U.S. economic growth remains healthy overall, but a closer look reveals a stark divide across various cohorts.
January 12, 2026
Tasneem Azim-Khan Vice President and Chief Investment Strategist
U.S. economic growth for 2026 is forecast to be just over two percent, based on RBC Global Asset Management (RBC GAM) forecasts . While this is more or less in line with their forecast for real GDP growth in 2025, it is lower than the nearly three percent growth in 2024. Though the dynamic of U.S. exceptionalism may not be as emphatic in recent years, it seems for now to be persisting by a narrow margin.
Economic tailwinds related to AI capital spending and related productivity gains; fiscal stimulus via passage of the One Big Beautiful Bill Act (OBBBA); deregulation; favourable wealth effects and the potential benefit from previous and future rate cuts, are all expected to allow growth in the U.S. to continue at a healthy rate in 2026.
Still, the risk of stagflation (low to no economic growth combined with rising or elevated inflation) is likely to persist next year as growth decelerates, inflationary pressures persist and the labour market softens. The November Consumer Price Index (CPI) figure—the main gauge of consumer-level inflation—showed an unexpected downward trend in price levels. Yet, we are hesitant to place too much stock in this development considering the lack of economic data as a result of the U.S. federal government shutdown, which lasted for 43 days (the longest in history) and concluded on Nov. 12.
We also remain somewhat cautious on the labour market heading into next year. In our view, a combination of tightening immigration policies, corporate restructurings, record retirements of baby boomers, AI-driven job losses and tariff uncertainty have all conspired to amplify risks to employment for 2026. The era of “no-hire-no-fire” corporate policies seems to have given way to a “no-hire-start-to-fire” era in late 2025. According to leading U.S. outplacement provider Challenger, Gray & Christmas , layoffs in the U.S. topped over one million as of early November—and were more than 50 percent higher than the same 11-month period a year earlier. This is also the highest level of layoffs since 2020 , when pandemic-driven job losses sent unemployment skyrocketing.
The unemployment rate in the U.S. crept up to 4.6 percent this past November. This rate in and of itself is not problematic and is likely somewhat muddied by the government shutdown. Directionally, however, it corroborates the narrative of a softening labour market. We are closely monitoring this trend going forward, and we believe that a crisper picture of employment is likely to surface with the release of more economic data early in the new year.
While the overall outlook for economic growth remains healthy, some caveats emerge as one digs beneath the surface. A deeper dive reveals that the economic recovery is being experienced very differently across various income cohorts. Specifically, higher-income households are thriving, while economic conditions for lower- and middle-income households are deteriorating.
Lower-to-middle income households are disproportionately exposed to higher inflation and tariffs (particularly on goods versus services), and higher interest rates (as such households tend to borrow more and save less). The recent extension of tax cuts has been at the expense of lower income households and to the benefit of their higher income counterparts.
In contrast, older, wealthier and higher-income households are experiencing considerable wealth effects from the appreciation and income growth of liquid assets, many of which stem from multiple injections of stimulus since the pandemic. According to RBC Economics , “the top cohort has disproportionately benefitted from the post-pandemic monetary policy, accumulating trillions in liquid, income generating assets since 2020. The top 10 percent poured roughly $30 trillion into liquid, income-generating assets since 2020—six times more than any other group.” This dynamic has allowed higher-income earners to be less reliant on wages to maintain or grow their standards of living.
One important implication of this wealth divergence is the economy’s growing reliance on the spending of wealthier households. According to RBC GAM, the top 10 percent of earners now account for nearly half of consumer spending in the U.S.—a record share dating back to the late 1980s. As such, the sustainability of such spending in 2026 comes into focus, particularly given that ~70 percent of U.S. GDP is driven by consumption.
Much of the aforementioned wealth effects have been boosted by AI-related gains in the stock market in recent years. A potential correction in the lofty valuations of AI stocks may throw a wet blanket, at least temporarily, on the wealth effects that have in large part enabled higher income households to “carry” consumption thus far.
Indeed, more recently, the U.S. economy is beginning to show cracks in consumption. As of Sept. 2025, U.S. consumer spending increased moderately following solid gains in the prior three months —suggesting a loss of momentum at the end of the third quarter. In November, consumer confidence took a nosedive to its second lowest level since April, bringing it to nearly historic lows. Such developments are not surprising, as a recent pick up in layoffs, continued tariff uncertainty and widespread affordability issues—particularly amongst middle- and lower-income households—drive more cautious and value-based spending.
Future developments on this front bear surveillance, though we do not believe that consumption will fall precipitously next year. It is likely the wealthier segment will continue to power consumption. In our view, broader breadth of the consumer, alongside higher consumer confidence, would be an ideal development and would mitigate downside risks to economic growth in 2026.
On tariffs, it is worth noting that, overall, the direction of developments has been more or less better than feared. In stark contrast to the beginning of 2025, when most countries were bracing for impact, tariffs have since been largely watered down even among some of the most contentious trade negotiations with U.S. trading partners such as China, Canada and Mexico.
