Our economic and market outlook for 2026

Rapid evolution has increased AI’s potential to become a transformative economic force, with promising implications for productivity across industries. Adoption is accelerating, and while today’s AI leaders dominate headlines, tomorrow’s winners may look very different. These are the themes that frame our economic and market outlook for 2026.

Higher growth is on the horizon, driven by AI investment

Will AI transform or will it ultimately disappoint? Gauging signs of productivity’s impact and watching how competitive pressures play out, 2026 will be a year of assessment.

We believe the ongoing wave of AI-driven physical investment will be a powerful force, reminiscent of past periods of major capital expansion such as the development of the railroads and the more recent information and telecommunications surge. Our analysis suggests this investment cycle is still underway, and we project a 60% chance the U.S. economy will achieve a 3% real GDP growth rate in the coming years.

But this future is not quite now. In 2026, the U.S. is positioned for a more modest acceleration in growth to about 2.25%—although the first half of the year may be softer given the lingering effects of the stagflationary shocks of tariffs and demographics, as well as yet-to-materialize broad-based gains in worker productivity. We believe the labor markets, which cooled markedly in 2025, should stabilize by the end of 2026, with the unemployment rate staying below 4.5%. Economic growth should also keep inflation somewhat persistent, remaining over 2% in 2026.

Overall, the key risk for 2026 is if AI optimism collapses and the investment build-out stalls.

Equities: Between near-term strength and long-term complexity

For U.S. equities in 2026, we expect a continuation of the recent past, where returns are solid, driven by rising earnings growth. The risk may even skew to the upside. Strong AI capital investment, fast AI diffusion across a broad swath of sectors, and a strong wealth effect could easily push the U.S. economy beyond our forecast of 2.25% growth—toward 3%—and support a double-digit return for U.S. equities. Even at current stretched valuations, such momentum would not be unprecedented.

However, the heady expectations for tech stocks are unlikely to be met over the longer term for two reasons: the already-high earnings expectations and the typical underestimation of creative destruction from new entrants into the sector.

The history of investing during technology cycles reveals some counterintuitive—yet increasingly compelling—investment opportunities regardless of whether AI proves transformative or not. Both U.S. value-oriented and non-U.S. developed markets equites should benefit most over time as AI’s eventual boost to growth broadens to consumers of AI technology. They could both serve as a hedge should the AI boom suddenly end.

Fixed income: High neutral rate will continue to provide support

Still-sticky inflation, in our projections remaining above 2%, suggests that in 2026 the Federal Reserve will have limited scope to cut rates below our estimated neutral rate of 3.5%. Our Fed forecast is a bit more hawkish than the bond market’s expectations.

We maintain our view that high-quality bonds (both taxable and tax-exempt) will continue to offer compelling real returns given higher neutral rates. Projected at around 4% over the coming decade, returns on high-quality U.S. bonds should average near current portfolio income levels—providing a comfortable margin over the rate of expected future inflation. This is the primary reason that bonds are back, no matter what central banks do in 2026.

Short- to intermediate-term bonds fare well, and high-quality U.S. fixed income provides diversification to the material downside risk in 2026 and beyond. If AI transforms, bonds will provide income and stability, improving risk-adjusted returns. If AI disappoints, bonds will hedge against muted equity returns and provide real income.  

Disclosures:

All investing is subject to risk, including possible loss of principal.

Past performance is no guarantee of future results.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.

Diversification does not ensure a profit or protect against a loss.