Economic and Market Outlook Dashboard
2nd Quarter 2026
The Economy
The Markets
Interest Rate Outlook
Asset Allocation Outlook
The U.S. economy grew at an annualized rate of 0.7% in the fourth quarter of 2025. A significant decline in federal government spending due to the government shutdown led to the weaker report.
Given the US/Israel attack on Iran, higher energy prices will increase headline inflation. It is uncertain how it plays out in the short term, but our base case is that it should not push the economy into a recession.
We anticipate economic growth to start off slower in the first quarter, picking up in the middle of the year due to higher income tax refunds and potential tariff rebate checks, and then slow down again towards the end of the year due to the fiscal stimulus wind down.
Approximately 178,000 jobs were added in March with the largest increase coming from the healthcare and social assistance sectors. The unemployment rate fell to 4.3% due to a decline in the labor force participate rate. Over the next year, we expect the unemployment rate to fall to approximately 4.0%, partially due to the changes in immigration policies.
In the fourth quarter, S&P 500 companies had earnings growth of 13.3% year-over-year. Sales and margins were the key drivers with higher earnings growth contributions from technology companies, followed by financial and industrial companies. The consumer and health care sectors struggled with rising costs hurting profitability.
The S&P 500 was down 4.3% in the first quarter. Despite tech stocks posting strong fourth quarter earnings, investors questioned the potential return on investment of AI-related capital expenditures. Value stocks beat growth stocks and small cap stocks outperformed large cap stocks in the first quarter.
In international markets, Developed Equities (MSCI EAFE) were down 1.2%. Given European and Asian markets are significant importers of energy, they were directly impacted by the spike in energy prices. Value stocks outperformed growth stocks in many developed regions.
Emerging Markets (MSCI EM) were down 0.1% in the first quarter. Positive AI sentiment helped Taiwanese and Korean stocks, in particular.
At its March meeting, the Federal Reserve held rates steady in a range of 3.50%-3.75%. The median interest rate outlook calls for one rate cut at the end of 2026. If economic growth and inflation fall below 2% by the end of the year, the Fed might be in a position to cut rates multiple times in 2027.
There were moderate changes in the Federal Reserve’s Summary of Economic Projections. Growth and inflation estimates were increased for this year and next year while unemployment rate forecasts were unchanged.
Headline inflation increased 2.4% year-over-year in February while core inflation (excluding food and energy) was up 2.5%. We expect inflation to increase to 3.5% by the middle of this year due to the conflict in the Middle East, tariffs, and fiscal stimulus.
However, we anticipate inflation may fall back toward 2.0% by the end of the year due to a normalization of energy prices, a slightly lower level of tariffs, and reduced shelter costs.
We expect geopolitical tensions, policy uncertainty surrounding tariffs, and stretched valuations in the U.S. equity market to continue to cause 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.
This newsletter contains general information that is not suitable for everyone and should not be construed as personalized investment advice. The views expressed herein are those of the firm as of the date indicated and are subject to change based on market and other conditions. Any references to asset allocation, investment strategies, or marketing positioning are for informational purposes only and should not be construed as a recommendation to buy or sell any security or adopt any particular investment strategy. Past performance is no guarantee of future results. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. In preparing this presentation, we have relied upon information provided by third parties, including J.P. Morgan Asset Management, FactSet, Bloomberg, Federal Reserve, MSCI, Standard & Poor’s, BLS, and BEA. While we believe these sources to be reliable, the accuracy and completeness of the information is not guaranteed. We have provided performance results of certain indices for comparison purposes only. The historical performance results of each index do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index. Additionally, certain statements contained herein that indicate future possibilities are forward-looking statements. Due to known and unknown risks, actual results may vary materially than those portrayed in such forward-looking statements. There is no guarantee that the views and opinions expressed herein will come to pass. For additional information about Arbor Trust, including fees and services, send for our disclosure statement as set forth on Form ADV from Arbor Trust using the contact information herein. Please read the disclosure statement carefully before you invest or send money.