U.S. economy in 2026 rides bullish stock market despite inflation and labour risks
The U.S. economy in 2026 faces a mix of strong stock market today momentum and growing structural challenges. While equities are expected to stay in a bull phase, inflation risks and widening inequality between Wall Street and Main Street remain key concerns. Analysts describe the year as 'glass half-full,' with policy support driving growth but labour shortages and demographic shifts adding pressure.
A weaker U.S. dollar is raising import costs, which could push up broader goods inflation. Tight labour markets, driven by baby boomer retirements, lower immigration, and slower population growth, have made the economy more finance-prone. Any economic rebound may now translate into higher wages and prices faster than in previous cycles.
Fiscal policy, including President Trump's One Big Beautiful Bill, is projected to add about one percentage point to GDP growth in 2026. This follows earlier tax cuts and spending shifts, such as reductions in health programmes and mass federal layoffs. Meanwhile, artificial intelligence could help offset some demographic pressures by improving productivity, though it may also disrupt jobs and push wages higher.
Stock markets are likely to stay strong through 2026, supported by ongoing monetary and fiscal stimulus. BMO Capital Markets strategist François Trahan has set a year-end S&P 500 target of 7,380, suggesting an 8% return. The near-term outlook favours risk assets, particularly in industrials, materials, energy, and financials.
Uncertainty remains around inflation, labour markets, and government debt. But for now, policy support continues to lift equities despite these risks.
The 2026 outlook combines cyclical strength with underlying vulnerabilities. Markets benefit from stimulus and productivity gains, yet inflation and labour pressures persist. Investors will need to navigate a landscape where growth and risks remain closely tied.
