The markets were strong in 2025. Will this momentum continue through 2026?

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Host: The markets were strong again in 2025. They’re anticipated to end for a third year in a row with high returns. Will this momentum continue through 2026? Coming up, our experts will weigh in with their thoughts.

From Thrivent Asset Management, welcome to Advisor’s Market360, a podcast for you, the driven financial advisor.

2025 certainly defied expectations. Despite a surge in trade and policy uncertainty, and some predictions of a recession at the beginning of the year, economic growth was solid. And for a third year in a row, there were very strong returns in the equity markets. Fixed income markets also fared well, helped in part by lower interest rates. But as we like to remind investors, past performance is not necessarily indicative of future results. So, what might those future results look like?

To help us get a feel for what might happen in 2026, we sat down to talk with three Thrivent Asset Management experts: Steve Lowe, Chief Investment Strategist, David Spangler, Vice President of Model and Mixed Portfolios and Kent White, Vice President of Fixed Income Mutual Funds.

We have a lot of ground to cover, so let’s get started …

As we turn our focus to 2026, we wanted to know what our experts are anticipating will be the main themes that will play out. Here’s Lowe on the buzziest theme, AI:

Lowe: Yeah, I expect artificial intelligence to continue to drive markets, especially equity markets. I think markets will be a lot less forgiving of this large-scale capital spending we've seen by large-cap tech and others without really a clear path to monetization of AI, and they need to demonstrate strong earnings growth. And, you know, so they can kind of grow into these very rich valuations.

Host: We asked Lowe about the broader economy and markets:

Lowe: I think markets as always are going to be focused on the economy and especially the labor market, which shows signs of slowing. And also how AI is impacting jobs. There are signs it’s impacting especially entry level jobs. But also, AI could boost productivity which should boost growth. And then there's, you know, deregulation and tax cuts. We still have deficit spending and a strong capital investment cycle that should aid economic growth. You know I think large-cap will continue to lead. But markets should broaden out beyond these large-cap tech names, particularly if the economy grows at a solid rate. And I expect the Fed to lower further in 2026. But there are conflicting forces right now. You have a softening labor market, and you also have really sticky inflation along with very solid economic growth. And there has been a core hawkish contingent in the Fed that doesn't really want to cut, you know. And finally, we will have a new Fed chair in 2026, most likely one that wants to lower rates.

Host: Next, we wanted to get White’s main themes for 2026…

White: So, we're looking for growth to moderate somewhat from its 2025 rate. Still remain decent. Likely somewhere in the 1.75 to 2% range. And Steve just mentioned AI continuing to drive the equity markets. We also think it will continue to be a factor driving the economy, too. So, especially given still large cap-ex spending levels from these big AI firms. We also have a lot of fiscal policy stimulus that would begin to take effect next year, providing a further boost to growth. And in terms of potential headwinds, I mean, I think one of the things that we need to look at and keep an eye on is consumer spending, especially as it accounts for nearly 70% of GDP. We've already seen some signs of softness, particularly in the lower income cohorts. And the wealth effect from booming equity markets may also turn into a headwind in 2026.

Host: Over the past year, the labor market has shown signs of softening. There has been reduced hiring and increased layoff announcements. And while unemployment is still relatively low, it has been rising. We asked Spangler for his expectations for the labor market in the coming year:

Spangler: Both the demand and supply for labor is down. That's been well reported. But at the same time, the unemployment rate has come up a bit to 4.4%. And that's really, you know, one of the one of the worst prints for about the last four years. Part of it is because the participation rate rose, but nonetheless still, a four year high in unemployment is not a great place to sort of start 2026. The growth in jobs has been in areas like private education, health services, social assistance, leisure industries and government. Whereas manufacturing, it's had five straight months of declines, and in fact, 100,000 less jobs over the last year within manufacturing. So, we're seeing cracks and unemployment that are a little disconcerting. The duration of unemployment has continued to climb and is consistent with levels you would often see within a recession.

Host: But according to Spangler, it’s not all bad news. He explains…

Spangler: There are some positives, and the positives coming into 2026 is that we have, presumably, a more easy monetary policy. We should have a little bit easier financial conditions. We would expect to see lending become a little less restrictive and supportive of business. And there's a lot of good tax policy out of the tax bills from earlier this year. We have lower tax rates, accelerated depreciation, deregulation continues. And that's all supportive. Continued cap-ex spending we would expect as well. And direct foreign investment. These are all really very supportive of, of business, both small and larger. So, all in all, I think that we want to watch the job market very closely. But at the same time, I think that there are good fiscal and monetary supports coming into 2026 that we believe should hold the job market, at least at some consistent levels. We don't expect any type of rapid deterioration at this point.

