The US economy faces 2026 in an unusual situation: inflation has fallen from its peak in mid-2022, growth has held up better than many expected, and yet US households say the situation still feels unstable. Uncertainty is the watchword, especially with a major Supreme Court ruling on tariffs on the horizon.
To find out what’s coming next, The Conversation US spoke with finance professors Brian Blank and Brandy Hadley, who study how companies make decisions amid uncertainty. Its forecasts for 2025 and 2024 held up remarkably well. Here’s what they expect from 2026 and what that could mean for households, workers, investors and the Federal Reserve (Fed):
What’s next for the Fed?
The Fed closed 2025 by cutting its benchmark interest rate by a quarter of a percentage point, the third cut in a year. The move reopened a familiar debate: Is the Fed’s easing cycle coming to an end, or does a cooling labor market signal a long-awaited recession on the horizon?
Although unemployment remains relatively low by historical standards, it has been rising modestly since 2023, and entry-level workers are beginning to feel more pressure. Furthermore, history reminds us that when unemployment rises, it can do so quickly. That’s why economists continue to watch for possible signs of trouble.
So far, the broader labor market offers little evidence of a broad-based worsening, and the latest jobs report may even be more favorable than the initial numbers made it appear. Layoffs remain low relative to workforce size – although this is not uncommon – and, most importantly, wage growth continues to hold up. And that’s despite the fact that the economy is adding fewer jobs than in most periods outside of recessions.
Gross domestic product was surprisingly resilient; It is expected to continue growing faster than the pre-pandemic norm and be on par with recent years. That said, the recent shutdown prevented the government from collecting important economic data that Federal Reserve policymakers use to make their decisions. Does that increase the risk of a policy mistake and a possible recession? Probably. Still, we’re not worried yet.
And we are not alone, as many economists point out that low unemployment is more important than slow job growth. Other economists continue to signal caution without alarm.
Consumers, the main engine of economic growth, continue to spend – perhaps unsustainably – with increasingly unequal force. Delinquency rates — the share of borrowers who are behind on required loan payments in housing, auto and other areas — have risen from record lows, while savings balances have fallen from unusually high levels in the wake of the pandemic. A more pronounced K-shaped pattern has emerged in household financial health, with older, higher-income households benefiting from the labor market and already appearing to have overcome the worst financial difficulties.
Still, other households are stretched thin, even as gas prices drop. This contributes to a continued “vibration,” a term popularized by Kyla Scanlon to describe the disconnect between strong aggregate economic data and weaker lived experiences amid economic growth. As low-income households feel the pressure of tariffs, wealthier households continue to drive consumer spending.
For the Fed, that’s the conundrum: strong earnings numbers, growing pockets of stress and noisier data all at once. With this inequality and weakness in some sectors, the next big question is what could tip the balance toward a slowdown or another year of growth. And increasingly, all eyes are on AI.
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Is artificial intelligence a bubble?
The dreaded “B word” is appearing more and more in coverage of the AI market, and comparisons to everything from the railroad boom to the dotcom era are becoming more common.
Stock prices in some tech companies certainly look expensive, rising faster than profits. This may be because markets expect more rate cuts from the Fed soon, and it’s also why companies are talking more about going public. In some ways, this is similar to the bubbles of the past. At the risk of repeating the four most dangerous words in investing: Is this time different?
Comparisons are always imperfect, so we won’t dwell on the differences between this time and two decades ago, when the dotcom bubble burst. Let’s focus on what we know about bubbles.
Economists usually categorize bubbles into two types. Tipping bubbles are driven by genuine technological advances and ultimately transform the economy, even if they involve excesses along the way. Think about the Internet or the transcontinental railroad. Mean reversion bubbles, on the other hand, are fads that inflate and collapse without transforming the underlying industry. Some examples include the subprime mortgage crisis of 2008 and the collapse of the South Sea Company in 1720.
If AI represents a true technological inflection—and early productivity gains and rapid cost drops suggest it could be—then the biggest questions revolve around how this investment is financed.
Debt is best suited for predictable investments that generate liquidity, while equity is best suited for highly uncertain innovations. Private credit is even riskier and often indicates that traditional financing is not available. So we are closely monitoring the bond markets and the capital structure of AI investment.
This is especially important given the increasing resort to debt financing in some large-scale infrastructure projects, especially in companies like Oracle and CoreWeave, which already appear overextended.
For now, caution, not panic, is warranted. Concentrated bets on individual companies with limited revenue remain risky. At the same time, it may be premature to lose sleep over “tech companies” broadly speaking or even data center investments.
Innovation is spreading throughout the economy, and these tech companies are quite different. And, as always, if it helps you sleep better, swapping your investments for safer bonds and cash is rarely a risky decision.
There is also quiet but significant change taking place beneath the surface. Market gains are beginning to expand beyond large technology companies, with the companies being the largest and most heavily weighted in the main stock indices.
Financials, consumer discretionary companies and some industrial sectors are benefiting from improved sentiment, cost efficiencies and the prospect of greater policy clarity going forward. Still, political challenges remain for AI and housing with the midterm elections around the corner.
Also read: The markets watch list for 2026: Fed succession, political risk and, of course, AI
Will they ever seem affordable again?
Policymakers, economists and investors have increasingly shifted their focus from “inflation” to “affordability,” with housing being one of the biggest pressure points for many Americans, especially first-time buyers.
In some cases, housing costs have doubled as a share of income over the past decade, forcing households to delay purchases, take on more risks or even give up hope of homeownership altogether. That pressure matters not only for housing itself, but for sentiment and consumption in general.
Still, there are early signs of relief: Rents have started to decline in many markets, especially where new supply is coming online, such as in Las Vegas, Atlanta and Austin, Texas. Local conditions such as zoning regulations, housing supply, population growth and labor markets continue to dominate, but even modest improvements in affordability can significantly affect household balance sheets and confidence.
Looking beyond the housing market, inflation has fallen sharply since 2021, but certain types of services, such as insurance, remain persistent. Immigration policy also plays an important role here, and changes in labor supply could influence wage pressures and inflationary dynamics in the future.
There are real challenges ahead: high housing costs, unequal consumer health, fiscal pressures amid an aging demographic, and persistent geopolitical risks.
But there are also significant trade-offs: tentative falls in rents, widening equity market participation, falling AI costs, and productivity gains that can help cool inflation without breaking up the labor market.
Encouragingly, greater clarity on taxes, tariffs, regulation and monetary policy could come in the coming year. When it does, it could help unlock lagging business investment across multiple sectors, an outcome the Federal Reserve itself appears to anticipate.
If there is a lesson worth emphasizing, it is this: uncertainty is always greater than anyone expects. As baseball sage Yogi Berra memorably said, “It’s hard to make predictions, especially about the future.”
Still, these forces can converge in a way that keeps the expansion intact long enough for sentiment to catch up with the data. Perhaps 2026 will be even better than 2025, as attention shifts from markets and macroeconomics to things money can’t buy.
*D. Brian Blank is an associate professor of Finance at Mississippi State University and Brandy Hadley is an Associate Professor of Finance and Distinguished Scholar in Applied Investments at Appalachian State University.
This text was originally published in The Conversation
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