As we forge deeper into 2026, the one certainty in an uncertain world is that nobody has a crystal ball to guide strategy and tactics with absolute certainty. What we do have, however, is access to data and an ability to analyze it and make reasonable assumptions. With that in mind, we share a few thoughts on the economic and monetary policy outlook that investors can use when building portfolios.

The US Economy: Risks to the Upside?

After four years of robust economic growth, the US economy finally slowed to its trend growth rate of 2.0% in 2025. The economy slowed due to a cyclical cooling in private consumption and a slowdown in government consumption. The one bright spot in the economy was continued robust fixed investment in AI-related infrastructure. As we look ahead to 2026, the broad consensus appears to expect economic growth of roughly 2.0%. However, we believe risks to growth actually skew to the upside. There are three key factors behind our positive view on the economy.

• First, the fiscal impact from The One Big Beautiful Bill Act (OBBBA) signed into law in July 2025 should continue to provide an economic tailwind, perhaps boosting economic growth between 0.5% to 0.75% in each of the first three quarters of 2026, in our view. Both consumers and businesses should benefit from the OBBBA. We expect consumers will receive a windfall from record tax refunds, while businesses should see substantial tax savings in 2026 as corporations expense equipment, R&D, and manufacturing structures.
• Second, accommodative financial conditions led by easy monetary policy, the impact from AI, and continued deregulation could boost GDP growth by as much as 0.5% during the first half of 2026. A wealth effect (higher equity and house prices) could also be an important factor boosting consumption, particularly to the upper income cohorts. 
• And third, fixed investment, particularly AI-related, will continue to be among the main sources of growth in the new year. During the first half of 2025, AI-related investment contributed to a staggering 63% of total growth, according to our estimates, and we see a continued rise in AI capital expenditures in 2026.

Given the above scenario, we think US economy should grow around 3%, which we believe will be favorable for risk assets.

Monetary Policy: Stuck in Neutral?

The Federal Reserve began a new easing cycle in 2025 with three 25-basis point rate cuts. But now that fed funds rate is near neutral (i.e., a policy stance that will neither stimulate nor slow economic activity), we believe further rate cuts are likely to be minimal. The most recent Fed Dot Plot—which is a chart that shows the interest rate projections of individual Federal Open Market Committee (FOMC) policymakers—still suggests that the fed funds rate will be cut again (though minimally) in 2026 and ultimately trough at approximately 3% in early 2027. Of course, there is risk that inflation remains sticky and does not retreat to the Fed’s target level of 2%, particularly if growth surprises to the upside and the economy begins to overheat. Thus, we believe that there is a chance that the Fed disappoints markets and becomes more hawkish. If that happens, we may encounter periods of elevated volatility for both equity and fixed income markets.

The Takeaway

So how do we make heads or tails of all this? The outlook for US equities is favorable, in our view, given the monetary backdrop after several rate cuts, the impact of fiscal stimulus to the corporate sector from the OBBBA, the continuing implementation of AI, and our expectations for robust share buybacks. The favorable equity outlook and broad-based earnings growth should help increase breadth as valuations appear more attractive, especially when looking beyond the Magnificent Seven. Our outlook is also positive for international equities, including emerging markets assets, thanks to a promising global growth outlook, compelling valuations, global monetary easing, and a continuation of the USD bear market.

In terms of fixed income, we think the environment is generally constructive as well. Short-term Treasury yields should be supported by the relatively sound growth backdrop and a Fed having moved to a neutral policy stance. Long-term yields are likely to be anchored on periodic concerns over fiscal sustainability. One notable point is that high valuations may make investment grade and high yield grade less compelling, and thus security selection remains of paramount importance.

As always, our investment teams will be watching the data to see how the coming year unfolds, and we endeavor to tilt our portfolios opportunistically no matter what the rest of 2026 and beyond has to offer.