Host: Lowe believes that AI is starting to have an impact on the job market, though the extent of this impact is unclear. We asked Lowe about which jobs he anticipates will be most affected by AI:

Lowe: There are a lot of customer service AI chat bots right now. And also AI does a very good job in coding. And also, you know, in other areas that AI is now producing about half of the internet content, which is a little scary in some ways. And you're starting to see companies mentioned AI as a reason for layoffs. Challenger, which tracks job layoffs, said AI is now the second leading cause mentioned in layoff announcements. And all of this also has contributed to lower confidence in finding a job. Part of that is cyclical. But it's also due to AI and it's very low. But if you have AI skills and you know how to kind of apply AI, you're in very high demand. But, you know, it's really hard to assess a long-term impact over time.

Host: A bright spot in the economy is consumer spending which held up relatively well in 2025. We asked Spangler if he thinks that can continue in 2026.

Spangler: I do, I do think it can continue to 2026. And we know that prices are quite high. The levels are high. We've had a lot of free money over the last number of years. And that's pushed up, certain areas of the of the, the consumer spend money like housing, autos. But in general, the higher end of the sort of income distribution is doing relatively well. And they're continuing to spend. We know that the lower end is hurting, but, you know, dominant share of spending is at the higher end of the income distribution. It's supported strongly by, like, for example, the wealth effect and the wealth effect is that we've had three consecutive years of double digit returns in the stock market. Also, there's been a broadening of equity ownership. You know, you look at the millennials and they alone, they own a much larger percentage of their net worth in stocks than, let's say, older generations did it the same at the same time.

Host: As Thrivent Asset Management’s head of fixed income, Kent White keeps very close tabs on the actions of the U.S. Federal Reserve. Here’s what he is anticipating for 2026:

White: My view on the Fed at the moment is largely driven by some of the recent weakness that we've seen in the labor markets, despite inflation still running above the Fed's target. Given that many components of underlying inflation appear to be easing, and the Fed's view that some of the elevated inflation levels that we're seeing are due to tariffs and will be somewhat temporary. I think they will err to the side of caution and pay more attention to their employment mandate. So, which means the Fed is likely to continue its mid-cycle rate cuts to move closer to a more neutral and less restrictive policy rate. I think we're likely to see probably one more cut in early 2026 before they pause. Of course, that could change and we could see deeper cuts if we were to see a little bit more concerning signs of weakness in the labor markets. But that's currently not our base case.

Host: Given what has already been discussed about the economy and the Fed, we asked White what he expected for interest rates in 2026:

White: I think if we were only get one more rate cut from the Fed in 2026, that might be a bit of a disappointment for the market as it's been pricing in nearly three more cuts through the end of next year. So, rates would likely see some upward pressure to this potential outcome just getting priced in. And we have a large amount of fiscal stimulus that would begin to show up in the first half of 2026, in addition to inflation, that, as I mentioned before, is still likely to be elevated. That could also pressure rates somewhat higher. So, we think 10-year rates are probably likely to trade in a range from the high threes to somewhere in the 4.35-ish area during 2026.

Host: Drilling a little deeper, we asked White about his expectations for the yield curve:

White: So, on the yield curve, we think the front end of the Treasury curve is likely to be mostly anchored to expectations of what the Fed is going to be doing with their policy rate. We also believe that there's room for the 30-year U.S. Treasury yield to compress versus the front end. So, we've had steepener trades on through most of 2025. We now find a little bit of a flattening trade to be a bit more compelling than we had in the past.

Host: We asked White how the yield curve is affecting his approach…

White: We are underweight 30-year Treasuries. So that helped our performance quite a bit. Now, with the 30-year being a little bit more attractive, we could overweight or get at least neutral the 30-year part of the curve. So that would be a flattener when we're a little bit more overweight the longer-dated maturities.

Host: Credit spreads are another area where White can offer his expertise. Here’s what he thinks will happen with credit spreads in 2026:

White: So, with regard to credit spreads, you know, we've been at, credit spreads are the excess yield that you get over U.S. Treasuries. So those levels right now are at or near historical tights across virtually every fixed income asset class. And we just don't think there's much room to generate excess returns in 2026 from these levels. So, it'll be mostly a year in which we just earn our yield, which isn't necessarily a bad thing given where yields are today. So, however, just we just need to be a little bit more selective about where we're getting that yield or that excess yield. And we feel better being in some of the higher quality assets in fixed income at this point.

