Wall Street has big expectations after its best run since 2009

The new year began much as the last ended: markets rose, confidence on Wall Street was intact and there were few signs that the forces driving 2025 had run their course. What’s less clear is how long the synchronization between assets can take.Global stocks rose in the first session of January, extending a run that continued for much of last year as enthusiasm around artificial intelligence, easing inflation and supportive central banks overwhelmed trade disputes, geopolitical tension and rising valuations. For investors, it reinforced a simple lesson: taking risks is rewarded.

What made the year unusual, however, was not just the strength of the rally, but its reach across all asset classes. Stocks and bonds rose together. Credit spreads tightened again. Commodities advanced even as inflationary pressures eased. The gains were broad, sustained and unusually well aligned. By year’s end, financial conditions had eased to near 2025 lows, underscoring rising valuations and a convergence of investor expectations around growth and AI.Measured across global equities, bonds, credit and commodities, 2025 delivered the strongest cross-asset performance since 2009 – a year marked by crisis-level valuations and major policy intervention.

That alignment made diversification seem effortless – obscuring how much depends on the forces that drove the last twelve months’ gains staying the same. When assets intended to offset each other move in the same direction, portfolios become less protected than they appear. The returns are piling up, but the margin for error is shrinking.

“We believe that 2025 has revealed the risk of a diversification mirage,” said Jean Boivin, global head of the BlackRock Investment Institute. “This is not a story about diversification across these asset classes that provide protection.”

As markets move deeper into 2026, the concern is not that last year’s rally was irrational, but that it may be difficult to repeat. Wall Street’s outlook remains based on the same factors: heavy AI investment, resilient growth, and policymakers who can ease without reigniting inflation. Forecasts compiled by Bloomberg News from more than 60 institutions show broad agreement that these forces remain in place.

That optimism rests on a market that has already priced in a lot of good news.

“We assume that the rapid pace of valuation expansion we have seen in some sectors is not sustainable or repeatable,” said Carl Kaufman, portfolio manager at Osterweis, referring to AI and nuclear energy-related stocks. “We are cautiously optimistic that we can avoid a major collapse, but worry that future returns will be anemic.”

The size of last year’s rally helps explain why U.S. stocks returned about 18%, marking the third consecutive year of double-digit gains, while global stocks returned roughly 23%. Government bonds also advanced, with global government bonds rising almost 7% as the Federal Reserve cut interest rates three times.

Volatility fell sharply and the credit sector followed suit. Measures of swings in US bond markets posted their steepest year-on-year decline since the aftermath of the financial crisis, while investment grade spreads tightened for the third year in a row, keeping average risk premia below 80 basis points.

Commodities joined the advance. A Bloomberg index tracking the sector rose about 11%, led by precious metals. Gold hit a series of record highs, supported by central bank purchases, looser US monetary policy and a weaker dollar.

Inflation remains the fault line. While price pressures eased for much of 2025, some investors warn that energy markets or policy mistakes could quickly reverse this progress.

“The main risk for us is whether inflation will finally return,” said Mina Krishnan of Schroders. “We foresee a domino of events that could lead to inflation, and we see that the most likely path starts with a rise in energy prices.”

The tension is visible outside the markets. According to the Bloomberg Billionaires Index, the world’s 500 richest people added a record $2.2 trillion to their combined fortunes last year, while US consumer confidence fell for the fifth straight month in December.

Last year also marked a comeback for Wall Street’s old-fashioned diversification strategies. The 60/40 portfolio, which splits bets between stocks and bonds, returned 14%, even as an index that follows the so-called risk parity quantitative strategy rose 19% for its best year since 2020. Balanced strategies still don’t see investors chasing returns in those types of funds that have suffered prolonged outflows.

Asset allocators remain broadly optimistic, saying economic momentum and policy support remain strong enough to offset richer valuations.

“We want to spend as much money as possible to take advantage of the current environment,” said Josh Kutin, head of asset allocation for North America at Columbia Threadneedle Investments. “We really don’t see any evidence that we should be concerned about this downturn in the near future.”