2026 Outlook with Liz Ann Sonders: Part Two

Sean Walters: Hello, I’m Sean Walters. Welcome to The Exceptional Advisor podcast, brought to you by the Investments and Wealth Institute. We relaunched this show with a simple standard: every episode should help make advisors better — help them make better decisions, lead stronger teams, and serve clients with more confidence. This week, not someday. Today’s market update, part two, because the macro story just keeps moving, and we want to start the year with a couple of great guests to talk about what advisors should be thinking about as they think about the markets with their clients. Today I’m joined by longtime Investments and Wealth Institute favorite, Liz Ann Sonders. Hello, Liz, how are you?

Liz Ann Sonders: Good, Sean, how are you?

Sean Walters: Doing great. It’s great to see you again. Liz Ann is the Chief Investment Strategist at Charles Schwab, and one of the most widely followed market strategists in the industry. She’s known for not just talking about what the market is doing or what the market did, but what it really means and how professionals should respond. Liz Ann, I started as CEO of IMCA back in 2010, and we had you as a guest at our conference almost every year for several years there. So you know a lot about our members. Welcome to The Exceptional Advisor podcast.

Liz Ann Sonders: Well, thank you so much. Thanks for having me. Looking forward to our conversation.

Sean Walters: You know that we’re a professional association and we value professional education and credentials, but we’re also a community of financial advisors — exceptional financial advisors. So I always like to lead with something a little more personal about you and your start in the investment industry. Who helped you get your start in the business? Or what was the moment where you really knew you were in the right place at the right time?

Liz Ann Sonders: I think both of those, Sean, happened while I had already started my first job. There was nothing, say, when I was in undergraduate school — I wasn’t being given any particular guidance. My parents were not financial people. I’m the first person to graduate college in my entire family. So really, when I was in undergrad, all I knew was that I wanted to live and work in New York City. That was my initial goal. I interviewed across the spectrum of industries, and I had two interviews at this company called Zweig-Avatar. Something spoke to me, and I joined the firm as a grunt. And then I grew up in the business, so to speak, under the tutelage of the late Marty Zweig and his founding partner, Ned Babbitt. So my first job gave me my start, and they were my mentors — and I fell in love with the industry by virtue of just taking a chance on that particular company.

Liz Ann Sonders on the Rolling Market Cycle: Where the Economy Is Strong and Where It’s Straining

Sean Walters: That’s great — it’s great to hear those origin stories. So, you’re known for helping advisors step back from the headlines and focus on what really matters beneath the surface. And this is a podcast, not a presentation where the markets are whizzing around us as you’re speaking. As you look at the environment today, generally: what’s one area that feels more resilient than expected, and maybe one that’s showing real strain? And if you want to keep going — one that’s generating a lot of noise but not a lot of signal.

Liz Ann Sonders: I would say that in terms of where there are pockets of strength and weakness, it really depends on the month or the quarter. This has been an incredibly unique cycle, really going back to the COVID era — it’s been a rolling cycle, rolling pockets of strength and weakness over time. And the benefit of that unique backdrop is that, save for the very short-lived pandemic-oriented recession, we’ve managed to have these sectoral recessions, these segmented recessions, but in an ongoing broad aggregate expansion. That’s because where we’ve developed pockets of weakness, they’ve been offset by pockets of strength.

The first way that manifested itself was in the goods versus services side of the economy — because, of course, services were completely shut down during the early part of the pandemic. When the stimulus kicked in, we still had access to buying goods. So we had this huge surge on the goods side of the economy, a huge surge in inflation in that part of the economy, but shutdown, recession-like conditions in services. Then when services opened back up, by virtue of the creation of vaccines and the economy opening up, we had pent-down demand on the manufacturing side but pent-up demand on the services side. It worked its way through inflation that way too. We’ve been in this recessionary backdrop for manufacturing.

Maybe to get more specific to part of your question: I think what we may be starting to see now — and I would emphasize may — is finally manufacturing trying to pull itself out of its recession, and not quite as robust a backdrop in services. So more of that roll-through, both in terms of the growth side of the economy and where these pockets of weakness are. It all has to do with the K-shaped nature — there are so many facets to that, which we’ve written about a lot. And I think that kind of roll-through backdrop is more likely to persist than not.