Host: One concern that has bubbled up with our experts is the increasing role of private credit in the economy. White explained his concerns:

White: Yeah, I do have some concerns not only about the asset class, but also about the impact private credit could have on the broader public markets in case we see any further weakness there. My primary concern or concerns are that we have seen significant growth in that space. When combined with leveraged loans, this market is now twice the size of the traditional high yield market. Yeah. So, we're also seeing some early signs of stress in the market with rising defaults and other elevated stress indicators in that market.

Host: Lowe had this to add:

Lowe: Private credit loans skew heavily toward lower credit buckets, particularly like triple C or even lower bonds and, lower rated bonds and loans. You know, we've seen credit issues pop up in some private loans and bonds, which have sold off very, very sharply, which in turn has impacted BDCs that have invested in private credit. Those are business development corporations. Also, you know, some of those leaders building out AI infrastructure. And some of these are high grade companies, but they're starting to use more complex and riskier funding schemes, and they're starting to leverage up, which increases broader market risks. If the AI leaders are not able to monetize their investments in AI. You know, and then on top of that, you have banks lending to private credit, which adds another layer of risk because then the banks are exposed to private credit. And, you know, fund managers in a, in a recent kind of market wide survey, named private credit as the most likely source of a systemic credit event.

Host: We asked Lowe why investors have been looking more towards private credit instead of traditional public credit…

Lowe: I think part of it is just simply diversification away from public markets, but also for the yield. The issue is, though, that, there's sort of this rating arbitrage in private credit. You know, there's they go to smaller rating agencies and get higher rated credit. And the Bank of International Settlements just commented on this. So, in other words, they can get kind of a triple C yield with a B rating in the private credit market.

Host: Returning to the U.S. economy, we wanted to get Spangler’s outlook for equities in 2026.

Spangler: Well, I think in general our outlook for 2026 is relatively constructive overall for the markets. Yes, there is concentration in the markets and that has been a feature of the markets for some period of time here some years. And yeah, valuations of the largest companies AI-related are rich relative to history. But it's also generally rare to see multiple compression at a period of time when you have earnings per share growth that is strong and positive, and above long-term medians and an accommodative Fed. So, we're not see, we're not expecting, compression and multiples. And as a result, I think what you could see rather is somewhat of a broadening out. In fact, generally this year within the Mag 7, only two of them have actually outperformed the market. The others are at or below the S&P 500 returns. So, we're possibly already seeing that type of a rotation, if you will, or broadening out.

Host: Spangler mentioned the Mag 7—or, the Magnificent 7—which refers to a group of seven of the largest and most influential technology and AI-focused companies in the U.S. stock market. The Mag 7 is a source of concern for Spangler:

Spangler: What I would watch for, though, is the, you know, like I mentioned, the capital spending of the largest, companies and whether the markets begin to question the eventual pay off of those, because if we do see the largest companies – the AI-related companies—rollover, it can bring the whole market with them, and they may underperform the rest of the market. But that means that the whole market is also rolling over because they’re so large a part of the market.

Host: At the other end of the spectrum are small-caps. Spangler is cautiously optimistic about these equities:

Spangler: They can do better because there's a lot of fiscal support as we come into 2026 that, you know, small businesses will have accelerated depreciation. There should be good investment by smaller companies. And I think that that can support that area of the market. One of the things too, is that it doesn't take really a lot of money to flow into small-caps. They’re so small relative to the rest of the market in terms of their market cap and their float, that it only takes a small amount of money to come in to really buoy their, their, equity prices. But in general, I think there's a lot of longer term structural impediments to small-caps being able to perform. But they could have some supports from lower rates and from fiscal supports that are coming into 2026 that could help them close the, the valuation gap they have between large-caps. But I don't necessarily think that intermediate or longer term that small-caps are going to outperform large.

Host: Earlier in the episode, we touched on interest rates. But we wanted to understand how interest rate changes could potentially impact equities. Here’s Spangler:

Spangler: If we sort of think about it first, with rates moving up, they can move up for good reasons. They can move up for not good reasons. If it's good reasons, it would be because we have good supports to growth and inflation remains generally anchored. I think in that case, if rates were to come up, that would be viewed well within the markets and I think the overall markets would perform well even with a little bit higher rates. Small-caps, in that kind of an environment may not participate as well as large-caps, but I think in general, the overall market can, can perform well. The other part of that is for bad reasons, if inflation becomes unanchored. And then we have concerns about whether the Fed can continue to cut rates or even if the Fed would have to pause and then maybe raise rates. These are bad reasons. And I think in that case the whole market can roll over. But in that case, those which have performed best would probably perform worse. And that means the large-cap and large-cap tech would not perform well but perform even worse than the whole market. But everything is generally probably going to come down in that scenario. We've seen this sometimes when, you know, let's say the 10-year gets up to, you know, it can get up to 450 and that's okay. But as it's approaching five, it's not good.

