Economic and Market Outlook Dashboard
1st Quarter 2026
The Economy
The Markets
Interest Rate Outlook
Asset Allocation Outlook
The U.S. economy grew at an annualized rate of 4.3% in the third quarter of 2025. Consumer spending, business investment, and government spending rose while residential investment remained weak.
The impact of tariffs, the federal government shutdown, and declining immigration most likely slowed the U.S. economy in the fourth quarter, but we expect growth to bounce back to 2.0% in 2026.
The One Big Beautiful Bill Act should be stimulative to the economy in early 2026 via strong income tax refunds. While serving to boost economic activity in the first half of 2026, once this refund effect fades, it is expected that growth will slow in the second half of the year.
Approximately 41,000 jobs were lost in October and November, mainly due to the drop in federal government employment. Private payrolls rose by 121,000 over this same time frame. The unemployment rate rose to 4.6% but is expected to decline towards 4% by the end of 2026 due to lower net immigration and a declining working-age population.
In the third quarter S&P 500 companies had earnings growth of 13.0% year-over-year. Sales and margins were the key drivers with higher earnings growth contributions from technology and financial companies. Energy companies are struggling with declining oil prices, and consumer companies are under pressure as customers reduce demand and tariffs increase costs.
The S&P 500 was up 17.9% in 2025 driven by continued excitement around artificial intelligence (AI) and strong earnings growth. Growth stocks continued to outperform value stocks and large cap stocks outperformed small cap stocks over the course of last year.
In International markets, Developed Equities (MSCI EAFE) were up 31.9% in 2025 due to strong performance in Europe. Value stocks outperformed growth stocks in many developed regions.
Emerging Markets (MSCI EM) were up 34.4% in 2025 with performance being broad based across all regions. Korean markets saw the strongest gains given AI excitement and corporate governance reforms.
At its December meeting, the Federal Reserve cut rates by 0.25% to a range of 3.50%-3.75%. In total, the Fed has cut rates by 1.00% in 2024 and 0.75% in 2025. The median interest rate outlook calls for one rate cut in 2026 and one more in 2027.
There were moderate changes in the Summary of Economic Projections. Growth estimates were increased higher to 1.7% in 2025 and to 2.3% in 2026, while unemployment rate forecasts were unchanged. Rate hikes were not in the base case, implying the continuation of an easing bias from the Fed.
Headline inflation increased 2.7% year-over-year in November, while core inflation (excluding food and energy) was up 2.6%. We expect inflation to increase to 3.5% by the middle of this year due to tariff effects and higher income tax refunds. However, lower tariff rates and fading fiscal stimulus later in 2026 may cause inflation to fall back towards 2% by the end of the year.
We expect policy uncertainty surrounding tariffs, stretched valuations in the U.S. equity market, and AI bubble concerns, along with geopolitical tensions, to continue driving market volatility.
Although we continue to be constructive on U.S. equities for the long term, our focus remains on high-quality companies with strong balance sheets and sustainable earnings.
Long-term growth prospects, improving fundamentals, favorable valuation levels and a further decline in the U.S. dollar support our increased allocation to both developed and emerging international equities.
Bonds offer attractive levels of income, as well as protection against an economic downturn. High-quality core fixed income with attractive yields continues to be our focus.
We continue to invest for the long term and to advocate for diversified portfolios as the best way to combat market volatility.
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