Economic Outlook Following 1st Month

One month in, the outlook remains encouraging. The U.S. economy continues to demonstrate steady expansion, supported by resilient consumer spending even amid a cooling labor market, moderate inflation levels, and evolving Federal Reserve policy adjustments.

Despite ongoing tariff pressures, overall fiscal measures, global trade dynamics, and economic momentum have outperformed many earlier forecasts. Consumers are holding firm, maintaining robust spending patterns despite subdued job growth and elevated prices.

Looking ahead, Goldman Sachs forecasts US GDP to grow 2.5% in 2026.  That’s not huge growth, but if it comes through, it is enough to support earnings and stock gains in 2026.

On the other hand, things aren’t ideal.  Life never is.  Even with ongoing economic expansion, the labor market is losing steam.  While we see a stable job market in 2026, there are still risks of increased softening over the first two to three quarters.  Morgan Stanley expects the unemployment rate to rise from 4.3% to 4.7% by mid-2026 before gradually easing. 

A weaker job market can lower wage pressure and help soften inflation, but it also shows signs that businesses are becoming more careful.  Weaker job data often leads to interest rate cuts, which can boost bond prices but create mixed signals for stocks. 

Inflation remains high, above the Feds long-term target of 2%.  Tariff-driven price increases have inflation near 2.8%.  Most forecasts expect inflation to gradually cool to about 2.4% in 2026.  Of course, this depends on the Fed’s paying attention to both ends of their dual mandate of increasing growth and containing inflation. 

New Fed leadership that favors growth over inflation control could put stocks and bonds at risk over the medium-term.  Moderating inflation is generally positive for stocks because it protects corporate profits.  Bonds are helped by falling inflation because this increases the real value of their interest payments.

President Donald Trump has announced that Kevin Warsh will be the next Federal Reserve Chairman.  Many financial professionals admire his “crisis era experience.”  Dean Lyulkin, Investment Advisor and Founder of the Dean’s list said,

“Warsh brings something markets crave right now; credibility rooted in experience.  He was in the room during the financial crisis, and that kind of policy scar tissue matters.”  Warsh knows how quickly credit stress can spread, and according to Lyulkin he should be able to provide the clarity that help businesses and investors plan with more conviction.