2026 U.S. economic outlook: A straightaway full of potholes
2025 Year in review
2025 is likely to be remembered as a mid-decade inflection point that set the trajectory for the remainder of the 2020s. Dramatic shifts across trade, immigration, taxation and foreign policy reshaped the U.S. economic landscape and its engagement with the world. At the same time, the race for artificial intelligence intensified: Six U.S. firms invested roughly $400 billion into AI infrastructure—up 60% from 2024—and ChatGPT’s global user base expanded from 300 million to nearly one billion.1,2 Despite this undercurrent of structural change, the macro and market outcomes appeared deceptively calm: Real gross domestic product(GDP) likely grew a touch below 2%, and the S&P 500 returned close to 20%.1,3
Policy changes imposed a drag on growth, while AI-related investment offset some of that constraint. Through November, the federal government collected $257 billion in tariff revenue—three times the prior year and representing a tax increase equal to ~0.5% of GDP.3 Immigration flows from the Southern Border slowed to near zero, contributing to a sharp deceleration in labor force growth. Fewer entrants meant fewer workers and softer consumption: The economy added less than half a million jobs over the first nine months of the year, and real consumption growth slowed from 3.5% annualized early in the year to 2.1% through September.4 Meanwhile, the stimulative components of the One Big Beautiful Bill Act (OBBBA) will not be felt meaningfully until the first half of 2026.
AI capital investment emerged as the economy’s central force of dynamism. In the first half of 2025, growth in AI-related business investment accounted for roughly 90% of total GDP growth, offsetting weakness in categories such as construction and government spending. While this share will decline as full-year data becomes available, it underscores the extent to which the AI buildout muted the macro impact of softness elsewhere in the economy.3
The U.S. economy navigated pervasive uncertainty in 2025 with notable resilience, though the sources of that resilience narrowed. A steady but cooling labor market, cautious yet spending households, and businesses focused on efficiency gains defined the year. In our view, 2025 served as a transition period in which the economy absorbed major policy and technological shifts and positioned itself for continued growth in 2026—but on terrain that demands careful navigation.
2026 Outlook
As the economy enters 2026, we see a credible path to a healthier growth backdrop—one anchored by improving productivity, friendlier policy and strong household balance sheets—but also one dotted with meaningful risks. The Goldilocks scenario requires:
- AI-driven productivity to improve as adoption broadens
- Policy across the three main channels—fiscal, monetary and trade—to turn friendlier on net
- Household spending to hold up despite poor consumer sentiment
Downside risks
Downside risks to that scenario organize around three themes:
- AI monetization risk
The AI cycle’s centrality to both markets and the economy gives it critical importance in 2026. Should investors question the monetization path or the sustainability of infrastructure spending, funding could slow, equity markets could correct and the wealth effect could turn negative. - Cyclical softness invulnerable sectors
The goods economy and housing remain fragile. Both have historical precedent for transmitting weakness to the broader economy and labor market if the slowdown deepens. - Policy volatility
A change in Fed leadership raises the risk that markets perceive political influence over monetary policy. If inflation risk premia rise, long-term yields could move higher even as the Fed attempts to ease, tightening financial conditions at the wrong time.
Our base case
These risks will likely produce episodes of economic and market volatility, but we do not expect them to derail growth in the world’s most dynamic economy. AI productivity gains appear gradual but real, supporting margins and continued capex. Fiscal and monetary policy should be more growth-positive than in 2025, and a rebound in corporate M&A activity should enhance capital formation. Despite poor sentiment, the consumer remains on solid footing.
investment implications
This backdrop should create meaningful opportunities across public and private markets in 2026, but realizing them will require actively managing the risks that define this new phase of the cycle.
- Address AI concentration risk
Investors should diversify growth exposure beyond the tech megacaps, where the AI trade is beginning to separate winners from losers, into the broad base of companies positioned to benefit from AI-enabled productivity gains—including those in private markets, where value creation can be more actively influenced. - Buttress portfolio against upside rate risks
Markets have fully priced in a non-recessionary Fed easing cycle. While a steepening yield curve can be a challenging environment for fixed income investors, floating rate strategies—especially those in private credit where strong covenants remain present—offer healthy levels of income and duration relief. - Favor domestically focused businesses
Tariff policy will continue to challenge internationally oriented firms. Businesses with durable domestic demand—particularly in the U.S. middle market, where exposure to trade friction is lower—are better positioned in this environment.