Investors who are looking to either match (or hopefully beat) the indexes in 2026, there are plenty of factors to consider.
Top of mind for most investors may be overall economic growth, and that of AI. Indeed, the AI trade is driving most of the GDP growth we’ve seen in recent quarters, and that’s a trend that’s expectid to continue. And with most of the economic growth still coming from the top 10% of wage earners, the likelihood that we see the so-called “K-shaped” economy gather steam, this could become much more important to the overall investing narrative in 2026.
That said, I think interest rates, and more specifically, how quickly interest rates come down next year – that’s going to be a very important story to follow.
For those who think (as I do) that interest rates could come down faster than many economists think next year, here are three ways to benefit from this trade playing out.
Bonds
Various types of savings bonds
Investors who have plenty of capital gains on their books, and may be looking to reallocate some of these gains toward other asset classes which may provide some portfolio protection (in the case that future rate cuts come alongside recessionary headwinds), bonds are a great place to hide out.
Personally, I prefer to invest in bonds via ETFs or other funds that track a broader basket of such securities. That’s because buying individual bonds can come with their own idiosyncratic risks. And if you’re buying bonds for risk protection and portfolio diversification purposes, steering clear of as much risk as possible is the name of the game.
That said, as interest rates come down, bond prices go up (they’re inversely correlated). Thus, buying a portfolio of bonds across the duration spectrum (I prefer Treasurys, as they’re the safest, but there are other higher-yielding options in this group as well) can deliver outsized returns in a down or sideways market.
It’s my view that rates will ultimately come down from here, boosting bonds and making this portfolio hedge an actual winner. We’ll see if this thesis plays out, but that’s my base case for now.
Alternative Assets
Image of a house for sale
Another key way investors can diversify their portfolio into assets that can benefit from interest rate cuts in 2026 and the years to come is to consider investing in alternative assets.
This asset class typically revolves around real estate, but can include other non-publicly-traded assets, precious metals, crypto and other income producing businesses or assets that exist outside the traditional stock market.
It’s my view that alternative assets could continue to climb in value relative to equities and other assets in the year ahead (and potentially longer), due to the fact that consumers may begin to value “hard” assets – those they can touch and feel – to a greater extent. The value trade could come back on, as evidenced by some of the valuation-related concerns that have clearly bled into some impressive moves in certain high-flying AI stocks of late.
If that’s your view, looking at saving down for a down payment on a house or rental property, or adding to one’s precious metals holdings (even at a time when they’re soaring) may help one sleep better at night. That’s not to say there isn’t risk with this asset class (there is). But if interest rates come down, that should be broadly bullish for all the aforementioned alternative assets listed above.
Dividend Stocks
Dividend visual
Finally, I think dividend stocks can play a meaningful role for investors looking to benefit from interest rate cuts in the coming year.
Whether that’s picking world-class dividend stocks like Fortis (NYSE:FTS | FTS Price Prediction) with more than five decades of annual dividend hikes backing up a dividend growth strategy which should continue for decades to come, or selecting dividend ETFs that cover a broad basket of such equities, there are plenty of options to choose from in this regard.
Dividend stocks generally become more valuable in times of declining interest rates. That’s because stocks that are viewed as bond proxies carry yields that will be viewed more favorably at a lower benchmark rate set by the Federal Reserve.
The idea is intuitive. A stock providing a dividend yield of 5% today may not have been attractive when money market funds were paying 5.5% or higher not that long ago. But with the overnight rate now below 4%, such companies may become of interest to investors, particularly because it’s not just the yield these companies provide – but also their capital appreciation upside – that can provide total returns that beat the market.
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