2026 Economic and Market Outlook

Global economy

One of the prevailing trends impacting the global economy heading into 2026 is the move toward deglobalization and improving the proximity and security of supply chains. This decade’s global pandemic and growing nationalism in a more volatile geopolitical environment have likely ended the post-Cold War move toward globalization, which helped open emerging economies and unleash much more intense price competition. With the United States leading this deglobalization charge, concerns are developing around future economic growth and inflationary implications of becoming incrementally more insular. An important countervailing trend that should help the demographically challenged developed economies effectively navigate deglobalization is the aggressive adoption and utilization of productivity-enhancing technology products. Increased investment in robotics on factory floors and artificial intelligence (AI) in the services industries will be key elements in maintaining, and perhaps advancing, economic growth rates without a notable increase in inflation. Unfortunately, there may be a zero-sum element to this dynamic, as emerging economies that may not have the necessary skill sets or the wealth to invest in more advanced technologies will be left behind in an environment in which export growth may be more challenging.

Source: Cerity Partners, FRED, 1/2/2025

After registering two strong quarters of above-trend growth in the middle of the year, the U.S. economy likely slowed to ~2.0% trend growth in the fourth quarter because of the government shutdown and restrictive immigration policies slowing job growth. Moving into 2026, gross domestic product (GDP) growth early in the year will be bolstered by the easier fiscal and monetary policies implemented in the second half of 2025. As a result of the passing of the One Big Beautiful Bill Act, the extension of the 2017 Tax Cuts and Jobs Act and the accelerated depreciation benefits for businesses should help broaden both consumer and capital spending, adding to the base provided by the continued build-out of data centers and power generation facilities core to the AI revolution. There is little chance the economy will fall into recession in the near term. Progressing through 2026, investors will increasingly be looking for signs of returns on the enormous investments made over the prior two years in productivity-enhancing technology. Lack of this evidence would likely slow capital spending and employment growth in the second half of the year. Productivity growth will be key in allowing the U.S. economy to stay near trend GDP growth as labor force participation begins to decline.

Source: Cerity Partners, FactSet Estimates as of 12/13/2025

The economies of Europe should be able to stay out of recession in 2026 as the restraining impact of tariffs on exports is offset by easier fiscal and monetary policies. The southern-tier economies have benefited from strong spending on services, which should continue to drive the important leisure and hospitality sectors. The biggest enigma and potential swing factor in Europe is the performance of Germany, its largest economy. Tariffs on goods and intensifying competition with China have slowed the critical German manufacturing and industrial sectors. However, the historically austere German government surprised observers in 2025, promising to broaden deficit spending through a significant increase in the defense budget. The spending should help support the economy and allow Germany to come closer to satisfying its increased financial obligation within NATO.

In Japan, 2026 economic growth is projected to be in the 1.0%–1.5% range, as domestic demand and business investment spending benefit from ongoing fiscal policy support and only a slight tightening of what remains a very loose monetary policy. For China, aggressive U.S. tariffs will slow export growth and make it difficult for the government to achieve its 5.0% GDP growth target. Domestic spending in China continues to be constrained by the hangover from its strict pandemic isolation policies and the continued property recession. The longer-term demographic headwind caused by many years under the strict one-child policy must also be overcome. Help will be needed from the government in the form of more aggressive fiscal and monetary support. There is growing doubt that the government will provide necessary rate cuts as it looks to protect its currency. Investors will be watching for fiscal initiatives that support private-sector entrepreneurial innovation as opposed to the less efficient state-run enterprises.

Monetary policy

Source: Cerity Partners, FRED, 1/2/2026, seasonally adjusted. October data interpolated from September to November to reflect government shutdown.

Progress on bringing inflation down to the Federal Reserve’s (Fed’s) 2% target stalled in 2025 primarily because of tariffs on goods prices and continued strong consumer demand for services. There may be some spillover effects of tariffs early in the new year, but tariffs are unlikely to cause entrenched inflationary pressures. Lower energy prices will be helpful in making disinflationary progress in 2026, but finally achieving the target is more likely to happen in 2027 as consumer spending remains reasonably strong.

The composition of the Federal Open Market Committee (FOMC) will continue to lean dovish under a new Fed chair. As labor market growth has slowed in the back half of 2025, the Fed should begin to concentrate more on its full employment mandate. However, enough legacy members remain who will most likely continue to point to inflation still being above the target and will vote for further rate cuts only if tangible progress is achieved. With that progress likely to be slow, only one or two rate cuts of 25 basis points are likely to be implemented during the year, with the apparent terminal goal of 3.00% not being hit until sometime in 2027.

With inflation hovering around its 2.0% target, the European Central Bank is likely to hold its key policy rate at the current level for all of 2026. Any bias that develops within the policymaking committee would be for further rate cuts, as the greater risk in Europe appears to be weak economic growth as opposed to any near-term revival of inflation. The Bank of England should pause further rate cuts until the rate-setting committee sees more concrete evidence of disinflation. That evidence should surface by mid-year as the U.K. economy is expected to slow.

