What if the economy is doing well?
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Wall Street is bullish on 2026, with many calls seeing a reaccelerating economy.
Why it matters: The economic vibes don't feel great, but the data has yet to indicate a sharp slowdown. With several policy headwinds set to ease, investors are eying an early growth cycle that could lift both stocks and the economy.
What they're saying: "What if companies are poised to start hiring after a policy-driven wait-and-see start in 2025?" Citi's Stuart Kaiser wrote. "This is the most positive scenario for equity markets, and also maybe the least priced."
- Uncertainty surrounding taxes, tariffs and immigration policy could reverse, leading to "pent-up demand for labor and investment being released."
- Corporate America is also set to receive some stimulus from the passage of the One Big, Beautiful Bill Act.
- "We actually expect things to pick up modestly next year," Keith Lerner, co-chief investment officer at Truist, tells Axios.
Yes, but: Stock investors tend to look at the bright side, in contrast to everyday Americans whose views on how President Trump has been handling the economy have been sinking.
- Investors, for the most part, are ignoring the economic uncertainty that's plaguing job data or the increasing signs of sticky inflation.
Zoom out: Indeed, the stock market is not the economy, and that's perhaps never been more true.
- The K-shaped recovery has higher-income earners spending more, while lower-income workers struggle amid a slowing labor market.
- Spending from the wealthy could cloud signs of economic weakness in other wage groups.
Follow the money: Watching where investors allocate is one of the best ways to try and suss out what part of the cycle they're pricing in.
- Sectors that perform well in early growth cycles coupled with lower interest rates are rallying as earnings wind down.
- Small caps and homebuilders, both rate-sensitive corners of the market, are hitting record highs.
- Retailers and consumer discretionary stocks, which are tied to consumer spending and economic strength, are also rallying.
What we're watching: As always, the bond market is the school principal waiting to wag its finger at equity investors.
- If bonds sell off, rates will go up regardless of what the Federal Reserve does.
- Those higher rates could be a headwind for stocks and the economy.
The bottom line: If aggregate spending from corporates and consumers expands while the Fed cuts rates, that could support broad earnings growth, as long as the bond market doesn't intervene.
