Trade friction and an extended government shutdown have skewed recent economic data. But next year, as tariff turbulence subsides, investment broadens and monetary policy eases, real GDP growth could accelerate, signalling the start of a new business cycle.
Don't mistake the recent softness in the US economy for a lasting shift. Growth has cooled along with winter temperatures thanks to the government shutdown, elevated rates and the continuing focus on trade troubles. But all the signs suggest that this is not the start of a trend, merely a temporary setback. Momentum already seems to be rebuilding.
We project that US real GDP growth will rise from its 2025 rate of 1.7 % in the fourth quarter to 2.1 % in the same period of 2026. This shift will be supported by continuing increases in capital expenditure, fading tariff anxiety, and potential stimulus cheques for consumers. These forces will fuel investment and cushion consumption, although duties will keep goods prices elevated and - combined with sticky services inflation - hold the consumer price index above 2.5 % all year.
Despite inflation above the Federal Reserve's target of 2 %, monetary policy is bound to ease. The leadership of the Fed is set to change when Jerome Powell's term as Chair ends in May 2026. And while we anticipate that the Fed will remain largely independent through this - withstanding pressure from the White House to lower rates -, we also assume it will proceed in a measured fashion.
A contradictory economy - but a clear direction.
The Federal Open Market Committee (FOMC), which sets interest rates, will aim for a rate level it considers prudent, yet likely somewhat lower than economic conditions would justify. This entails a risk of overstimulating the economy.
At the longer end of the yield curve, large US fiscal deficits are likely to increase the premium paid to hold long-term government bonds, while overall, the halt in quantitative tightening in December points to structurally lower yields.
Credit markets also reflect conflicting forces. Attractive all-in yields support demand. Yet spreads are expected to widen somewhat from their currently very tight position, as AI buildout, revived merger activity and record Treasury supply fuel competition for capital. Outside the mega-cap names in the tech sector, high-quality credit names still look preferable; for weaker issuers, we place emphasis on liquidity.
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Narrowing growth and real-rate differentials with other currencies are simultaneously nudging the US dollar downwards against the euro and the Swiss franc. We anticipate that the US dollar will slowly drift lower, punctuated by mid-term election volatility, as foreign investors increase their hedging, while network effects uphold the greenback's reserve role.
With the S&P500 priced at 22.1 times forward earnings, valuations are lofty, and lower than expected earnings results could lead to falling share prices. Consensus among analysts puts earnings per share (EPS) for the US stock market at 16 % for 2026, propelled by a 36 % surge in the tech sector. Software and information-processing equipment investment - our proxy for AI- and digital-infrastructure capital expenditure - is increasing more moderately than at the height of the dot-com boom in 2000.
Real IT infrastructure outlays remain immense as demand for more data centres stays strong. If this spending translates into productivity gains, it should extend the tech momentum into broader equity markets. But a pause in AI infrastructure orders, or fresh policy shocks, could quickly impact today's hefty valuations.
In addition, accelerating economic momentum, increasing investments in manufacturing from onshoring, deregulation and the bonus depreciation that came into force through the "One Big Beautiful Bill" will benefit certain sectors of the stock market: industrials are expected to see 15 % growth in EPS, with utilities, not often the beneficiaries of double-digit growth, gaining 11 %.
The economic picture in the USA remains contradictory, but the overall outlook is clear: a unique combination of forces means the economy will slow briefly before regaining speed.
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