2026 Inflation and Fed Outlook: Rates, the Labor Market, and a New Fed Chair

Sean Walters: Within that — that’s a really nice macro view on the growth piece. How do inflation and rates play out for the year? What are your thoughts on that?

Liz Ann Sonders: I’ll give you a big-picture thought on inflation and tie it to the Fed’s 2 percent inflation target. In the era that predated the pandemic — often called the Great Moderation era, from the mid-to-late 1990s up until actually the first two years of the pandemic, until the 2022 inflation spike — that was an environment where, if you pull up a chart, you could see that 2 percent was almost the ceiling in a range that inflation bounced around. Now I think we have to think of 2 percent as maybe the floor in a range it will bounce around.

You really have to slice and dice inflation to get the full story. We had the massive differential in goods inflation versus services inflation, courtesy of the pandemic and its aftermath. We actually went into goods deflation for a while, until tariffs kicked back in. Since then, we’ve gone from negative 2 percent deflation back up to about 2 percent inflation. So some who say tariffs haven’t had a deleterious impact on inflation might point to that and say it’s right around the Fed’s target — but the direction of travel also matters, and it has been that turn higher.

You can slice and dice inflation in a number of other ways, not just goods and services. You can slice it into discretionary versus non-discretionary items — the “wants” components measured in inflation statistics and the “needs” components. That ties further into the consumer-related K, and why there continues to be so much pressure on the bottom end of the K, the lower-income consumers: non-discretionary inflation is running hotter than discretionary inflation, and those needs components represent a larger share of what lower-income consumers have to spend money on. It’s yet another example of data where you’ve got to peel at least one layer of the onion back to get the fuller story. You can look at imported goods versus exported goods — there are so many ways to get a sense of the unique facets of this environment and how they’re impacting inflation.

In the meantime, what the Fed is maybe a little more focused on, as it relates to their dual mandate of inflation and the labor market, is the labor market. They’ve shown us that their decision to either pull the lever forward or pull it back has been driven more by what’s happening in the labor market than on the inflation side, barring an extreme move one direction or another in inflation. So I think the Fed is probably on hold, at least through the March FOMC meeting — maybe up until Powell’s term ends as chair, and we’re going to assume Kevin Warsh is installed as chair. I think we’ll continue to have a relatively calm backdrop in terms of expectations for short rates. That doesn’t necessarily mean it stays calm in the bond market in terms of long-term interest rates.

What Financial Advisors Should Watch in the Next 90 Days

Sean Walters: Well, let’s pause on that. If I’m an advisor listening to this, what’s the practical implication of that base case over the next 90 days? Is there anything you think advisors or their clients are most likely to overreact to? Anything you’d counsel advisors to focus on, given all the information that’s going to be coming and some of the swings that might happen?

Liz Ann Sonders: Great question. I think there’s what is going to be highly focused on — and I’m not necessarily saying you shouldn’t focus on it — which is commentary, not just from Kevin Warsh. He’s been radio silent since President Trump made the announcement that he was his pick. And I should say, full disclosure: I’ve known Kevin for close to 25 years. That doesn’t necessarily mean anything, but I do know him. I think he’s very, very smart. But we’ll also concede that he has had a variety of views over the years, and that’s what everybody’s trying to figure out right now. He’s generally seen as a hawk — that was the quick reaction on the part of markets when his name was announced. But now it’s been radio silence. So I think there’s going to be a lot of analysis of any comments made by Warsh along the way through the confirmation process, and by other members of the FOMC, to hear what they might be willing to say about this transition from one chair to another. That type of news could be market-moving. It could change expectations for what the Fed is going to do. It could have implications for the slope of the yield curve.

And of course, as it relates to more recent behavior: anything AI-related. Disruption in the software space, this broadening out in how we’re thinking about AI. We’re now in a stage where we’re simultaneously thinking about who the beneficiaries of AI are, but also where the disruption is going to be felt most acutely. I’ve been talking about it in the context of the three Cs: we had the create phase, we had the catalyze phase — the build-out, data centers and energy — and I’ve been saying we’re in the cultivate phase. But we may also be in a little bit of a creative-destruction phase, which is natural when you have a fast-growing innovation and you start to weed through the winners and the losers.

