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The Economic Backdrop of 2025 and 2026 Opportunities
Investing in 2026
The experience of 2025 and the outlook for 2026 reinforce the importance of maintaining discipline, diversification, and humility as economic leadership broadens and the cycle continues to mature. To forecast investing for 2026, let’s look back on the economic landscape of 2025.
The Economic Backdrop
As we look back on 2025, the economic landscape was defined not by extremes, but by contradictions and recalibration. Growth that started the year with momentum slowed as policy tension and uncertainty mounted. Tariff shocks, tax reform, and rapid technological investment shaped a year that defied simple characterization.
At the forefront was a dramatic shift in trade policy. Early in the year, the federal government implemented sweeping tariff actions sharply lifting duties on imported goods to levels not seen since the mid-20th century to rebalance trade and promote domestic production. These measures heightened uncertainty for businesses, raised input costs across sectors, and contributed to volatility in markets and supply chains. The resulting legal challenge culminated in a Supreme Court case that may redefine executive trade authority going into 2026.
Fiscal policy played a meaningful role in shaping the economic environment with the passage of the One Big Beautiful Bill, a significant tax and investment package enacted during the year. The legislation introduced a combination of tax reductions and incentives intended to encourage capital formation, business investment, and economic activity. Its effects have been most visible in improved corporate cash flows and a lower effective cost of capital, factors that helped support business confidence and investment decisions. At the same time, the benefits have filtered through the economy unevenly, as households continued to navigate higher costs in certain areas of everyday spending.
Beyond policy, the AI boom dominated market narratives, particularly among large-cap technology companies. AI-related capital spending—especially in data centers, semiconductors, and cloud infrastructure—drove outsized earnings growth and market returns in 2025, reinforcing a narrow leadership cohort within equity markets. This tech-led expansion helped underpin overall GDP performance and investor confidence, even as broader corporate earnings ex-tech lagged.
Throughout the year, labor markets showed signs of softening, with hiring activity slowing and participation patterns fluctuating. Inflation, once a headline concern, gradually eased, and by late 2025 the Federal Reserve began moving toward rate cuts in response to weakening demand signals, albeit still above long-term targets. Asset prices proved resilient, buoyed by expectations that the combination of tax reform, technology investment, and more accommodative monetary policy would avert recession.
This combination—slower underlying fundamentals alongside rising asset prices—has historically been fertile ground for investor complacency. As 2025 progressed with relatively few visible shocks, it became easier to mistake short-term stability for long-term certainty. Yet economic cycles do not disappear when volatility subsides. They persist quietly, often revealing themselves only after expectations have grown comfortable.
Opportunities Ahead
Looking ahead to 2026, we expect this dynamic to evolve rather than reverse. Earnings growth across some of the more dominant themes of recent years, particularly within parts of the AI ecosystem, is likely to moderate as growth rates normalize and comparisons become more demanding. At the same time, we see the potential for a broader set of economic drivers to reassert themselves. More traditional sectors tied to physical investment, infrastructure, energy production, and materials stand to benefit as capital spending, replacement demand, and real-economy activity play a larger role in sustaining growth.
Lower interest rates may continue to ease financial pressures, but they remain no substitute for durable fundamentals. Over full cycles, long-term returns are built on steady earnings, sound balance sheets, and sustainable cash flows—not on narratives alone.
Verity Investment Partners is here to answer your questions and discuss the market further. We look forward to hearing from you.
The experience of 2025 and the outlook for 2026 reinforce the importance of maintaining discipline, diversification, and humility as economic leadership broadens and the cycle continues to mature. To forecast investing for 2026, let’s look back on the economic landscape of 2025.
The Economic Backdrop
As we look back on 2025, the economic landscape was defined not by extremes, but by contradictions and recalibration. Growth that started the year with momentum slowed as policy tension and uncertainty mounted. Tariff shocks, tax reform, and rapid technological investment shaped a year that defied simple characterization.
At the forefront was a dramatic shift in trade policy. Early in the year, the federal government implemented sweeping tariff actions sharply lifting duties on imported goods to levels not seen since the mid-20th century to rebalance trade and promote domestic production. These measures heightened uncertainty for businesses, raised input costs across sectors, and contributed to volatility in markets and supply chains. The resulting legal challenge culminated in a Supreme Court case that may redefine executive trade authority going into 2026.
Fiscal policy played a meaningful role in shaping the economic environment with the passage of the One Big Beautiful Bill, a significant tax and investment package enacted during the year. The legislation introduced a combination of tax reductions and incentives intended to encourage capital formation, business investment, and economic activity. Its effects have been most visible in improved corporate cash flows and a lower effective cost of capital, factors that helped support business confidence and investment decisions. At the same time, the benefits have filtered through the economy unevenly, as households continued to navigate higher costs in certain areas of everyday spending.
Beyond policy, the AI boom dominated market narratives, particularly among large-cap technology companies. AI-related capital spending—especially in data centers, semiconductors, and cloud infrastructure—drove outsized earnings growth and market returns in 2025, reinforcing a narrow leadership cohort within equity markets. This tech-led expansion helped underpin overall GDP performance and investor confidence, even as broader corporate earnings ex-tech lagged.
Throughout the year, labor markets showed signs of softening, with hiring activity slowing and participation patterns fluctuating. Inflation, once a headline concern, gradually eased, and by late 2025 the Federal Reserve began moving toward rate cuts in response to weakening demand signals, albeit still above long-term targets. Asset prices proved resilient, buoyed by expectations that the combination of tax reform, technology investment, and more accommodative monetary policy would avert recession.
This combination—slower underlying fundamentals alongside rising asset prices—has historically been fertile ground for investor complacency. As 2025 progressed with relatively few visible shocks, it became easier to mistake short-term stability for long-term certainty. Yet economic cycles do not disappear when volatility subsides. They persist quietly, often revealing themselves only after expectations have grown comfortable.
Opportunities Ahead
Looking ahead to 2026, we expect this dynamic to evolve rather than reverse. Earnings growth across some of the more dominant themes of recent years, particularly within parts of the AI ecosystem, is likely to moderate as growth rates normalize and comparisons become more demanding. At the same time, we see the potential for a broader set of economic drivers to reassert themselves. More traditional sectors tied to physical investment, infrastructure, energy production, and materials stand to benefit as capital spending, replacement demand, and real-economy activity play a larger role in sustaining growth.
Lower interest rates may continue to ease financial pressures, but they remain no substitute for durable fundamentals. Over full cycles, long-term returns are built on steady earnings, sound balance sheets, and sustainable cash flows—not on narratives alone.
Verity Investment Partners is here to answer your questions and discuss the market further. We look forward to hearing from you.
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