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Today’s guest is Liz Ann Sonders, the Chief Investment Strategist at Charles Schwab—one of the most widely followed voices in markets and the economy, and someone I’ve personally been reading and learning from for nearly two decades.
In this conversation, we go well beyond the usual “what’s your prediction for next year?” kind of interview. Liz Ann Sonders explains what it really means to be an investment strategist, why she doesn’t believe in year-end price targets, and what she thinks forecasts should be used for instead: building perspective and staying disciplined when uncertainty is high.
We also break down some of the biggest lessons from 2025—including why index returns can hide what the average stock investor actually experienced—and what that might mean for the 2026 environment, from earnings and inflation to market breadth. From there we dig into the Federal Reserve, the dollar’s reserve currency status, and what investors should—and shouldn’t—worry about when it comes to U.S. debt.
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Why Schwab Won’t Do Year-End Targets (3:00)
Our discussion begins with Schwab’s 2026 Market Outlook that Liz Ann and her team put together, but their outlook isn’t built around the classic Wall Street ritual of predicting year-end price targets.
Liz Ann explains the “why” in the context of the perils of forecasting.
She remembers her very first conversation about taking the job—26 years ago, directly with Chuck Schwab—and his explicit desire that Schwab not fall into the trap of year-end targets.
Her core issue: year-end targets pretend precision where there isn’t precision.
Because markets don’t march cleanly toward a single number on a calendar. They “traverse a path of constant uncertainty.” That’s also why she laughs at the phrase the market hates uncertainty—because the market is always uncertain. She’s never woken up to a world where the Wall Street Journal headline reads: “We know everything. Everything is certain.”
A single target for 4 p.m. on the last day of the year ignores what actually shapes investor outcomes along the way: the volatility, the interim drawdowns, the churn and rotations under the surface, and the different regimes that pop up midstream.
In her view, year-end targets become a scoreboard for strategists—who was right, who was wrong—but that’s not great guidance for investors. Liz Ann stresses that trying to time the market is an impossible (or nearly impossible) thing to do—and you don’t have to do it to be successful. The “get in, get out, pick tops and bottoms” mentality is a misperception of what actually works.
How Liz Ann Builds an Outlook: cycles, quadrants, and “better or worse” vs. “good or bad” (08:23)
When Liz Ann is building a market outlook, she’s trying to assess whether the current economic cycle resembles “normal” history—and if so, where we are in the cycle.
But she’s also clear that the post-COVID environment has added unique features that don’t follow a neat, linear script of early-cycle → mid-cycle → late-cycle → recession.
Her framework leans into a kind of quadrant approach: economic drivers that directly influence markets, including:
- the direction of inflation (up/down, high/low)
- what that means for monetary policy (easier/tighter, and transitions between the two)
- investor sentiment (she nods to Marty Zweig, “don’t fight the Fed,” and his “investor liquidity” component)
- the trajectory of earnings
- the valuation backdrop (with the constant reminder that valuation is a terrible market-timing tool)
She adds an idea she’s been saying for decades: “Better or worse often matters more than good or bad.”
Investors naturally ask if data was “good” or “bad”—jobs, retail sales, GDP, earnings. But markets are often reacting to the direction of change.
At the top, data can still look fantastic in absolute terms—because it’s just started to roll from getting better to getting worse. At the bottom, data can look horrific—because it’s just started to go from getting worse to getting better.
Markets have an uncanny ability to sniff out those turns—often before they’re obvious in the headline economic data (and long before revisions smooth everything out).
As she puts it, her job in providing an outlook is to connect those dots: where are we in the cycle, and how might that map to market behavior—without pretending that there’s a foolproof timing tool.
2025’s Biggest Investor Lesson (13:33)
One trend Liz Ann sees continuing into 2026 the market is shifting into a “broadening out” trade that began late in 2025.
A few really interesting data points she shares in supporting this viewpoint:
Yes, the S&P 500 finished up 16% in calendar year 2025, but the average member of the S&P 500 had a maximum drawdown of 27% during the year. The NASDAQ was up 20% at the index level, but the average member saw a maximum drawdown of 52%.
That gap happened through rotation and churn under the surface, while mega-cap dominance kept cap-weighted indexes looking “fine.”
In other words: a lot of investors were living through something far rougher than the headline index return suggested.
The Magnificent Seven Misconception: contribution ≠ performance (16:48)
Liz Ann says 2025 also highlighted a mistake she still hears constantly: investors conflating contribution to index returns with actual stock performance.
Her “poster child” example is NVIDIA—the stock most people associate first with AI and the Magnificent Seven.