And the nature of trading in this environment — with the power of retail traders, and to maybe not an equal but an important degree, the big speculators and the commodity trading advisors — narratives can change and moves within the market can happen so quickly. My advice would be: don’t try to anticipate those narrative changes and trade in advance. This is an environment where you should expect more frequent bouts of volatility. Let rebalancing be your friend.

Sean Walters: A lot of advisors like to use an indicator dashboard — that 60-to-90-day dashboard. Are there any indicators you’d encourage advisors to watch over the next quarter, and what might they tell advisors they should be doing?

Liz Ann Sonders: I touched on it already as it relates to the Fed’s dual mandate and where their sharper eye is focused: I think it’s the labor market data that is going to be key — not just as it feeds into monetary policy decision-making, but as it feeds into the consumption side of the economy. That may seem like an obvious statement; health in the labor market is an important part of maintaining the consumption side of the economy. But it’s more acute now than in the past, because many of those traditional supports for consumer spending — like the savings rate, or the excess savings that came about from the massive pandemic stimulus — have largely been drawn down. There’s pretty much no excess savings now. The traditional savings rate is back to slightly subpar levels. Which means that pillar of confidence in the labor market is an important support for the consumption side of the economy. So that piece of the economic quilt is incredibly important.

I also think about the capital spending side of the economy. We’ve been in this bifurcated environment where anything AI-related has been on fire and non-AI-related capital spending has been much more subdued. In an ideal scenario, if you get some drawdown in capital spending trends on the AI side, you see a lift elsewhere. The concern, of course, is if confidence remains dented.

And the last thing I’d say ties into the consumer but also the business community: it’s really important in this environment to not just listen to what they’re saying, but what’s actually happening. That differential between soft data and hard data — survey-based data, what individual investors are saying versus what they’re doing, what consumers are saying versus what they’re doing, what businesses are saying versus what’s actually happening on the ground. Pay attention to the differential. The ISM manufacturing report that came out recently was really strong on the upside — manufacturing shown as pulling out of contraction back into expansion, new orders picked up, employment picked up. But one of the things ISM does when they release those indexes is provide a summary of verbatim comments from the purchasing managers they’re surveying. You look at the verbatim comments in the recent release, and then you look at the headline readings, and you’d think you were looking at two completely different surveys. So there again is the difference between how they’re really feeling — it’s sort of the vibecession — and what’s actually happening on the ground. We should never look at just one in isolation.

Financial vs. Emotional Risk Tolerance: Managing Client Behavior Through Volatility

Sean Walters: That sounds like a further part of the recipe for volatility this year — two different sets of signals driving things. That’s a perfect bridge into the behavioral side, the client behavior. As you know, one of the bigger challenges for financial advisors is managing their clients’ fear and uncertainty — and their bad decisions. With all the volatility we might expect this year, what’s the most effective way for advisors to frame it so clients don’t drift into bad decisions?

Liz Ann Sonders: Probably the first step — and maybe one of the most important discussions an advisor should have with their client when establishing a plan. Typically the plan is a function of their time horizon, what their needs are, whether it’s short-term or long-term spending, and in particular their risk tolerance. That’s the financial risk tolerance end of the spectrum. A lot of investors will too directly tie time horizon to risk tolerance: I’m younger, I’m going to be working for 30 or 40 more years, therefore I should take a more aggressive stance — I have high financial risk tolerance. But then there’s the emotional risk tolerance, which can sometimes be completely distinct from your financial risk tolerance.

Ideally, what advisors can do is help investors figure out whether there’s a yawning gap between those two, or a narrow gap, before they learn the hard way — by panicking at the first 15 percent drop in a portfolio and realizing, I can’t handle this pain. They might still have 40 years ahead of them; that’s their time horizon. But that doesn’t mean they’re automatically a risk-tolerant investor. I think that’s the most important part of the discussion.

