The start of the year should be no different from any other day in terms of how we are approaching the market and our investment strategies. In fact, I encourage our team to constantly have a “day one” mentality. Despite any past successes, we must continue to work like it’s still day one for every client and every investment. We start the year by staying humble. We can’t be complacent and must constantly raise the bar—today and throughout 2026.

Investors are concerned

The US equity market surprised to the upside in 2025. Stocks across a wider range of sectors proved their resilience in the face of many macroeconomic challenges. Investment opportunities increased as the market broadened, and corporate earnings growth exceeded expectations. The potential in artificial intelligence (AI) became an even more powerful driver of sentiment and investment across sectors well beyond technology.

Despite positive developments in 2025, markets today are concerned about various challenges. We’re seeing reports of worsening sentiment among low- and middle-income consumers, and job creation appears to be softening or even stalling. Other issues include a possible delayed impact from tariffs, ongoing US-China tensions, and—most prominently—the potential for a bursting AI bubble. Investors are also anxious about lofty equity valuations, as the S&P 500 forward price/earnings multiple is in the highest quintile relative to history.

Spend more time on what could go well

For decades, equity investors have been hyper-focused on what might go wrong for the markets. Of course, it’s critical to constantly measure and evaluate risks for equities. However, perhaps investors should spend more time contemplating what could go right.

Looking to the year ahead, we believe there’s a lot that could go right. At a high level, we have easing financial conditions globally, the result of synchronized rate cuts from central banks. The US banking system has a healthy combination of strong capital ratios and lower-than-average delinquencies. While anxiety over higher price levels has not dissipated, recent inflation trends remain in check, even with the impact of tariffs.

AI investments are only just beginning

As debate intensifies around the risk of an AI bubble, investors should not lose sight of the long-term power of this emerging and revolutionary technology. The planned investment in AI is staggering and just commencing, with US$500 billion planned from hyperscalers alone. This is also catalyzing an investment cycle in electricity generation and transmission. In the year ahead, we expect AI to continue to offer new subsets of potential winners and a wide array of new use cases. There’s also the potential for a general productivity boom as AI starts to deliver tangible productivity gains.

We believe strong earnings growth combined with a continued high multiple could continue to power equity markets higher through 2026. At the same time, a combination of higher valuations and significant investments in AI with unclear long-term payoffs should bring higher volatility to equity markets. Strong equity returns are rarely realized in a straight line but rather are accompanied by high volatility. We expect no different in today’s environment.

Shep Perkins, CIO at Putnam, part of Franklin Templeton.