Quarterly Market Outlook for Q1 2026
- Zachary Allen, CFA
- Feb 17
- 6 min read
Key Takeaways:
Recent GDP readings remain elevated relative to expectations, while measures of manufacturing activity, housing, and labor markets present a more mixed picture.
Yield curve dynamics, reduced rate-cut expectations, and historically tight credit spreads suggest that financial conditions are sensitive to changes in inflation data and monetary policy communication.
U.S. equities reflect elevated valuation levels supported by earnings expectations, while non-U.S. developed markets, real assets, and alternative investments continue to exhibit divergent trends.
US Economy
GDP growth in the United States remains robust and significantly above expectations. The initial BLS estimate of real GDP growth for Q3 2025 came in at 4.3%, well above consensus expectations of 3.3% [1]. Contributions to GDP suggest the strength was largely buoyed through robust consumer spending, increasing exports, and decreasing imports [2]. Consensus expectations point to a more muted Q4, however the Atlanta Fed GDPNow estimate points to 5.3% as of January 14, 2026 [3].
The US economy sees modest increases in Monetary and Fiscal support amid moderating cyclical conditions. M2 Money Supply growth in the US grew at 4.3% on a year-over-year basis as of November, suggesting improving but moderate liquidity conditions [4]. ISM Manufacturing PMI came in 47.9 for the month of December, supported by increasing pricing but weighed down by Employment and New Orders [5]. Tax refunds in 2026 are poised to provide a modest boost to consumers, though the gains will likely accrue to wealthy taxpayers in high-tax states [6]. Existing Home Sales for December came in at 4.35M, up from 4.13M the prior month [7]. The indicator has seen a steady increase since its low in June of 3.93M, suggesting a modestly improving environment with the backdrop of lower mortgage rates [8]. Non-Defense Durable Goods Orders ex Aircraft rose 0.5% in the month of October, continuing 4 consecutive months of gains since July [9].
The labor market continues to show mixed signals, with initial claims declining and the unemployment rate rising. Initial jobless claims for the week of December 27 came in at 199K, below consensus expectations of 220K and continuing 4 consecutive weeks of declines [10]. Continuing jobless claims for the week of December 20 came in at 1,866K, the second-lowest reading since May [11]. Non-farm Payrolls for the month of December came in at +50K, below consensus expectations of 60K, but continuing a streak of low and volatile readings since May [12]. The unemployment rate ticked up unexpectedly in November to 4.6%, ahead of consensus expectations of 4.4%, but declined back down to 4.4% in December [13]. While October data was not collected, the reading has increased by an average of 0.1% per month going back to June. While Job Openings decreased significantly to 7.146M in the month of November [14], the Quits Rate held steady at 2.0% [15].
According to CPI data, inflation has cooled significantly, though the federal government shutdown likely resulted in reported inflation measures that understated actual price pressures. The Consumer Price Index declined significantly in November to 2.7%, below expectations of 3.1% [24]. Shelter CPI declined to 3.01% in the month of November, declining significantly from September's 3.58% [25]. Due to the federal government shutdown, the BLS carried forward prior rent and owners’ equivalent rent (OER) values into October and incorporated those imputed values when calculating November indexes, impacting the reported shelter CPI [26].
US Fixed Income
Both market participants and FOMC participants see fewer rate cuts in 2026, though Trump's appointment of a new Fed Chairperson adds considerable uncertainty for the forward path of rates. According to the FedWatch tool from the CME Group, the market is pricing in two additional rate cuts in 2026 [16]. According to the Summary of Economic Projections released after the Fed's December meeting, the median estimate for the federal funds rate by the end of 2026 is 3.4% [17]. The minutes released from the Fed's December meeting reflected notable divisions within the Committee on the future policy path [18].
The long end of the curve remained surprisingly muted in 2025, with a steepening yield curve and declining real rates. Volatility has reduced at the long-end of the curve with the 10-year Treasury trading tightly between 3.90% and 4.20% since September [19]. The yield curve continued its steepening through the end of 2025, ending at 0.71% from the year's beginning of 0.32% according to the 10-Year minus 2-Year yield [20]. 10-Year real rates for the month of December ended at 1.45%, down from 2.06% at the start of the year [21].