And then, truly going to the disciplines: diversification across and within asset classes, periodic rebalancing — and the fact that you can approach rebalancing in different ways depending on the environment. A lot of investors do calendar-based rebalancing; a lot of traditional mutual funds do quarterly rebalancing in the last week of every quarter. But there are times when volatility-based rebalancing can help. Basically, it means let your portfolio tell you when it’s time to do something, by virtue of more extreme moves across and within asset classes. It gives you that opportunity to add low and trim high — when, if you base it solely on the calendar, you’re at the mercy of whatever happens to be going on at that moment.

These may be the slightly more boring things to talk about. And I love podcasts like yours, because they’re long-form questions with the allowance for long-form answers. In sound-bite television I’m often asked: okay, Liz Ann, are you telling your clients to get in or get out? And I always think — neither get in nor get out is an investing strategy. That’s just gambling on two moments in time. Investing should be a disciplined process over time.

I love to do jigsaw puzzles. I’ll often ask an audience of investors: what’s the most important piece of a jigsaw puzzle? Hands go up, and they’ll say the last piece, or the corner pieces, or the side pieces. And I always say: it’s the picture on the box. That’s the plan. If you try to do a 1,500-piece jigsaw puzzle without looking at the picture on the box, good luck. And I think too many — especially the younger retail trader cohort — threw the box away. It’s just, let’s have fun with the pieces. It’s really those tried-and-true disciplines that are key to success.

Sean Walters: That’s definitely what we teach and test in the CIMA certification — the picture on the box is the right first step. Before we move into the portfolio implications, I want to touch one more time on the behavioral piece: financial risk tolerance versus emotional risk tolerance. What a great way for advisors to look at their clients and the way they’re reacting to the markets. Anything else you want to say on that topic?

Liz Ann Sonders: Well, unfortunately, many investors who do figure out that there’s a bigger gap between those two than they thought learn it the hard way. I had a Schwab client come up to me at an event last spring, in the May time period. She said: I’ve been a Schwab client for a long time. I follow all the research you put out. I listen to you all the time. And I did what I absolutely should have known I shouldn’t have done. On the morning of April 9th last year, she panicked and sold absolutely everything — and that was the intraday reversal day, to the tune of 10 percent. So that’s an example: she said, I’m seasoned, I understand this stuff, I listen to and read what the experts say. I get it — have discipline, diversification, panic is not a strategy. She said: and then I panicked. Somebody learning the hard way.

So there are maybe ways you can probe with clients based on past experiences — hopefully not an epic past experience where they panicked and sold everything in March of ’09, but other touch points that might suggest their gut is going to come into play. It’s gut and heart over mind. We know what the right thing to do is, but we’re very emotional about our money.

Sean Walters: I can give you so many examples similar to that woman, even in my own life. What I always tell consumer audiences is: that’s what an advisor is for. Call your advisor when you’re feeling that emotional pressure.

Liz Ann Sonders: Right. And Sean, another way to think about it is not just the decisions one makes on the downside. Just like panic is not a strategy, nor is greed, or FOMO, or performance chasing. And that’s been as much in play — if not more — in the last couple of years as the panic side of things. A recent example: for the last several months, notwithstanding more recent action, precious metals — gold and silver — have gone absolutely parabolic. During that stretch I was getting absolutely ambushed with questions: Should I get in? When should I buy? How much should I have in my portfolio? And the little voice in my head that’s been doing this for 40 years thought — these are people who never would have thought about gold or silver, never would have asked questions about gold or silver. The only reason they’re doing it is because they see what the prices are doing.

Asset Allocation in 2026: International Diversification, Rebalancing, Bonds, Alts, and Crypto

Sean Walters: Let’s use that as our bridge to portfolio implications — rebalancing, asset allocation. There are so many areas we could talk about if we had more time: bonds, international equities. Just high level: what are your thoughts on what advisors should be thinking about in terms of asset allocation in 2026? And then talk a little more about what you mentioned earlier — letting the portfolio guide you on when to rebalance.