Host: We asked Spangler about the impact of interest rates coming down…

Spangler: Now, on the other hand, if we think about rates coming down, if the Fed is and continues to be on a, a cutting mode, that would be supportive overall to the overall markets, a lower discount rate. So, it's good for longer term duration assets, but also too, I think that would be supportive of small-caps. Small-caps would probably in that case, have an advantage over large-caps. Maybe not for the longer term, but at least in a more intermediate or shorter term they could perform well.

Host: Next, we wanted to get some insights on earnings for the coming year. Here’s Lowe:

Lowe: Positive earnings have been an important story for the equity market over the last year. They've been strong. Most companies are beating expectations. And if you look at 2025 earnings are expected to increase about 12% or so despite tariffs and despite uncertainty spiking earlier this year. And next year, 2026 is expected to come in stronger, even at about 15% growth. And that's in good part largely due to profit margins expanding. And you could look at revisions from analysts. And those have been very positive. They've been raising earnings estimates through the year.

Host: How much of that earnings growth has been driven by tech stocks, and is that a cause for concern? Lowe answers:

Lowe: You know, the one concern I have is that earnings, you know, like the overall market are very concentrated. You know, the top 10 stocks account for about 30% or so of the earnings growth. You know, and excluding tech, earnings growth is lower. It's about 9%. But that's still, you know, solid. And we are seeing some broadening with tech earnings starting to slow because as they get larger and larger it gets a little bit harder to maintain the same growth rate. We've also started to see that small-cap earnings expectations are increasing, rather significantly.

Host: International equity markets performed well in 2025—much of that was at the start of the year, through early April. We wanted to know if international equity can perform well again in 2026. Spangler had some thoughts:

Spangler: They certainly could. But if we sort of think about how international perform relative to domestic, last year it was generally, as you mentioned, through April, and it was for a number of reasons. One was we had a devaluing dollar. So, we price domestic and international in dollars. So, a dollar depreciation makes the, the international perform better relative to domestic. Also, too, there was a lot of positive expectations from announcements in Germany that they were going to suspend their, their debt limits and that they were going to spend more on military. Also, you know, we have a lot of political issues within, you know, the European area, both within Germany and in France. France is a bit of an a stalemate. And then, you know, UK is got a lot of troubles as well, and they're performing very poorly.

Host: We wanted to hear more about other international equities markets. Again, here’s Spangler:

Spangler: Japan, on the other hand, they've changed policy that they've held for decades, and they're raising rates. And they are now having, you know, more inflation, but also, you know growth as well. So, Japan is performing, you know, relatively well relative to the rest of the world. And so, I think on balance, yes, international can perform well. I think it will be more in the emerging market areas, less in the developed. So, the way we sort of think about it is, you know, you can have overall international perform well, but you want to be able to pick your areas in areas maybe more in the emerging markets and less in the developed areas.

Host: Lowe had this to add about technology in emerging markets:

Lowe: The technology story in emerging markets, which includes, you know, South Korea, Taiwan and China, is really good story from a market viewpoint. And that, you know, they have advanced capabilities. In particular, China is doing very well in artificial intelligence.

Host: In 2025, equities were the key drivers for performance within a mixed asset portfolio. So, what is the role of fixed income? We asked White:

White: So, the role of fixed income has historically been to provide a buffer in periods when equities sell off, fixed income should provide yield or some excess return to offset those, those equity declines. So, right now, fixed income has, I believe, has definitely returned to its traditional role in a diversified portfolio after an extended period where it wasn't performing the way it was supposed to. And this was mostly during the period of extremely low interest rates, where you're only getting paid 1 or 2% in Treasuries. And that's not enough of a yield cushion to really offset any equity weakness. So, with yields now back to levels we hadn't seen since 2008, the yields are much more attractive to allocate to fixed income. And in the event risk markets do have a pullback, you have that incremental upside as well to those yields. And we saw that play out just this year 2025. There were two large equity market drawdowns, one in April, another in November, where fixed income dramatically outperformed equities. So, it's working the way it's supposed to.

Host: Next, we asked each of our experts to share one or two concerns they have that could negatively impact their base case scenarios. We started with Spangler:

Spangler: Two that are coming to my mind is an accelerated weakness within employment. In which case, then you would have a lot more talk about are we moving towards a recession? If so, then we would expect to see, you know, relatively strong weakness in, within the equity markets. On the other hand, though, it would be if inflation expectations themselves become unanchored. Right. So, if we have, you know, better than expected growth in the next year. And that would then cause inflation expectations to become a little bit unanchored that could cause the Fed to decide that they may need to pause or even raise rates. And that could also cause weakness within the equity markets, as well.

