As investors prepare for 2026, Darrell Cronk, chief investment officer for Wealth & Investment Management and president of Wells Fargo Investment Institute, believes the coming year will test patience, but reward discipline.
While near-term volatility is likely, Cronk sees a set of durable economic forces already in motion that could support growth, earnings, and markets as the year unfolds. He’s been sharing his insights with InvestmentNews and cautions that the early months of 2026 may feel unsettled.
“While we expect choppy jobs, spending, and household sentiment data early in 2026 and tariff implementation throughout the year to create market volatility, we also see economic improvement as the year develops, mainly because of positive, durable, and mutually reinforcing economic drivers already in the pipeline,” he says.
Those drivers begin with fiscal policy.
“First, individual tax cuts should help drive a rebound in household spending, while corporate tax cuts reinforce broadening capex spending related to reshoring manufacturing and especially the artificial intelligence themes,” Cronk explains, adding that monetary and regulatory dynamics also matter. “Second, lower short-term borrowing costs and cost-saving deregulation should support small businesses and promote hiring.”
Demographics and technology are another pillar.
“Third, we think greater AI adoption, slower workforce growth, and an aging population and stricter immigration will accelerate productivity gains and wage growth,” he says. And monetary policy could amplify those trends: “Finally, broadly easing Federal Reserve (Fed) policy in a growing economy should bolster liquidity conditions and encourage corporate earnings growth.”
Inflation, in Cronk’s view, should continue to moderate. “We expect moderating inflation, as tariff impacts fade, rental inflation cools, deregulation gains more traction, and productivity improvement adds output at lower average labor cost.”
Taken together, these forces underpin a constructive regional outlook.
“We view the US as the engine of global economic expansion in 2026, supporting our tilt toward U.S. assets in a diversified portfolio,” Cronk says. He favors “US Large and Mid-Cap Equities” and highlights “the Financials, Industrials, and Utilities sectors, which we believe are ancillary ways to lean into the AI theme at attractive valuations.”
On the fixed income side, expectations for the yield curve shape portfolio construction.
“Given our expectation for a steepening yield curve, we prefer investment-grade corporate bonds (three- to seven-year maturities) and municipal securities,” he says, while still encouraging “a full allocation to international stocks (both Developed and Emerging Markets), especially as AI-related spending expands across sectors globally.”
Cronk favors caution on duration but sees opportunity. “We maintain a neutral but cautious view on duration risk,” he says, advocating active management and emphasizing “investment-grade maturities in the 3-7-year range.” He also highlights mortgage-backed securities, investment-grade corporates, and municipals as ways to earn yield without excessive risk.
For alternatives, volatility creates opportunity. “We believe investors can prepare for those bouts of higher volatility by incorporating strategies that are not highly correlated with traditional equity or fixed income markets,” Cronk says, pointing to hedge funds, distressed credit, and private infrastructure as potential diversifiers.
Rate cuts in a growing economy are uncommon, and Cronk sees that rarity as meaningful. He frames the current easing cycle as normalization rather than stimulus.
“The latest Fed easing cycle that started in September 2024, for a total of 175 basis points of cuts… can be seen not only as an easing cycle, but as a normalizing cycle,” he says, noting that the Fed has been moving toward a neutral policy stance.
Cronk points to Jerome Powell’s guidance that “a 3.75% fed funds rate could be considered the higher end of the neutral range,” which aligns with Wells Fargo Investment Institute’s outlook for “two more quarter-point Fed rate cuts.”
Lower borrowing costs feed directly into corporate fundamentals.
“We believe lower short-term borrowing costs is part of a series of positive trends converging to promote revenue growth and lower costs across firms, especially small-cap companies,” Cronk says.
Looking further out, he expects “long-term Treasury yields (10s and 30s) to finish 2026 in a range of 4.00%-4.50%,” producing “the resulting steeper yield curve that we anticipate.” That environment, he adds, “should benefit the Financials sector in the S&P 500 and should focus fixed income investors on the middle part of the maturity spectrum, 3-7 years is our target maturity range.”
Despite optimism on the US, Cronk highlights meaningful risks abroad: “We believe that the US has structural advantages versus other global economies, including a dynamic technology sector, less reliance on exports, and comparatively more favorable demographics and financial markets.”
By contrast, “Europe and Japan face potentially more immediate debt and deficit problems than the US, with limited scope for monetary policy support.” He cites rising yields in Germany, France, and Japan, and flags China’s challenges: “China’s government spending focus on AI neglects now chronic underperformance and default risks in China’s consumer, property, and manufacturing sectors.”
Trade tensions also remain a wildcard. “The ongoing US-China economic competition may continue to surprise investors with new trade restrictions and then retaliatory measures,” Cronk says. Currency risk is another consideration, though he expects “the dollar will remain around current levels in 2026.”
AI is central to the outlook, but Cronk is clear-eyed about uncertainty.
“Our view is that the technology spending in 2026 has momentum that could well extend beyond next year,” he says, but adds that “profitability will depend on the future rate of technology adoption, which… remains to be determined.”
Adoption could accelerate dramatically, lifting productivity, or it could disappoint. “Alternatively, if adoption is poor, today’s technology spend rate likely will become excessive at some point and could force equity prices to correct significantly,” he warns.
As a result, volatility is likely. “The questions about the future profitability of AI are likely to resurface in 2026 anytime a company’s earnings or projections disappoint,” Cronk says. “The equity trend is higher, we believe, but not in a straight line.”
Cronk expects improving growth to lift earnings. “We expect US economic growth to improve as the year progresses and drive full-year earnings per share on the S&P 500 Index from $270… to $300, an 11% gain,” he says. The firm’s year-end target of “7400-7600 reflects mainly that expected earnings growth, not multiple expansion.”
“Valuations for market-cap-weighted indexes skew expensive,” he acknowledges, but “looking at equal-weighted indexes shows valuations near historical averages.” He notes that the firm actively adjusts exposure when sentiment swings too far.
Sector preferences hinge on AI capex and inflation dynamics. “Any unexpected disruption to AI capex spending… would lead us to reconsider our favored sectors,” he says. Financials, in particular, would be vulnerable “if inflation were to unexpectedly accelerate… which would flatten the yield curve and curtail lending activity.”
On policy, Cronk believes positives outweigh drags. “We expect tax cuts, deregulation, modest disinflation, and the Fed’s interest-rate cuts to overshadow lingering headwinds from tariffs and tighter immigration controls,” he says.
Tariff impacts, in his view, will be “more drawn out, piecemeal, and… more muted.”
Immigration effects may be more acute in certain industries, but “the greater impact on growth and inflation in 2026 will stem from tax cuts retroactive to the 2025 tax year,” including “individual tax refunds estimated at nearly $520 billion.”
With headlines likely to dominate, Cronk says that perspective is key.
“We encourage investors to ask themselves if any headline really alters the overall investment backdrop encompassing our tactical time horizon,” he says. While surprises are possible, “we see dominant forces — tied to AI, tax cuts, deregulation, and easier monetary policy, shaping our 2026 Outlook.”
“We think disciplined investors, who stick with their targeted allocations and look through bouts of market volatility, are likely to be rewarded over the longer term,” he concludes.
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