Representatives from Allianz Investment Management LLC provide commentary on market and economic indicators, including Federal Reserve actions, interest rates, credit markets, and economic releases such as inflation, GDP, consumer confidence, housing, retail sales, and job unemployment news. Here is their outlook for 2026.
Reflecting on 2025, the year was marked by significant policy shifts and market volatility, teaching investors crucial lessons about diversification, discipline, and the importance of maintaining a cash allocation. Markets were shaped by the Trump administration’s pivotal policy shifts, which focused on trade protectionism, deregulation, and fiscal impulse. The combination of swift policy change and uncertainty surrounding the outcome led to higher market volatility and a slowdown in business activity during the first six months of 2025, as investors and business leaders looked for confirmation on the “rules of the road.” Despite these challenges, the S&P 500® Index demonstrated resilience, recovering swiftly from a 15% decline to reach new all-time highs and a third consecutive year of double-digit gains in the index.
With the “tariff tantrum” in the rearview mirror and most of the policy shifts in place, the current market environment is poised for growth, but characterized by a strong concentration in large-cap stocks, particularly within AI and tech sectors. We anticipate that concentration risk will remain a key area of concern next year, as the S&P 500® Index's impressive performance of +17.5% has been driven largely by the top 10 companies. With more than 60% of the returns this year coming from the 10 largest companies in the S&P 500® Index, diversification through indexing remains more of a mirage than a reality.
However, looking ahead, the economic outlook for 2026 is constructive, as pro-business policy shifts from last year have largely been put in place. While a recession is not anticipated, we expect the economic cycle to gain momentum, bolstered by AI capital expenditure and fiscal stimulus from tax cuts that will give consumers the wherewithal to spend, driving consumption. Where we see concern is the potential for cost pressures eating into corporate profit margins, and firms using the tax-cut window to pass those costs down to consumers.
From the Fed’s perspective, the potential impact to inflation levels will be problematic for monetary policy and will thereby make additional rate cuts more difficult as both objectives of their dual mandate move away from their targets. Because of Powell’s departure in May and a hawkish rotation among voting Fed members, it will be challenging to achieve consensus for further rate cuts. With softer labor conditions expected to persist and inflation moving away from the target, a steeper yield curve is the most plausible outcome (as lowering short-term rates may not translate to lower long-term rates, amid inflation risks). Whether it’s Kevin Hasset, Kevin Warsh, or Chistopher Waller seated as the new Fed Chair to lead the charge in cutting rates, the bar will be high with the well-known division among policy voting members.
Overall, momentum is expected to lift the U.S. economy in 2026 as apparent tailwinds in place currently look like they will outweigh the risks. The constructive backdrop will remain a focus in 2026 and performance will reflect the strength of technological innovation and the impact of pro-business policies. However, equity concentration risk is high and the U.S. debt burden will remain a concern, influencing the Treasury market and contributing to a higher-for-longer interest rate environment. In summary, while 2025’s market dynamics were unpredictable, the evolving landscape of 2026 will be characterized by a balance of policy shifts with strategic momentum that will influence a market that is currently priced to perfection.
The 2026 U.S. GDP outlook anticipates growth between 2.0% and 2.5%, higher than 2025’s performance. Strength in GDP is driven by robust consumer spending, AI-related capital expenditure, and reduced import drag. AI investments are expected to contribute 40 basis points to GDP, while fiscal stimulus from the One Big Beautiful Bill Act (OBBB) adds approximately 20 basis points to growth. Lower rates and deregulation will fuel economic expansion. However, GDP faces challenges from slowing exports and government spending. Downside risks include tariff passthrough to consumers, potential AI spending slowdown, rising unemployment, and renewed trade tensions. Conversely, upside potential exists from tariff rescissions and increased consumer spending fueled by the OBBB. On balance, policy uncertainty from 2025 is anticipated to diminish, providing a more stable environment for economic growth.
Following 75 basis points of cuts in late 2025 due to labor-market concerns, the Fed policy outlook for 2026 suggests a more cautious approach. Despite market expectations for further rate cuts, the Fed emphasizes that reaching a 3% Fed funds rate is uncertain, as fiscal boosts and GDP growth shift focus to inflation risks. The economic backdrop supports a slower rate-cut path, with elevated inflation pressures and fiscal policy contributing to upward pressure. The unemployment rate, at 4.6%, indicates a softening-yet resilient labor market. While the next Fed Chair may lean dovish, their influence on rates is uncertain without strong consensus building. We anticipate a gradual pace of rate cuts, with the Fed policy rate ending 2026 between 3.25% and 3.75%.
The outlook for U.S. inflation in 2026 suggests a challenging environment for the Federal Reserve’s 2% target,as firms increasingly pass higher costs on to consumers. While 2025 saw core PCE surge before stabilizing at a monthly rate of approximately 0.23%, the annualized rate remains elevated at 2.8% through September. Core goods inflation, rising since 2024, is expected to persist as businesses capitalize on opportunities to transfer costs. Trade frictions and planned tariffs pose risks for higher inflation, particularly as companies expand profit margins alongside tax cuts. The current administration’s fiscal policy and increasing federal deficit further contribute to inflationary pressures. Inflation risks are anticipated to remain, with potential moderation later in 2026, within a range of 2.5%-3.0% for core PCE.
