Why Schwab expects a 'vibepression' from sticky inflation and a sector rotation next year

By Jules Rimmer

Charles Schwab's outlook highlights policy crosscurrents and labor market wobbles

Charles Schwab emphasizes that volatility will complicate stock market investment next year but that overall, equities should be able to churn higher regardless.

Charles Schwab thinks stocks will churn higher on better earnings in 2026 and, for a change, it won't be all about tech and AI.

That said, heightened volatility and a stock market rotation will be the defining features of 2026 and strategists at the brokerage say investors must become accustomed to it. It's going to be a year of instability, not just uncertainty, its annual outlook predicts, with a K-shaped consumer recovery, sticky inflation and a lot more sectoral rotation than has been observed in recent years.

Published Tuesday, Schwab's 2026 outlook on stocks and the economy is authored by Liz Ann Sonders and Kevin Gordon.

The report identifies "oscillating inflation" as a key shaper of 2026 trends, its different components contributing to this "bifurcation" in consumer fortunes where the wealthier and their spending are immune to its pressure. Schwab predicts that persistently sticky inflation concerns will remain front and center of investors' focus. Inflation as measured by the personal consumption expenditure price index has stayed above the Fed's 2% target since the pandemic and remain stubbornly above pre-pandemic levels, with tariffs are contributing additional upward pressure.

Schwab predicts persistent inflation

Affordability pressures for the U.S. consumer are not abating, Sonders and Gordon claim. Recent years have shown that "the U.S. economy can handle hotter inflation but it doesn't come without cost: public backlash, sharp drawdowns in the stock market when yields spike." For Schwab's strategists, investors will simply have to learn to live with stubborn inflation.

Schwab points out that the positive relationship between stock and bond yields that has characterized the last two decades, has shown recent signs of breaking down as inflation has become a genuine threat to bonds. Bond yields move in the opposite direction to prices.

The positive relationship between stocks and bonds appears to be breaking down of late

While noting that labor markets may retain a moderately weak tone next year, Schwab is enthusiastic about the stimulus benefits to businesses and consumers from the One Big Beautiful Bill Act, which they estimate could add a 0.7 percentage point boost in 2026 and something similar in 2027.

One term Schwab uses for 2026 is a "vibepression" whereby the consumer sentiment stays weak but GDP growth continues.

On a sectoral level, Schwab's outlook predicts a widening out in terms of the AI theme with ongoing rotations. Noting only two of the Mag 7 have outperformed the wider index this year, Schwab imagines investors will be more selective and tactical. The AI theme is still with us, but it is nuanced and changing in complexion, with a greater emphasis on small caps and they maintain a preference going into the new year for communications, healthcare and industrials sectors.

Earnings are expected to be the chief locomotive for stock performance in 2026 with 8 out of 11 sectors forecast to grow faster next year than this, according to consensus. Schwab are cognizant of higher valuations but remind investors that valuations are useless when it comes to timing the market. This time last year, the S&P 500 SPX looked pricey on a 22 times forward earnings but the market has advanced by a healthy 13% so far, the strategists noted.

-Jules Rimmer

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12-10-25 0746ET