Liz Ann Sonders: Sure. One of the things I won’t do here on your show — nor would I ever do — is talk about asset allocation with percentages. We have $12 trillion of client assets at Schwab. There’s no one cookie-cutter answer. I could have a bird land on my shoulder and whisper in my ear, telling me right now with 97 percent probability what the S&P 500 is going to do, what bond yields are going to do, how international stocks are going to perform relative to domestic. If I watched the bird fly away and sat down at a table with two investors — investor A is 25 years old, just inherited $10 million from their grandparents, gainfully employed, isn’t going to look at the portfolio very often, doesn’t need to generate income from it, goes skydiving on the weekends, very risk-tolerant; investor B is 76 years old, retired, built a nest egg, can’t afford to lose a dime of it, and is living on the income generated from that portfolio — with, round it to 100 percent conviction about what the markets are going to do, what I would tell those two investors is entirely different. So shame on anybody who provides a cookie-cutter answer as if it’s applicable to all investors.

So I’ll speak more generally, almost in the context of within asset classes. We are believers in the “international is now a diversifier” asset allocation thinking. For a long time, talking to investors about why you want international diversification meant constantly having to say “I’m sorry.” Now you get to say “you’re welcome.” We believe you go through these secular cycles where for quite a few years the U.S. just dominates non-U.S., and vice versa, and we think that when the last bear market ended in 2022, there was a decent chance we were starting another one of those secular cycles. Not that international beats the S&P 500 every quarter or every year — but that there are rewards that accrue to your portfolio by virtue of having that international diversification. Within that, whether the bias should be more toward developed international or emerging markets — that absolutely comes down to where you sit on the risk-tolerance spectrum, because there’s more volatility and broader swings in emerging markets. It’s a higher-risk international equity asset class.

We also believe in the broadening-out trade. We’ve seen this incredible move in relative terms by equal weight relative to cap weight, by small caps relative to large caps, and we think that has legs. But that just means diversification inclusive of small caps, inclusive of maybe a combination of active and passive — not, okay, now we tip to the complete other side. Correlations have come way down. Dispersion is much higher — and not just broad dispersion, but dispersion within asset classes, within sectors, even within previous cohorts of great attention like the Magnificent 7. Massive dispersion even within that. So another message about how to think about portfolios: this is not an environment where you want to put on your monolithic lens and say, I’ll just buy the Mag 7 and do well, or I’ll just buy the S&P and do well, or pick a sector. Still one of the most common questions any of us in this business get is “what sector do you like?” That, to me, is not a piece of advice that means a whole lot, especially in an environment of higher dispersion and lower correlations. I think we’re starting to see a more level playing field between the rest of the market and the mega-cap leaders, between equal weight and cap weight, between passive management and active management. And I think that’s a good backdrop.

Sean Walters: And on rebalancing — do you see anything that particularly triggered the need to rebalance based on what’s happening in the market?

Liz Ann Sonders: Precious metals. Just do the math. Even if gold had started as maybe 2 percent of a portfolio — which tends to be what you hear, somewhere in the 2 to 3 percent range as a diversifier; we don’t have gold as a formal component of our strategic asset allocation models at Schwab, we never have — the parabolic nature of those moves, especially if you add silver into the mix, would have taken that allocation well beyond, assuming you were sticking by some sort of asset allocation framework.

The same thing has happened as it relates to concentration in the portfolio. I’ve been saying for quite some time — really going back to the beginning of 2024, when we started to see the acute concentration problem associated with cohorts like the Magnificent 7 — there’s no reason not to pare things back as they’re going up. And that gets to the emotional side of things; that’s where we sometimes have to get out of our own heads.

A great example of this concept was a conversation I was only peripherally part of — I was in the room, listening, while a colleague of mine talked to a client at an event where I was speaking. The client was a longtime employee of NVIDIA, with a very large concentrated position for obvious reasons, and he’d been working with his Schwab consultant. He said: my consultant kept telling me, trim 10 percent of the position, trim 10 percent of the position. I fought him, I fought him, I fought him. I finally split the difference and trimmed 5 percent. And then the stock proceeded to go up 20 percent, and I’m so not happy. To his credit, my colleague said: would you really have been happier if the 95 percent you still own had gone down 20 percent — because you’d have bragging rights in your own head that you nailed the trim at the high? Or should you be happy that the 95 percent of the position you still own is now up another 20 percent? And to his credit, the client said: you’re absolutely right, of course that’s how I should think about it. The same thing had happened either way — it was the framing that changed.