The outlook for 2026 suggests a steeper yield curve, with longer rates poised to remain elevated or move higher while short-term rates decline. Resilient U.S. growth and exceptionalism compared to other developed markets are expected to persist, influencing rate dynamics. Terminal rate expectations have driven volatility throughout 2025, and factors such as a shallow rate-cutting path and a higher terminal rate than previous cycles support our view that 10-year rates will remain above 4%. Lingering inflation concerns and fears of acceleration in 2026 will likely keep the term premium elevated, while federal budget deficits and new fiscal policies are unlikely to be disinflationary. Risks to this view include potential strong reactions in risk markets that could shift terminal rate expectations, but our 10-year forecast for yearend 2026 is between 4.00% and 4.50% for the third consecutive year.
The 2026 equity market outlook is optimistic, with U.S. equities poised to benefit from an accommodative Federal Reserve, a business-friendly political environment, and productivity gains from AI. However, potential labor market weaknesses warrant attention. The Republican-led government is expected to maintain favorable business conditions, although the midterms may introduce a Democratic shift. Business spending remains strong, particularly in data centers, though concerns arise about circular or debtfinanced spending. The Fed’s dovish stance supports equities, but persistent inflation could challenge this path. AI bubble concerns will likely persist, with risks of sharp declines in technology stocks if AI expectations falter. Despite robust earnings, equity multiples continue to exceed long-term averages. Our S&P 500® Index return expectation for 2026 ranges from +5.0% to +15.0%, with mid and high scenarios being possible.
Table Columns
Previous – Observation as of the end of the prior month
Survey – Economist survey prediction for current month’s observation
Actual – Actual observation as of the end of the current month
Next – Date of next period’s observation
ISM Manufacturing Index
Based on a survey from the Institute for Supply Management, this index indicates a positive growth in the manufacturing sector when the figure is above 50 and a contraction of the sector when it is below 50. An increase in the figure indicates either slowing contraction or accelerating growth. The index represents underlying figures in employment, inventories, new orders, production levels, and deliveries. (Source: Bloomberg)
Unemployment rate
Based on a monthly survey of households, the unemployment rate is one of many figures in the Current Population Survey that move markets by indicating what portion of the population is at work, looking for work, what they are getting paid, and how many hours they work. The unemployment rate is the percentage of workers unable to find work who are actively seeking a job. The survey is conducted by the Bureau of Labor Statistics.
Retail sales
Retail sales measure the total amount of purchases by consumers in stores that sell merchandise, food, and other services to end consumers. This measure is a significant indicator of trends in consumer spending, which moves markets because consumer spending accounts for over two-thirds of U.S. economic output. Data is compiled by the U.S. Bureau of the Census.
Consumer Price Index (CPI)
The Consumer Price Index measures the prices of a fixed basket of goods that reflect an average consumer’s cost of living. CPI is a popular indicator of inflation, driving prices on U.S. inflation-linked bonds, and is used to adjust tax brackets and Social Security payments. CPI is compiled by the Bureau of Labor Statistics monthly.
Home Price Index
The S&P CoreLogic Home Price Index is the seasonally adjusted average price of residential homes in 20 major cities in the U.S. Data is published with a two-month lag (numbers available in March reflect price changes from January). Housing prices affect consumer wealth and consumers’ ability to borrow and spend, which in turn affects U.S. economic growth.
Gross Domestic Product (GDP)
Gross Domestic Product is the sum of the value of all goods and services produced in the economy. It is one of the most comprehensive benchmarks for economic performance. Real GDP measures economic productivity adjusted for inflation, which measures growth that is not due to goods getting more expensive. GDP is published by the Bureau of Economic Analysis.
University of Michigan Consumer Sentiment Index
The index is derived from surveys of 500 households by the University of Michigan on consumer finances and attitudes regarding the economy. The index is set to 100 as of 1966, reached a high of 107.3 in June of 1999 and a low of 56.4 in June of 2008. High consumer confidence levels lead to robust consumer spending, whereas low consumer confidence levels lead consumers to pull back on spending.
S&P 500® Index
The S&P 500® Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.
Chicago Board Options Exchange (CBOE)
Volatility Index® (VIX® Index)
Created by the Chicago Board Options Exchange (CBOE), the Volatility Index®, or VIX®, is a real-time market index that represents the market’s expectations of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500® index options, it provides a measure of market risk and investors’ sentiments.
The views, opinions, and estimates expressed above reflect the views of Allianz Investment Management LLC (AIM LLC) and Allianz Investment Management U.S. LLC (AIM US) as of the date of publication. This document is provided for informational purposes by AIM LLC, a registered investment adviser that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. AIM US, a wholly owned subsidiary of Allianz Life Insurance Company of North America, provides investment management and hedging services to the broader Allianz Group. These views may change as interest rates, market conditions, tax rulings, and other investment factors are subject to rapid change which may materially impact analysis that is included in this document. This report does not constitute a solicitation or an offer to buy or to sell any security, product, or service. It is not intended and should not be used to provide financial advice as it does not address or account for an individual's circumstances. Consult with your advisor and tax professional before taking any action based upon the information contained in this document. Past performance does not guarantee future results and no forecast should be considered a guarantee. Any investment and economic outlook information contained in this document has been compiled by AIM LLC from various sources, including affiliated entities. AIM LLC takes reasonable steps to provide up-to-date, accurate, and reliable information, and believes the information to be so when provided, but no representation or warranty, express or implied, is made by AIM LLC as to its accuracy, completeness, or correctness.
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