In 2025, NVIDIA was the #1 contributor to S&P 500 returns, but it ranked 75th in the S&P 500 for price performance.
Why? Because contribution to a cap-weighted index is price performance multiplied by market cap. A huge stock can be the biggest contributor even while dozens of smaller stocks outperform it.
That’s why she pushes back on the idea that “the only way I can do well is to only own those names.” They were big contributors—but not necessarily the best performers.
In 2025, only two of the Magnificent Seven outperformed the S&P 500. Meanwhile, two of the best-performing S&P stocks were SanDisk and Western Digital—more “old school” than hype-driven.
The 2026 Outlook (21:05)
Liz Ann’s 2026 outlook that frames the year’s setup says:
“Uncertainty generally assumes unknowns: elections, wars, Federal Reserve decisions, etc. Instability stems from the inner workings of the system itself, such as: Tariffs and their uneven application; Housing supply frozen because existing homeowners have locked in low mortgage rates and can’t move without taking out new mortgages at higher rates; Labor supply altered by immigration shifts; Fiscal stimulus and deficits decoupling from the business cycle; Oscillating inflation components; Stock market breadth—how many stocks are participating in an index’s move—narrowing and widening in sharper bursts.”
So what’s Liz Ann most focused on as 2026 gets underway?
She goes straight to the fundamental driver she keeps coming back to: earnings—“the mother’s milk of stock prices.”
Not because earnings drive prices in lockstep, but because they’re still the most important fundamental anchor.
Her “things that could go wrong” list starts with earnings expectations being too high (the bar set too high) and inflation re-escalating enough that the Fed not only stops easing—but potentially has to tighten.
Notably, she doesn’t lead with geopolitical crises. They matter, but they don’t typically have long-lasting market impacts on their own. She tells a quick story about social media pushback on a geopolitical table Schwab published—someone tried to pin 2001 market weakness on Afghanistan, and she basically points out: there was also the bursting of the internet bubble and a long bear market happening, so cause-and-effect isn’t that simple.
Overall, she’s constructive—just with a “different flavor” than the mega-cap-dominated market of early-to-mid 2025.
The Federal Reserve, Rate Cuts, and a New Fed Chair: why the “C” in FOMC matters (26:09)
Liz Ann’s guess is that the Fed may not be as anxious to cut again immediately, given sticky inflation and a healthier-than-expected labor report (and she points out there will be another jobs report between the January 7 recording date and the January 14 publish date of this episode).
What she finds most interesting about this Fed era is the sheer volume and variety of Fed communication. She jokes the FOMC could be called the Federal Open Mouth Committee—with so many speakers, so many platforms, and so much real-time commentary enabled by the internet and social media.
Right now the Fed doesn’t have a clean, unified thread. There are more dissents and a wider range in dot plot projections than usual. That makes it trickier to gauge the next move because it’s not just about the data—it’s also about a committee with genuinely different views.
On the new Fed chair: she notes the view at the time is that it’s likely “one of the Kevens,” while also acknowledging the president can change direction. She’s less concerned than she was six or seven months earlier about an imminent threat to Fed independence.
She references:
- Stephen Myron being put on the Fed (and not swaying others)
- the Lisa Cook situation (an attempt to fire her stayed by the courts),
- and the fact that Kevin Warsh was still in the running (she discloses she’s known him for 20+ years)
Her anchor reminder is “the C in FOMC is committee, not chair.”
Even if you imagine political pressure, there are still voting members—and she believes the dispersion of views and the persistence of dissent actually reinforces independence (even if it’s not a risk she’d say is “zero”).
The US Dollar and Reserve Currency Fears: “there’s no replacement for it” (31:39)
Liz Ann’s answer is not worried about the dollar losing reserve status largely because there’s no viable replacement.
She walks through the usual alternatives people cite:
- The Euro: Single currency, but many countries with different fiscal policies and separate bond markets—so it’s not feasible as a clean replacement
- The Chinese Yuan: Not truly convertible and still a single-digit percent of world trade
- Bitcoin: She says she doesn’t even get that question much anymore
Where she does see change: over time, we may see a world of multiple reserve currencies, with more trade in local currency terms—driven partly by technology (easier “on the fly” currency translation) and shifting trading blocs shaped by tariffs, geopolitics, and post-COVID supply chain lessons.
She also notes that diversification away from the dollar isn’t new. China’s central bank (PBOC) has been diversifying away from Treasuries for over a decade—and that gradual process will likely continue.
But the dramatic scenario—China waking up and dumping dollar assets overnight—doesn’t make sense to her. It would be “aiming the gun squarely at their own economic foot,” damaging themselves at least as much as the U.S.