The Bank of Japan will again attempt to normalize its monetary policy after decades of extreme ease. With inflation now above the 2.0% target and economic growth comfortably positive, the policy direction should not be controversial, although the new administration under Prime Minister Sanae Takaichi favors expansionary fiscal and monetary policies. The People’s Bank of China will continue to be cautious around its approach in cutting rates to support the economy. The government prefers currency stability and is cautious about provoking any capital flight in this increasingly deglobalized environment.

Bond markets

Source: Cerity Partners, FactSet

After finally moving back to its more natural upward slope in 2024, the U.S. Treasury yield curve saw a distinct steepening through 2025 due primarily to stronger-than-expected economic growth but also to fears of further growth in the national debt. This dynamic removed some of the benefit that usually accrues to investors who extend duration positioning in an easier monetary environment. While demand for U.S. Treasurys remained rather robust throughout 2025, other global markets in countries running large deficits have seen price declines in their intermediate- and longer-term maturities. Further curve steepening in the United States and these other debt-laden markets is likely in 2026.

Credit spreads in both the investment-grade and high-yield asset classes remained generally stable throughout 2025 although some cracks began to develop in the private debt space. As underwriting standards usually loosen in an extended economic expansion, investors will be watching for any pickup in default rates, which have been low for most of this decade. With supply expected to moderate and credit underwriting standards remaining much more disciplined, the municipal bond market appears poised to outperform the taxable bond space in 2026.

Equity markets

The strong, positive fundamental revenue and earnings indicators seen in U.S. equities throughout 2025 appear to be carrying over into the new year. With nominal GDP growth expected to be around 5% and profit margins expanding from increased productivity, earnings should grow by roughly 15% for the large capitalization S&P 500 stocks. Valuations may not increase much, as they are already at lofty levels going into the new year, but they should at least be maintained at the asset class level, as expansionary fiscal policy and less restrictive monetary policy continue to provide support.

Progression may be more interesting at the sector and industry levels as the handful of stocks that have driven U.S. equities higher over the last three years may experience some multiple contraction due to still-strong but slowing earnings growth rates. But the market seems poised to finally experience better breadth of participation in the advance as earnings growth, and perhaps multiples, expand for the other more cyclical sectors in an old economy revival. This increased breadth should also extend to the small- and mid-capitalization areas of the U.S. equity market where earnings growth is expected to accelerate.

Source: Cerity Partners, FactSet estimates as of 12/8/2025

European equities may see some multiple expansion given favorable monetary policy support and an accelerating earnings growth rate. The uncertain impact of tariffs is a potential headwind that may delay any meaningful closure of the valuation gap with U.S. equities. There may be more room for the valuation gap to close between emerging and developed equity markets. Favorable monetary policies should help most of the economies in this space, although a bifurcation may develop between the Latin American and Asian emerging markets with U.S. tariff policy seemingly less onerous to their Western Hemisphere trading partners.

Commodities and currencies

Increased OPEC and non-OPEC oil supply in a slowing global economy should continue to place downward pressure on oil and other energy prices. A still-hot geopolitical environment is likely to set a shallow floor for how low prices can move. With global manufacturing remaining slow into the new year, industrial metals prices in aggregate should remain range-bound, with any breakout around the current levels more likely to be to the downside. The uncertain tariff impact may hit this space particularly hard next year.

Federal funds rate cuts into 2026 should be bullish for gold prices early next year, although it appears the global monetary easing cycle is nearing an end. It is difficult to determine how much more central bank buying will drive the price, but there should still be enough to at least form a floor for the price and prevent any kind of collapse in a commodity that produced such strong returns in 2025. With the advent of spot exchange-traded funds, the cryptocurrency asset class is maturing and becoming more pervasive in thoughtful portfolio construction. The bear market that occurred toward the end of 2025 may be the first sign of a change of hands away from momentum and growth investors to those looking to hedge against currency debasement and inflation—which was one of the original intended use cases for the asset class.

After a 10-year bull market that ended in 2022, it is not readily apparent an extended bear market in the U.S. dollar has begun. The weakness seen in the first half of 2025 was likely a function of surprise about the magnitude of announced tariffs and the uncertainty around their ultimate effect. Relative economic growth rates and relative interest rates continue to favor the dollar against most other currencies. With Fed ease near an end, the dollar is likely to remain in the relatively narrow trading range in existence for the last three years.

Risks to our outlook

• Monetary easing was too little, too late for labor markets and a recession ensues
• Inflation reaccelerates and the FOMC starts talking about rate hikes . . .
• Or overtly political behavior from the FOMC causes a loss of credibility
• Something breaks in the AI capital spending chain
• Midterm elections tilt Congress away from policies favorable to business and toward greater deficit financing
• Bond vigilantes react to higher deficits and return to the Treasury market, driving yields notably higher
• Globally, fiscal stimulus fails to reignite growth in foreign economies
• Geopolitics enter a more dangerous phase, with a growing number of hot spots around the world, including Ukraine, Gaza, Venezuela, Taiwan, and Iran