Today’s market backdrop reflects a tension between expectations and reality. Despite higher oil prices and plenty of geopolitical noise, the US economy remains resilient and durable, supported by steady consumer spending, a labor market finding its footing, ongoing fiscal support and a surge in AI and infrastructure investment.
While resilient, there is still a touch of unpredictability in today’s markets. One moment, the data shows strong payrolls and solid demand; the next, it’s hit with increasing AI-driven layoffs and consumer pullbacks. That’s the nature of cycles: rarely linear, often noisy and prone to short-term twists that don’t change the broader outcome.
At the end of the day, the fundamentals remain solid. We expect US GDP to grow 2.4% in 2026, supported by fiscal tailwinds, tax incentives and continued investment in AI and data centers. That capex isn’t just driving demand, it’s improving productivity while a stabilizing labor market underpins consumer spending. For now, the US economy remains strong.
Read more: What to Watch This Earnings Season
Inflation remains a challenge, fueled in large part by elevated oil prices tied to the lingering Middle East supply disruption. As long as energy remains a pressure point, inflation continues to remain elevated. We expect Personal Consumption Expenditures inflation to end 2026 at 3.7%, above the Fed’s 2% target. However, the setup is beginning to shift and oil is the key catalyst.
With a US-Iran deal in place, supply dynamics should gradually improve. We expect WTI to end the year at ~$70 per barrel, close to its level just prior to the Iran conflict. The reopening of the Strait of Hormuz and changes in oil demand patterns should all contribute to lower energy prices. This would relieve one of the most persistent sources of inflation pressure and help accelerate the broader cooling trend.
While the build-out in AI and data centers is adding to near-term demand pressures – particularly in electricity and critical minerals – we believe the longer-term impact is disinflationary. Rising investment in AI should lift productivity, improve efficiency and ultimately help curb inflation. Despite pressures, the balance of forces is starting to turn, and if history is any guide, the shift may not be gradual. It may take a decisive move – led by easing oil prices and stronger productivity – to bring inflation back down.
With Kevin Warsh stepping in as Federal Reserve chair, the Fed is navigating a complex backdrop: Growth remains resilient, inflation is still elevated and geopolitical risks persist. We expect the Fed to remain on hold through at least year-end, closely monitoring how the data evolves.
The bond market’s rising long-term yields – now at their highest levels in over a decade – have delivered income and diversification to investors’ portfolios. From here, the opportunity set looks increasingly attractive. We expect the 10-year Treasury yield to finish the year in the 4.25%–4.50% range, leaving bonds fairly valued with compelling income potential. We continue to favor high-quality, investment-grade securities, where risk-adjusted returns remain more attractive than in lower-quality credit. Municipal bonds also stand out, offering appealing tax-equivalent yields for investors seeking income with tax efficiency.
Meanwhile, the equity market continues to prove it has endurance. Despite Fed moves, geopolitics, and short-term market swings, performance is driven by the fundamentals. Earnings have delivered six straight quarters of double-digit growth, and we expect that momentum to carry well into next year. While the upside may be more measured given elevated valuations, the fundamental backdrop supports our constructive view, with S&P 500 targets of 7,650 for 2026 and 8,200 over the next 12 months (June 2027).
Technology continues to lead with the AI theme, but the rally is starting to broaden. Industrials should benefit from defense spending and the ongoing AI buildout. Consumer discretionary and health care, two very different sectors that have lagged and remain less favored by investors, could also help power the next phase of the rally. So, despite potential distractions – from elections and a new Fed chair to geopolitics and seasonality – the underlying story remains intact: This market has the staying power to extend its run.
While surprises happen, narratives shift and outcomes evolve, our job is not to react to every headline. Instead, it’s to stay grounded in fundamentals, remain disciplined and adjust as the conditions evolve. In investing, success comes from understanding the structure beneath the noise, not getting distracted by it.
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All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Committee and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. No investment strategy can guarantee success.
Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss.
There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office.
The S&P 500 Total Return Index: The index is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.
Sector investments are companies focused on a specific economic sector and are presented here for illustrative purposes only. Sectors, including technology, are subject to varying levels of competition, economic sensitivity, and political and regulatory risks. Investing in any individual sector involves limited diversification.Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
© Raymond James
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