Wall Street thinks best is yet to come for the economy
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After a year of mixed economic signals and policy uncertainty, Wall Street strategists are growing more optimistic the economy will rev up in 2026.
Why it matters: Easier credit and less policy uncertainty are going to create favorable conditions for the economy next year, according to strategists and analysts, even if labor market data is painting a murky picture for growth.
What they're saying: The fourth quarter "might feel a little uncomfortable," cautions Sam Zief, global macro strategist with JPMorgan. "It's probably the slowest that the economy is going to be, and things look better as you move into 2026."
- The Federal Reserve is cutting interest rates from a "risk management" perspective, not because of a recession, Zief says, which could prevent layoffs or a deeper deterioration in the jobs market.
- The long end of the yield curve isn't steepening significantly, a sign that the bond market supports the central bank's methodical rate-cut path.
- That drives looser financial conditions, improves lending opportunities for smaller businesses, and adds more room for growth in the economy.
- Policy uncertainty around tariffs has also fallen sharply since the spring, priming companies to take advantage of this easier financing and invest in people and operations.
Between the lines: Small businesses are the largest U.S. employer and are often the first to pull back when borrowing costs rise.
- They rely heavily on regional banks and floating-rate loans, which makes them especially sensitive to policy moves at the short end of the curve.
- As rates come down, regional banks are more willing to lend, giving small businesses better access to credit. That stabilizes hiring, easing one weak spot in the economy and reducing the risk of a broader layoff cycle.
- Even a modest pickup in small business activity can ripple through the labor market, supporting both employment and consumer demand.
Yes, but: The AI narrative now driving the bull market has within it a promise of productivity gains.
- Productivity is "just a real polite way of saying something crass: robots for people," Chris Wolfe, president at Pennington Partners, a multifamily office firm, tells Axios.
- There are conflicting reports on how AI is impacting the labor market, but so far, signs of workers being replaced by AI en masse have not shown up.
- AI "has the potential to improve the fortunes of the middle classes rather than generate mass unemployment," Dario Perkins, managing director for TS Lombard, writes in a note to clients.
The bottom line: If the Federal Reserve continues to cut rates and inflation remains under control, an economic reacceleration may be in store for 2026.
