor, yet potentially undervalued, offering selective opportunity for investors comfortable with interim price volatility.

Key Takeaways

• The macroeconomic and market backdrop heading into 2026 remains solid.
• This environment calls for portfolio diversification across and within asset classes.
• Investors should retain the ability to put dry powder to work during prospective market opportunities.
• Volatility—especially during U.S. midterm election years—is normal and part of the investment process.
• Remaining invested is emphasized as more important than attempting to time the market.