So rebalancing — that act of paring back where there have been outsized gains, and adding — it’s a version of buy low, sell high. By “version” I mean buy low, sell high often suggests all in, all out. It’s add low, trim high. And it quite often goes against what we tend to do when left to our own devices.

Sean Walters: All right, I’m going to wrap up this portfolio piece with three rapid-fire thoughts on three different topics. I’ll tell you all three so you’re not shocked when I hit them: bonds, because there’s been some interesting stuff going on there; alts; and crypto. Want to take crypto first?

Liz Ann Sonders: Well — I don’t cover it. It’s not my area. I have generally been a skeptic; I’m always the first to admit that. At Schwab we hired a gentleman named Jim Ferrioli — he’s our crypto expert, and he’s starting to publish. I now blissfully get to figuratively phone a friend when I get the crypto questions.

I’m also not an alts expert — I don’t cover them. I would say the most important thing for investors looking at alternative assets, whether it’s private equity or private credit or private real estate, is to understand how it fits in your portfolio. Understand the differential in terms of liquidity and transparency. What is your aim — is it to be a diversifier? Are you comfortable with lower transparency and less liquidity? It’s really about understanding the goals of adding this into the mix, and truly understanding both the risks and the opportunities.

On bonds: Kathy Jones is our chief fixed income strategist — she has a phenomenal team, and we’re all in the same Schwab Center for Financial Research, so I’ll parrot a little of the fixed income side’s views since it’s not my bailiwick day to day. We think there’s a quality bias — we like the higher-quality areas like Treasuries and investment-grade corporates. For those on the more aggressive end of the spectrum, there are opportunities in some places in high yield, even in areas like emerging market bonds, but again, that has to be in the context of a risk assessment. We think there have been lots of opportunities in munis, but that’s obviously very client-specific.

And the last thing I’d say — probably even more important within fixed income than on the equity side of a portfolio — is personalization. There is most certainly no cookie-cutter structure for individual investors as it relates to fixed income. Even just the simple questions: is it a taxable account or a non-taxable account? Is your goal income generation, capital preservation, or for it to represent a diversification component — and if so, relative to what? What are you trying to diversify? The customization is even more important on the fixed income side than on the equity side.

Sean Walters: Okay, good. Well said. Let’s land this plane. We ask one final question of each of our guests, and since we’re the Investments & Wealth Institute — an association of and for advisors — what’s one piece of advice you’d give advisors today?

Liz Ann Sonders: Some of them I already touched on: get in, get out is not an investment strategy. Understand the difference between financial risk tolerance and emotional risk tolerance. But maybe one I’d also bring up — it’s an adage I’ve been saying for my 40 years doing this, and I think not understanding it trips investors up: better or worse often matters more than good or bad. Specifically, I’m talking about the relationship between data — what’s going on in the economy, a jobs report, a retail sales report, earnings season — and the market. Better or worse, the direction of travel, often matters more than the level. It’s human nature, when a report or an earnings release comes out, to think: was it good or was it bad? Was it strong or was it weak? But the reality, as it relates to the connectivity between data and the market, is that better or worse often matters more than good or bad — especially at inflection points.

When things stop getting better and start getting worse, at the top of that V, in level terms the data is still pretty darn good. But the market tends to sniff out that it’s not getting better anymore — it’s starting to get worse. Which is why the market is a leading indicator; why it tends to sniff out recessions in advance of recessions happening. It looks for that inflection point when things stop getting better and start getting worse. The same thing happens in the other direction. And I think that’s what investors miss, because they tend to think in level terms, not direction terms.

Sean Walters: That’s great advice, and a great note to end on. Thanks for joining us, Liz Ann Sonders — so wonderful to talk with you again. And to everyone listening: if you found this useful, follow The Exceptional Advisor podcast. We’ll be releasing at least one new episode every month, and if there’s any other information we can help you with as a premier advice professional community, please come to us as well. I’m Sean Walters, your host. Thanks for listening, and we’ll see you next time.