Can the US Economy Pull Off a Win in 2026?

I’ve been writing an annual economic outlook piece for the last fifteen years, and this year’s is by far the most difficult. As the largest and most diverse economy in the world, the US has immense potential, but there are serious headwinds which make a positive 2026 outlook anything but assured. 

I put a great deal of effort into writing from a purely economic perspective, but politics and the economy have become inextricably linked. 

For the first time since the Great Recession, the European markets grew faster than the United States’. Take it for what you will, but we view it largely as a flight of capital due to the perceived instability of the United States: ever-fluctuating trade policy, self-defeating immigration policies, inconsistent foreign policy, and now adventuring in regime change and serious discussions around the annexation of a fellow NATO member’s territory. Regardless of your opinion, and regardless of the long-term outcome, the perception of the United States as a stable and reliable trading partner and ally is in question, leading the international community to reassess its relationship to, and dependence on, the US.

We don’t expect the volatility to subside this year. First, consider that it’s becoming more likely that the democrats will take at least one house of Congress. That matters because it creates a shortened timeline for the administration to achieve some of its more controversial objectives. The resulting instability may serve to exacerbate the flight of capital to other markets and further erode the value of the dollar. 

The dollar index fell nearly 11% in 2025, which was the greatest decrease in over fifty years. A weaker dollar makes US goods less expensive in foreign markets, but it also makes foreign goods more expensive in the US. Combine that with price increases due to tariffs, and the trend of rising inflation could be likely to continue. 

Through December, the ISM Manufacturing Index has signaled contraction for the last ten months, meaning that US manufacturing is, broadly, in recession. This trend directly contradicts the case for tariffs, especially since ISM respondents blame the contraction, in part, on tariff-related uncertainty.

Employment numbers have shown a worrying trend, as unemployment has risen to 4.6% from 4% at the start of 2025. It will be crucial to monitor this trend, as maintaining full employment is one of the Federal Reserve’s dual mandates, and will help determine the direction of interest rates in the new year. 

Jerome Powell will be ending his term in May of 2026, and will be replaced by a yet-unnamed appointee of the President, who has indicated a strong desire for a direct role in the setting of interest rate policy. Given that, and the republican majority in the Senate, we believe that the next Fed Chair will be amenable to the President’s influence. That said, the Fed Chair, alone, does not set interest rate policy; that is set by the FOMC (Federal Open Market Committee), of which the Fed Chair is a member and gets one vote. 

Since interest rates are essentially the cost of money, in the event that we see bargain basement rates, we expect markets to respond positively in the short-term, as businesses take advantage of cheap borrowing costs to expand and invest in their operations. We’d also likely see a dramatic increase in inflation, especially in certain sectors. Homes that are already unaffordable to many could become increasingly out of reach as buyers flood the market, as they did during Covid. 

I’ve written about AI in the past, and it continues to drive growth in US indices. Whether AI represents a bubble is yet to be seen, however it should be noted that, at least from a pure diversification standpoint, the dependence on these relatively few companies for growth is, itself, a major risk. Of the 500 companies represented in the S&P 500, ten companies make up 40% of the index, and almost all of those are tech companies. The last time we saw this kind of concentration in technology was just before the dot-com bubble burst, when many of those companies saw their values drop by upwards of 80%, and many more went out of business altogether. 

In 2025, corporate bankruptcies reached the highest level since just after the Great Recession, with more than 717 companies filing; a nearly 15% increase year-over-year. The industrial/manufacturing sector was most affected, as many manufacturers crumbled under the weight of increasing costs due to tariffs. Personal bankruptcies also increased by more than 10% year-over-year.

While this all may sound very doom-and-gloom, it’s important to remember that the United States accounts for roughly 4% of the world’s population but produces roughly 25% of the world’s GDP. In other words, our economy is incredibly broad, our workers are incredibly productive, and our businesses are incredibly resilient. While all indicators may not be trending the right direction, one cannot underestimate the possibility that the US economy could pull off a win in 2026. 

We don’t believe that it’s time to run for the hills, but we do believe that the current environment underscores the paramount importance of broad diversification in your portfolio, the need to understand your risk profile, and the value of the relationship you have with your Certified Financial Planner® professional. Make adjustments as your needs change, and as the world around you dictates. 

Stephen Kyne, CFP® is a Partner at Sterling Manor Financial, LLC in Saratoga Springs. This piece contains forward looking statements which are subject to change. 

Sterling Manor Financial, LLC is an SEC Registered Investment Advisor and does not provide tax or legal advice, nor is it a third-party administrator. Consult your attorney or accountant prior to implementing any tax or legal strategies.