2026 Economic and Tax Outlook: What the Year Ahead May Mean for Your Financial Plan

As we move toward the end of 2025, attention is turning to the year ahead. Economic conditions, interest rates, market performance, and tax policy will all play a role in shaping financial decisions in 2026. While uncertainty remains in several areas, the overall outlook suggests continued economic expansion and new planning opportunities for individuals, investors, and business owners.

Here’s a look at key trends to watch—and what they may mean for your financial strategy.

A Look Back at 2025

Despite widespread concerns early in the year, the U.S. economy avoided a recession in 2025. Economic growth remained positive, inflation continued to moderate, and both stock and bond markets delivered solid returns.

One of the most impactful developments was a shift in U.S. trade policy, including the introduction of broad tariffs in the spring. Markets initially reacted sharply, but conditions stabilized as negotiations progressed and tariff levels were adjusted. By year-end, the broader economic effects proved more muted than many initially feared.

Economic Growth and Inflation Expectations for 2026

The outlook for 2026 points to steady economic momentum.

• Economic growth is expected to remain positive, with real GDP growth potentially approaching 3% as productivity improves and supply-side policies take hold.
• Inflation is projected to continue moderating, with expectations centered in the mid–2% range.
• Employment conditions are expected to remain relatively stable, with unemployment holding in the low-to-mid 4% range.

Although consumer sentiment remains cautious due to the lasting impact of higher prices, underlying economic fundamentals suggest continued expansion.

Interest Rates and the Federal Reserve

After multiple rate cuts in 2025, interest rates are expected to trend lower again in 2026. Cash and short-term yields have already declined meaningfully, and further easing could push those returns closer to—or below—3%.

Longer-term rates may also follow, potentially bringing the 10-year Treasury yield below 4%. As rates normalize, the yield curve is expected to return to a more traditional positive slope after a prolonged period of inversion.

With significant amounts of capital currently sitting in money market funds, the changing rate environment may encourage investors to explore opportunities further out on the yield curve.

Equity Markets: Supported by Fundamentals

Corporate earnings growth has been a key driver of equity market performance, and that trend is expected to continue into 2026. Analysts are projecting another year of double-digit earnings growth for large U.S. companies, marking the third consecutive year of strong fundamentals.

While valuations remain elevated, expectations are for positive stock market returns supported by earnings growth rather than aggressive valuation expansion. As always, market volatility should be expected, particularly during periods of political and economic uncertainty.

Bonds and Income Opportunities

With recession risk currently viewed as low, the outlook for bonds remains constructive. As interest rates decline, bond investors may benefit from both income and potential price appreciation. Credit spreads and real yields have become more attractive, creating opportunities for investors willing to move beyond cash and short-term instruments.

A Noisy Political and Global Environment

The year ahead is expected to bring heightened political activity, both domestically and globally. Midterm elections, potential government funding debates, and ongoing geopolitical tensions may generate short-term market noise.

Key global themes to watch include continued U.S.–China competition, the strategic importance of technology and artificial intelligence, access to critical resources, and ongoing regional instability. Historically, markets have tended to look past political disruptions, focusing instead on long-term economic trends.

Key Tax Changes Shaping 2026 Planning

Several recent tax law changes will have meaningful implications for financial planning in 2026 and beyond.

Individual Income Tax Updates

• Tax rates and brackets from the 2017 tax law have been permanently extended, avoiding a significant tax increase for many households.
• Standard deductions remain elevated, simplifying tax filing and reducing the number of itemized filers.
• Child tax credit has increased to $2,200 per child and is indexed for inflation.
• Income from tips and overtime pay may qualify for new federal income tax deductions, subject to income limits.
• A new senior deduction provides additional tax relief for older taxpayers, creating opportunities for tax-efficient strategies such as Roth conversions and capital gain planning.

SALT, Charitable Giving, and Planning Opportunities

• The state and local tax (SALT) deduction cap has increased to $40,000 through 2029 before reverting to prior limits.
• New limits on itemized deductions and charitable thresholds may make bunching charitable contributions more effective in certain years.
• Beginning in 2026, taxpayers may deduct up to $2,000 in charitable cash donations even if they do not itemize.

Estate and Business Tax Considerations

• Estate tax exemptions have been permanently increased to $15 million per individual and $30 million for married couples, with inflation adjustments going forward.
• Annual gifting strategies remain an effective way to reduce taxable estates while supporting family members.
• For business owners, the Qualified Business Income (QBI) deduction has been permanently extended, and 100% bonus depreciation is now available for new business assets.

Planning for the Year Ahead

While uncertainty is inevitable, the economic and tax landscape heading into 2026 presents a range of opportunities. With moderating inflation, shifting interest rates, and favorable earnings growth, thoughtful planning can help individuals and businesses position themselves for the year ahead.

A proactive review of your investment strategy, tax planning opportunities, and long-term goals can help ensure your financial plan remains aligned with changing conditions.

For more insights into the upcoming year, watch our free webinar with Keith recorded in December 2025 on YouTube.

Keith and our team of financial advisors bring worldly expertise, local knowledge, and service to the table for every discussion. Call us today and set yourself, your business, and your employees up for success in 2025 and beyond – 866.872.1866 or visit The Wealth Group website.

Disclaimer

Disclaimer: This is a general communication being provided for informational purposes only. It is not designed to be a recommendation for any specific investment product, strategy, plan feature, or other purposes. By receiving this communication, you agree with the intended purpose described above. Union Savings Bank and its’ representatives are not suggesting that the recipient or any other person take a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax, and other professionals that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be appropriate for all investors.

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