4th Quarter Market Review and Outlook
Over the past quarter, markets moved higher overall, along with a moderate increase in volatility. Economic growth remained strong, and while the labor market has shown some pressure, it is still generally on solid footing. If you remember, earlier in the year the market was down over 16%, with the subsequent recovery attributed to ongoing economic growth and fading ambiguity around tariffs, allowing investors’ fears to subside and attention to return to fundamentals.
Looking ahead to 2026, we continue to see an economy that, while not without challenges, is on reasonably sound footing. We believe GDP will rise around 2.5% next year, driven largely by tax cuts and renewed business investment. In other words, we expect both the broader economy and the “real” side of the economy—factories, production, and output—to continue moving in a positive direction. A key part of this outlook is the consumer. Consumer spending has been surprisingly resilient in the face of higher everyday inflation and the resumption of student loan payments. A larger-than-typical average tax refund this season should help support spending in the first half of 2026. Despite headlines about artificial intelligence eliminating jobs, recent reports suggest that labor market weakness has more to do with companies protecting near-term profits than with widespread job losses from AI.
After the uncertainty of 2025, we expect businesses will likely step up spending next year. Many firms delayed projects and built up cash due to policy and economic ambiguity. With much of that uncertainty fading, we anticipate renewed investment in equipment, technology, and infrastructure—supporting both growth and productivity over time. We are also seeing a continued shift toward economic nationalism, with companies pledging billions to build manufacturing capacity in the U.S., reworking supply chains, and increasing domestic capabilities.
Importantly, the income picture is healthier than many headlines suggest. Median U.S. income is near record highs, particularly when adjusted for inflation, and real wages for many workers—especially lower earners—are at or near historic peaks. Combined with strong stock market gains, this has emboldened many consumers to continue spending, which is supportive of the economy. That said, the picture is uneven: lower-income households feel inflation more acutely, while higher-income households (the top 10%) now account for more than half of all consumer spending.
Even though we expect growth in 2026, we recognize that markets are not cheap. By many measures, valuations are elevated, and markets do not always move in lockstep with the economy. Stocks can get ahead of the data and can react sharply to surprises. Still, an expanding economy—even with bumps along the way—is a far better environment for long-term investors than a contracting one. We are watching several key headwinds. First, inflation could pick back up or remain more stubborn than expected, pressuring consumers and businesses and potentially prompting the Federal Reserve to shift monetary policy. Second, any move by the Fed to tighten again—or simply signal that it is done cutting rates—could weigh on both stock and bond markets. Third, geopolitical tensions remain a persistent source of uncertainty, affecting energy prices, supply chains, and investor sentiment. Fourth, corporate earnings and profit margins may come under pressure if costs rise faster than revenues. Finally, with valuations already elevated, markets have less margin for error, making them more vulnerable to sharp bouts of volatility when expectations are not met.
In the midst of all this, it’s easy to focus heavily on politics and headlines. As we’ve noted before, there is a tendency to put politics at the center of every economic story. However, factors such as consumer spending, business investment, productivity, and innovation are often more important to the long-term health of the economy. Elections and policy do matter, but they are only one part of a much larger picture.
For you as an investor, our role at Harvest Financial Advisors remains the same. First and foremost, it is about risk mitigation. We cannot control headlines or predict every market move, but we can build and manage portfolios and plans designed to weather a wide range of environments. We do this through proper portfolio diversification and thoughtful risk management tailored to your goals, time horizon, and income needs.
We are pleased with how our individual stock portfolios have performed through both the up and down cycles this year, and our fixed income holdings have met or exceeded expectations in the current environment. We anticipate a constructive year for fixed income in 2026 as well.
If you have any questions about your portfolio or financial plan, please do not hesitate to contact our office, and as always, we thank you for your trust.
Marc Henn, CFP®