In the meantime, global trade still uses dollars on one side or the other, and those dollars need somewhere safe, liquid, and short-term to go. Again: no replacement.
US National Debt: not a default story, but a long-term “wet blanket on growth” (35:19)
Liz Ann is worried about the implications of the U.S. debt but isn’t worried about a U.S. debt default.
Her main investing-relevant implication of a high and rising debt burden: it tends to suppress growth. Beyond the higher cost of servicing, debt becomes a wet blanket on growth—a historical and global phenomenon. She says when you study different debt regimes (levels, growth rates, deficits), you often see negative implications for GDP growth, job growth, productivity, and inflation dynamics.
In 2024, the cost of servicing U.S. debt leapfrogged the cost of defending the country and Liz Ann notes that “centuries’ worth of books” talk about empires weakening when servicing costs exceed defense costs. She’s not calling it an immediate trigger for doom—but it explains why attention ramped up.
Then comes the political reality she thinks investors struggle to reconcile: neither side of the aisle truly acts like it cares. There aren’t honest Washington conversations about tackling it because most people won’t vote for what would be required:major entitlement reform, major spending cuts that hit them, or major tax increases.
The non-draconian “real solution,” as she frames it, is to get to a point where the growth rate of debt is lower than the growth rate of the economy. That’s how you “mathematically chip away” at the problem. Of course, rising debt makes it harder to grow faster because there’s a crowding out effect that pulls resources away from more productive uses.
Long-Term Investing vs. Gambling: owning vs. hoping, and why “get in/get out” isn’t a strategy (43:02)
Even when Liz Ann writes about timely topics, she ends with long-term perspective.
Liz Ann explains that there is a bright line between investing and gambling—and this distinction has become more urgent as short-term trading and betting-platform behavior has risen since the pandemic. As she puts it: “Investing is about owning. Gambling is about hoping.”
She points to the data showing that as time horizons shorten, performance suffers (she references the Dalbar-style findings investors often cite in this context). Short horizons push people into a get-in/get-out mentality—and she has a line she clearly loves:
Neither get in nor get out is an investing strategy. Because it’s gambling on not one moment in time, but two.
She dismantles another misperception: that success comes from knowing what the market is going to do next. Her view: it’s not what we know—it’s what we do along the way.
That’s where “boring” but beautiful disciplines matter: periodic rebalancing, diversification, and sticking to a plan.
I love the analogy she shares, asking: What’s the most important piece of a jigsaw puzzle? People say corners, edge pieces, the final piece.
Her answer: the picture on the box. Try doing a 1,500-piece puzzle without looking at the picture—good luck. The picture is the plan. With a plan, pieces fall together. Without one, you’re winging it—and that’s where people get tripped up.
How Liz Ann Sonders Invests Her Own Money (47:22)
With that “plan” framing in mind, I ask Liz Ann about how she manages her own money given that she’s so deep in markets. She explains that “manage her own money” in the sense of picking stocks or even picking funds day-to-day.
She uses a full-service advisory relationship on Schwab’s platform—an all-inclusive approach spanning: asset management, tax planning, estate planning, wills, etc.
She emphasizes she’s not disengaged. She collaborates, talks big picture, talks asset allocation. But the security selection and day-to-day portfolio decisions are handled by others.
What’s Different Now: post-COVID sentiment, the retail trader, and why psychology got harder (50:16)
The final question of the interview was simply asking Liz Ann what’s changed in how she views markets in the post-COVID era.
Her answer centers on sentiment—and how the rise in power of the retail trader has changed the backdrop.
Instead of a single pendulum swing between monolithic optimism and pessimism, there’s now a wider array of sentiment depending on which cohort you’re surveying or observing.
She’s also seen bigger gaps between:
- attitudinal measures (survey data—how people say they feel)
- behavioral measures (what people do—equity exposure, fund flows, options activity)
She mentions the classic AAII weekly survey (bullish/bearish/neutral) as a pure “how do you feel” read—but contrasts it with behavioral measures like actual exposure. In recent years, those can diverge dramatically.
Even the “fund flows” lens has evolved: it’s not the old mutual-fund world anymore; you have to think in terms of ETF flows.
Her closing observation is a perfect summary of why her job exists:
- the bond market is largely about math
- the stock market is largely about psychology
Math is more concrete. Psychology is the tough part—but it’s also the fascinating part.
Resources:
- Check Out Schwab’s 2026 Market Outlook
- Follow Liz Ann Sonders on Twitter/X
- Visit the Schwab Website for Free Financial Insights
The Long Term Investor audio is edited by the team at The Podcast Consultant
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