Happy Holidays from Bernicke Wealth Management! We hope everyone is enjoying some time with family and friends during the holiday season. The early snowfall this year has been a boon for those of us with younger kids. Building a snowman and sledding is much more enticing than going outside while it’s cold and muddy!
For the last newsletter of 2025, I’d like to focus on a few key topics we believe will be the primary themes driving 2026.
Affordability and Inflation
While inflation at the headline number has broadly stabilized around 3% this year, the underlying dynamics of what feeds into inflation are continually changing. Some of the focal points from 2026 will likely be healthcare, shelter, and energy costs.
At the time of this writing, the enhanced Affordable Care Act (ACA) tax credits are set to expire at the end of 2025. Congress is currently working to pass an extension of these tax credits, but the details of which have not been agreed upon by both parties. If no extension is passed, those individuals using ACA health insurance will only be eligible to receive tax credits if their modified adjusted gross income remains below 400% of the federal poverty line for 2026. Beyond ACA health care, insurance plans more broadly are seeing premium increases as well. A study by PwC suggests medical costs will increase by 8.5% in 2026, exceeding the overall trend of headline inflation.
The good news is that shelter costs are not increasing at an aggressive rate like they were in prior years. Interest rates have fallen, as have 30-year mortgage rates. Down from its peak of 7.8% in October 2023, the 30-year mortgage is now down to 6.19%. While still not near the lows we saw as recently as 2021, falling rates make housing affordability less of a concern for those seeking to purchase their first home or adjust their standard of living.
Energy costs are somewhat of a mixed bag, depending on where you look. Gas prices continue to come down from their highs in 2022. The average gallon of gas in the US stands at $3.11, down from $5.10 in June 2022. However, the cost to power your home is expected to increase in 2026. The U.S. Energy Information Administration (EIA) forecasts residential electricity prices to increase 4% in 2026. This is partially due to increased demand from artificial intelligence data centers.
Artificial Intelligence (AI)
Speaking of AI, we expect this theme to persist for the foreseeable future. Businesses continue to spend billions on building their AI infrastructure while the question of revenue generation from the AI tools being built remains unresolved. It’s not to say money isn’t being made by these companies. Rather, it’s the scale to which the spending presently dwarfs the revenue earned.
The good news is that a large bulk of the spending is concentrated within companies that earn significant cash flows through other areas of their business. Meta, Microsoft, Amazon, and Alphabet are expected to spend $588 billion in 2026, with roughly 75% of that spend directed to AI infrastructure. No matter how you spin this number, it’s significant, and investors are going to want to see a return on their investment sooner rather than later. We believe AI will be transformative for many reasons. However, the economics behind the technology need to eventually emerge before we see clear winners establish themselves in the space.
Interest Rates and The Federal Reserve
Reading through the tea leaves suggests we’ll likely see the current Director of the National Economic Council, Kevin Hassett, nominated for the role of Fed Chair when Jerome Powell’s term ends in May 2026. This will likely be viewed positively by the market, as Hassett has a strong economic pedigree to back up his nomination. The key focus if/when he becomes Fed Chair will be how he handles Fed independence.
Historically, monetary policy (The Fed) and fiscal policy (Congress) have remained separate and distinct. The benefit of this “economic firewall” stems from the need to insulate monetary policy from the relatively short “political business cycle”. Simply put, setting interest rates and managing the flow of money often comes with long-term horizons in mind. These decisions can also be viewed negatively by the public. If inflation increases, the Fed’s antidote might be to raise interest rates. Higher rates are generally negative as it costs more to borrow money. Keeping an “arm’s length” from the political cycle can be seen as healthy when needing to set potentially unpopular interest rate policy.
Our base case is for a relatively “status quo” monetary policy throughout 2026. Unemployment appears contained, and inflation remains tepid, albeit something to keep an eye on. As a result, only two 0.25% rate cuts are currently priced into the market. This would set the target rate at between 3-3.25%.
Looking back, we’ve experienced two above-average years for the U.S. stock market. We view 2026 as one of cautious optimism based on the sound foundation of the U.S. economy and its consumer, alongside a healthy corporate America. Yes, there are some cracks we’re keeping an eye on, such as souring consumer sentiment, elevated AI spending, and slowing wage growth. That said, momentum favors the current trend of economic and corporate growth.
From all of us at Bernicke Wealth Management, we wish you a safe and healthy holiday season!
Welcome Brady Carrell