As we look ahead to 2026, many of the themes we have discussed in recent years remain in place. The global economy continues to expand, corporate earnings remain resilient, and markets are supported by powerful secular forces—most notably artificial intelligence (AI). At the same time, familiar late-cycle risks have intensified, including elevated valuations, market concentration, widening fiscal deficits, and rising geopolitical complexity. The defining feature of 2026 is less about whether growth persists and more about where it persists and at what price.
Economic Growth: Slowing, Not Stalling
The U.S. economy enters 2026 with momentum, though at a more measured pace. Consensus expectations among investors and economists suggest inflation-adjusted GDP growth in the range of 2.0% to 3.0%, supported by consumer spending, fiscal support, and continued corporate investment.
Economic activity has remained more resilient than many initially expected. Consumption continues to be the primary driver of growth, particularly among higher-income households. The top 10% of U.S. households now account for nearly half of total consumption, highlighting the importance of wealth effects in sustaining demand. As a result, sectors tied to affluent consumers—such as experiences, healthcare, and premium services—have generally outperformed, even as affordability pressures weigh on broader segments of the population.
Monetary Policy and Rates: Higher for Longer, with Implications
While inflation has moderated from its post-pandemic peak, it remains elevated relative to the Federal Reserve’s long-term target. Inflation is expected to remain in the high-2% to low-3% range, which may limit the pace and magnitude of future rate cuts. As a result, interest rates are likely to remain structurally higher than in the prior decade.
Bond markets are already reflecting this environment. Despite rate cuts late in 2025, the 10-year U.S. Treasury yield remains elevated, with scenarios placing it between 4.5% and 5.0% in 2026 should fiscal expansion persist. Higher rates have meaningful implications for equity valuations, as higher discount rates tend to pressure valuation multiples—particularly for companies whose expected cash flows are further in the future.
Equity Markets: Solid Earnings, Narrow Leadership
U.S. equities enter 2026 from a position of relative strength. Consensus assumptions point to mid-single-digit to low double-digit total return potential, driven primarily by earnings growth rather than further valuation expansion. While this supports a constructive outlook, it also suggests a more selective and fundamentals-driven market environment.
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