Wall Street in 2026: AI, Fed moves, and a divided economy set the tone

Core Viewpoint - The investment landscape heading into 2026 is characterized by a need for investors to balance optimism with caution amid a K-shaped economic recovery, where high-income households thrive while lower-income workers face challenges [1][2][3] Economic Environment - The U.S. economy remains fragmented due to post-pandemic fiscal and monetary measures, leading to uneven outcomes across income groups [2] - Job openings are declining, wage growth is moderating, and employers are signaling caution, indicating a cooling labor market [3] AI Influence - Artificial intelligence is expected to be a significant driver of market performance in 2026, with capital expenditures from major tech companies projected to rise from $400 billion in 2025 to approximately $520 billion in 2026, representing about 1.6% of U.S. GDP [7][8] - The "Magnificent Seven" tech stocks have contributed to over half of the S&P 500's earnings growth in recent quarters, a trend anticipated to continue into 2026 [9] Market Strategy - A disciplined and diversified investment approach is recommended to manage risks and seek new sources of return, emphasizing the importance of spreading investments across various asset classes and regions [6] - The Federal Reserve is expected to cut rates by 75–100 basis points in 2026, with core inflation projected to decelerate to 2.5% by year-end [10] Investment Opportunities - Transitional market phases are seen as favorable entry points into equities, with strong potential for continued equity performance into 2026 [11]