Host: We asked White what his concerns are…

White: I think I'm probably most worried about the equity market. It seems unlikely that we're likely to see another year of near 20% returns in 2026. And the wealth effect has been such a huge driver of consumption and economic growth that this could turn into a drag if equities do falter.

Host: And Lowe added to this list of concerns:

Lowe: I'm concerned about what I've talked about, which is really the ability of tech leaders to monetize AI services enough to justify the growth that's baked into very, very rich valuations. You know, I'm also concerned about increasingly strong competition from China that could impact U.S. leadership in artificial intelligence. And in some ways, they're ahead of the U.S. in certain areas.

Host: On the flip side, we wanted to hear what things could go right resulting in a better 2026 than expected by our experts. Again, we will start with Spangler:

Spangler: So, we could see enhanced productivity and more than what might be expected within the markets. I think with the enhanced productivity, that could be a, you know, strong support to the overall economic growth into the markets than a more significant reduction, I think, in tariff uncertainty. That would really help out medium and smaller sized companies in particular who find it much more difficult to be able to handle the tariff changes.

Host: Next up was White:

White: Yeah. I think, just to reiterate what David just said, regarding tariff uncertainty, I mean, we've had a lot of policy uncertainty in 2025. So, especially on the policy front, whether it's tax or tariff, just waiting to see what that was going to look like. So, there's been a lot of, I think, business has been kind, have held off on whether maybe it's hiring plans or expansion plans, whatever it might be. So, I think that might have been a little bit of a source of some of the labor weakness that we've seen in, especially in the back half of 2025. So maybe we get a little bit clearer picture of what that's going to look like. And businesses feel better about their future. What's their competitive environment going to look like. And that could be very supportive for the labor market and just economic growth in general.

Host: And Lowe added this…

Lowe: Yeah, for me, it's the economy. I think there are a lot of positives that are supporting growth right now. The Fed is most likely to cut rates. You know, banks are easing lending standards. You saw this very large amount of cap-ex spending on artificial intelligence. And we still have deficit spending. That's a tailwind. And I think most importantly, productivity is increasing, expected to increase further supporting economic growth.

Host: Next, we wanted to hear how each of our experts are positioning assets. We will start with Lowe:

Lowe: Yeah. So big picture. We're moderately overweight equities and underweight fixed income versus you know our peers or benchmarks. So, we're fairly close to home. But we have a positive view of the market. You know with the key concerns being valuation and you know concentration.

Host: Next, we will drill down on equities. Here’s Spangler:

Spangler: You know as Steve just mentioned overweight generally in equities. We're overweight a little bit in public equity. But we're also overweight in, in private equity as well within the fund. We're underweight developed overall, but neutral or a little bit overweight within. And then we're overweight growth. Generally, we're not, you know, a lot overweight growth. But we're overweight growth. And we're overweight large-caps, a little bit overweight mid-caps and then small-caps, generally neutral a little bit underweight, in within small-caps. And I think that while we've had a lot of returns coming from large-cap growth, I think we'll continue to see reasonable returns coming from that area of the market and that they can still lead in a positive economic and monetary environment.

Host: And finally, we asked White about how he is positioned on the fixed income side.

White: Mainly due to valuations in the credit markets, we're continuing to maintain an up and quality bias broadly across fixed income and even within the different asset classes in our portfolios. We're also modestly short duration right now with the expectation that rates do have a little bit of room to move higher from here. And as I mentioned earlier, we do find some more value now. And extending out the curve, I think keeping on that steepener bias where you're overweight the 2-year and underweight the 30-year, there's enough of a yield pick-up over 100 basis points right now too. You could really lag if you're underweight the back end too much. That's a lot of yield to give up. So, we are extending out the curve a little bit more than we did during 2025.

Host: We hope you enjoyed this 2026 outlook. Once again, we would like to thank Steve Lowe, David Spangler and Kent White for their insights. What did you think of this episode? Email us at podcast@thriventfunds.com with your feedback or questions for our experts. Want more episodes of Advisors Market360 and other market and investing insights? Visit us at thriventfunds.com, where you can learn how we can partner with you, the driven financial advisor. Bye for now.

All information and representations herein are as of 12/2/2025, unless otherwise noted.

Past performance is not necessarily indicative of future results.

Investing involves risks, including the possible loss of principal.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

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