Market Commentary – 2026 Market Outlook
By: Eric Sterner, CFA, CAIA, FRM, CIPM
Chief Investment Officer, Apollon Wealth Management and Apollon Financial
As we head into 2026, most investors remain bullish for many reasons including strong corporate earnings and net profit margins, lagged effects of Fed rate cuts, OBBA benefits, deregulation initiatives, and expected AI productivity gains. The 3rd Quarter earnings growth rate finished at 13.6%, which was the 4th consecutive quarter of double-digit earnings growth and 9th straight quarter with positive earnings growth. The blended net profit margin was 13.1%, which would mark the highest net profit margin going back to at least 2009. It marked the 7th consecutive quarter in which the net profit margin has increased. While the Magnificent 7 reported earnings growth rate of 18.4% for the 3rd quarter, it’s notable that the “other 493” reported earnings growth rate was 11.9% for the quarter, which marked the second time that the “other 493” reported double-digit earnings growth over the past three years.
Source: FactSet Earnings Insight, 12/19/25
While I remain a bull, I do expect heightened volatility in 2026. Unexpected events typically cause the most volatility in the markets, but we also have some expected potential bumps in the road with geopolitical tensions, another possible government shutdown, the Supreme Court’s ruling on tariffs, the market’s reaction to the new Fed chairperson’s nomination, and federal debt levels. There are always risks in the markets that we must navigate, but due to these large obstacles, I continue to favor leaning into the Quality factor by investing in companies with strong earnings, balance sheets and cash flows that can potentially better withstand any elevated periods of volatility. We are not in a complete risk on environment in my opinion.
Labor Markets
With the US government shutdown over, investors will gain more transparency into the labor markets. The monthly ADP Private Payrolls report has shown job losses in four out of the last six months. Smaller companies (less than 50 employees) have struggled the most with employment at those companies declining in six out of the last seven months. I believe we may be in a jobless expansion going into 2026 as the economy continues to grow but with minimal new jobs. We witnessed a jobless expansion in the early 2000s, and the macroeconomic trends back then are comparable to today’s environment including previous over hiring, slowing labor growth, increased productivity and policy uncertainty. The economy can grow without creating many jobs if productivity growth translates into real wages and increases to disposable income. The economy’s growth rate depends on its labor force and productivity growth. It’s likely that productivity growth will be the primary support for economic expansion as restricted immigration and an aging population limit the future labor force growth. The big question will be if the weakness in labor demand and supply will balance each other out and prevent the unemployment rate from spiking. The US economy has been in a low hire / low fire environment for most of 2025 and the economy as well as corporate earnings continued to grow. Corporate profit margins remain very healthy and would most likely need to compress much more to set off a major uptick in layoffs. If this trend of a jobless expansion continues, the economy could be very vulnerable to any adverse shocks as the labor market typically serves as the last line of defense before the onset of a recession.
The Fed and Inflation
Investors, including myself, are anxious to hear President Trump’s nomination for the next Fed chairperson. While there are high expectations the next chairperson will hold a more dovish opinion on rates, it’s essential that the Fed remains independent. The Fed’s last Dot Plot projected one rate cut in 2026, but I agree with the market-implied odds of two rate cuts. Taming inflation is always a long, bumpy road and while inflation is currently above the Fed’s 2% target, the previous major inflationary trends (high money growth rate and hourly earnings rate) no longer exist. While inflation has proven to be stubborn, I believe we will see inflation move closer to 2% in the 2nd half of next year as the tariffs’ impact will fade and housing disinflation will increase with lower mortgage rates and increased housing supply. Smaller companies can struggle under more restrictive rates and in my opinion, we need to continue rate cuts to provide those companies more relief. Companies with less than 50 employees represent approximately 40% of the private market sector. In the November ADP Private Payrolls reports, smaller companies shed 120,000 jobs, the largest one-month decline since May 2020.
US Consumer
The health of the consumer is always vital to the economy. It remains a bifurcated story with the top 10% of US income earners representing nearly 50% of US consumer spending. 30 years ago that segment only represented approximately 1/3 of consumer spending. The cost of living is approximately 25% higher since 2020 and it clearly is causing more pain for lower income consumers. However, some relief is on the way as consumers are set to receive aid of $150 billion thanks to the OBBA with the majority of those funds coming via tax refunds. Due to this stimulus, we may see a reacceleration of the economy in the first half of next year. If that reacceleration starts to fade in the 2nd half, we may see Congress pass fiscal stimulus in the form of tariff rebate checks to re-energize consumer spending and sentiment ahead of midterm elections.
Portfolio Positioning Thoughts
As far as areas of the market I like right now, here are some thoughts.
- I believe we are still in the early innings of the AI revolution and Technology will once again be one of the leading sectors in 2026. I think we may see elevated volatility in this sector next year due to frothy valuations, potentially more debt financing, and investor scrutiny around AI monetization.
- Financials had a great year, and I believe that positive momentum will continue into 2026 as M&A activity should pick up with lower interest rates and deregulation. Many companies that planned to go public in 2025 were delayed by the government shutdown in the fall, which could make 2026 a standout year for IPOs. Adding to the momentum, the Securities and Exchange Commission reported that more than 900 registration statements, including IPO filings, were submitted during the shutdown.
- Healthcare offers a rare mix of defensive characteristics and innovation-driven upside. I believe the weight-loss drugs are the 2nd most innovative trend in the market besides AI, but Healthcare had been held back due to supply bottlenecks, high costs, and White House policy uncertainty. The supply bottleneck issue has been resolved and under a recent deal with the White House, biotech companies have agreed to lower weight-loss prices in exchange for broader Medicare and potential Medicaid coverage, an arrangement Lilly says could expand access to its obesity drugs to roughly 40 million additional patients. Wall Street estimates the weight-loss drug market to be worth $150 billion by 2030, so we are also in the early innings of this movement. Additionally, Healthcare has historically been a strong performer in mid-term election years and the sector should greatly benefit from AI productivity gains.
- Small Cap stocks have several tailwinds behind them including rate cuts, reshoring initiatives through OBBA, deregulation, and projected earnings growth rates above large caps stocks. Consensus estimates show Russell 2000 net profit margins improving from 3% in 2025 to a record high of 5% in 2026. Profit margins will likely benefit from operating leverage and fading tariff headwinds. Finally, with M&A Activity expected to increase in 2026, small cap stocks may greatly benefit as many smaller companies are candidates for acquisitions.
We still have a slight tilt towards domestic stocks, but we are increasing our allocations to international stocks in 2026. I continue to be very bullish on Japan. Over the past decade, Japanese companies have delivered 250% cumulative EPS growth, outpacing the US, Europe, and the UK. Also, over the past decade, Japanese companies have grown dividends by more than 200%, again outpacing the US, Europe, and the UK. Japan’s profit outlook is strengthening, and its newly elected Prime Minister Takaichi is bringing in more pro-growth and reformist policies.
Finally, I believe the strong returns from emerging markets this year may continue to run in 2026 due to the depreciation of the USD and improving earnings led by tech-heavy Asian markets.
Apollon Wealth Management, LLC and Apollon Financial, LLC (“Apollon”) provide advice and make recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, Apollon has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing price to make decisions. The information contained herein is intended for information purposes only, is not a recommendation to buy or sell any security or strategy and should not be considered investment advice. Market performance information and projections have been provided by third-party sources and, although believed to be reliable, have not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Index returns are gross of fees; investors cannot invest directly in an index. Past performance is no guarantee of future performance. Please contact your financial advisor with questions about your specific needs and circumstances.