Corporate bond spreads remain tight by historical standards, suggesting the market is pricing in low default risks for corporate bonds. The ICE BofA BBB US Corporate Index OAS reported 1.01% on December 31, near all-time lows for the index [22]. The ICE BofA Single-B US High Yield Index OAS reported 3.01% on December 31, also near all-time lows for the index [23].
US Equity
The S&P 500 is trading at an elevated forward earnings multiple, supported by expectations of strong EPS growth and an unusually high rate of earnings beats. According to S&P Global, the forward P/E on the S&P 500 is 23.9 [27]. According to analyst estimates provided by S&P Global, earnings per share of the S&P 500 is expected to grow from $64.33 in Q4 2025 to $76.51 in Q4 2026, representing an 18.9% year-over-year increase [27]. With 498 companies in the S&P 500 having now reported Q3 earnings, 83.1% beat analyst expectations compared to 67% in a typical quarter and 77% over the past 4 quarters [28].
Small caps have seen EPS growth accelerate in 2025 with analysts expecting continued strength into 2026. The Russell 2000 index is trading with a forward P/E of 24.8 as of December 31 based on data provided by LSEG [29]. With 97.6% of companies in the Russell 2000 having now reported Q3 earnings, 61.7% beat analyst expectations, representing an anticipated 63.7% year-over-year earnings growth rate [29].
Non-US Equity
Economic growth ex-US for developed economies are forecast to be below trend and underwhelming compared to non-developed economies. The OECD forecasts 1.2% real GDP growth for the Euro area and 0.9% for Japan in 2026, which compares to 1.7% for the United States and 3.9% for Non-OECD countries [30]. The OECD forecasts 1.9% inflation in 2026 for the Euro area and 2.2% for Japan, which compares to a forecast 3.0% for the United States [30].
Developed economies face a fiscal backdrop with increasing debt service burdens. Public Debt to GDP in the United States is forecast to hit over 125% in 2025 [31], spurred on by an increasing debt service burden. The IMF reports that Emerging Markets & Developing Economies have grown public debt to GDP from 54.2% in 2019 to 69.0% in 2024, which compares to 104.9% in 2019 to 109.7% in 2024 for Advanced Economies [32].
Alternatives
Performance across alternative asset classes has diverged meaningfully, with gold outperforming most major asset classes. While gold has delivered substantial gains, broad commodities and U.S. real estate have produced only modest single-digit returns, reflecting weaker rent growth and higher financing costs. Bitcoin, by contrast, has been volatile and negative over the period, highlighting its sensitivity to liquidity conditions rather than its effectiveness as a stable inflation or monetary hedge. Gold’s price relative to M2 (in billions) currently stands at 0.17 - just below the post-1985 peak of 0.19 reached in September 2011, and well above the long-term median of 0.10 [33].
After a difficult 2025, U.S. REITs enter 2026 with low cash-flow expectations and meaningful upside if real rates decline. U.S. REITs are trading at historic discounts relative to equities, nearing all-time lows [34]. REITs now trade at a median implied cap rate of 7.7%, offering a compelling spread over Treasuries [35].
The contents of this document represent information gathered by Pension Consultants, Inc. (PCI) staff in regard to an investment fund manager (Company), as well as PCI staff analytics, insights, and opinions regarding the Company based on the information gathered. PCI cannot guarantee that all information received from third parties is complete and accurate. PCI also cannot guarantee that reliance on the information provided in this document will result in favorable outcomes. PCI is registered with the U.S. Securities and Exchange Commission as an investment adviser. The concepts expressed herein represent the views and opinions of Pension Consultants, Inc., and are not intended as legal, tax, or investment advice for any specific individual, account, or plan.
Source(s):
[30] - https://www.oecd.org/en/publications/oecd-economic-outlook-volume-2025-issue-2_9f653ca1-en.html
[34] - https://www.cohenandsteers.com/insights/insights-3-reasons-to-own-listed-reits-today-vol1is8/