While the U.S. tariff rate is declining, the average effective tariff rate remains elevated at ~16 percent, based on RBC GAM’s estimates.
Affordability concerns in the U.S., exacerbated by Trump’s tariff policies, seem to be reaching a fever pitch given some high-profile victories for Democrats, many of which can be attributed to campaigns that focused on addressing this issue for Americans. The White House has taken notice.
In what seems to be a bid to resolve perceived political deficits heading into midterm elections next year, Trump recently rolled back tariffs on several food products. More meaningfully, the administration has proposed $2,000 tariff rebate cheques for American taxpayers (excluding high income earners).
Another fiscal stimulus injection to pay for these rebates would cost the U.S. Treasury Department US$300 billion, according to the Tax Foundation (a nonpartisan organization). This is an amount roughly equivalent to the incremental annual tariff revenue generated by the new U.S. levies—and hence already accounted for as an offset against the cost of tax cuts under the One Big Beautiful Bill Act (OBBBA).
This proposal has been hotly debated even within the GOP, and as of the time of writing, there are no definitive plans for it to be rolled out. Still, this is a development worth monitoring closely. To the extent that cost-of-living concerns persist leading into midterm elections in November, we believe this could portend a less pugnacious stance on tariffs overall.
The U.S. Supreme Court (SCOTUS) is expected to rule on the legality of Trump’s tariff agenda imposed under the 1977 International Emergency Economic Powers Act (IEEPA). If SCOTUS rules against the Trump administration, this will mean that the U.S. government may have to provide tariff refunds “in theory.” Yet, high-profile members of Trump’s cabinet have already embarked on a campaign to characterize such a verdict to be a near fiscal calamity, thereby eroding any confidence that such refunds will be delivered in good faith.
Furthermore, questions abound on whether such refunds will have to be paid in part or in full; and, if they would apply to a small number of companies that have sued in the courts, or for all impacted companies. Should the Supreme Court rule against the Trump administration, efforts are already underway to fold current and future tariffs under other existing legislation, such as Section 122 of the Trade Act of 1974, and Section 338 of the Tariff Act of 1930. In short, there seem to be sufficient workarounds for Trump’s tariff regime to persist.
The path forward for the interest rates in the U.S. remains uncertain given the stickiness of inflation, which sits in opposition to recent signs of weakness in the labour market. We believe modest stagflation-ary pressures in the U.S. economy will force the Federal Reserve (Fed) to maintain a data-dependent stance on a rate-setting meeting-by-meeting basis.
On Dec. 9, 2025, the Fed implemented a 0.25 percent rate cut—its third consecutive cut in 2025, and the sixth cut overall (for a total reduction of 1.75 percent) since it began cutting rates in mid-2024, to a range of 3.50 percent-3.75 percent. The next Fed rate-setting meeting will be held on Jan. 27 and Jan. 28, and the general consensus is for them to keep the overnight rate unchanged.
More recent economic data delivered toward the end of 2025 has been mixed. For example, stronger than expected Q3 GDP numbers were a full percentage point above consensus at 4.3 percent and suggest a U.S. economy on stable footing. And yet, unemployment for November ticked modestly higher to 4.6 percent. Looking more closely at the data, this was almost entirely the result of re-entrants into the labour market and workers on temporary layoffs, whereas permanent layoffs ticked lower. Inflation readings for the same month came in well below expectations, as headline CPI slowed to 2.7 percent year-over-year, however the data had some quirks in it, and so must also be taken with a grain of salt.
Furthermore, one better-than-expected CPI result is likely insufficient for the scales to be tipped in favour of an interest-rate cut in January. Bearing in mind that the government shutdown late in the year has undermined the reliability of various economic data, the Fed is likely content to remain patient for additional data from December’s metrics to gain a stronger indication of any emerging trends.
In the Fed’s statement following the December rate-cut meeting, greater uncertainty was suggested with regards to the next rate cut, while the outlook for just one cut in 2026 was maintained. Fed chairman Jerome Powell also opined that the Fed had acted sufficiently to support the economy by way of stabilizing the labour market (the Fed expects a modest uptick in unemployment to 4.4 percent next year), concurrent with leaving rates high enough to combat an inflation rate that continues to remain sticky.
At the time of writing, consensus estimates are for two to three more cuts in the range of 0.50 percent-0.75 percent in 2026, which is more dovish than the Fed’s own current outlook. However, in the past this has proven to be a moving target, and we believe these estimates will be particularly sensitive to the release of economic data with the passage of time.
Uncertainty remains, as evidenced by the divide between the “hawks” and “doves” on the Federal Open Market Committee (FOMC), the Fed’s rate-setting committee. The more hawkish perspective would cite the lagged impact of tariffs implemented through the course of 2025, and how that should start to more meaningfully surface in the CPI figures this year. Businesses which have thus far shielded consumers from the impact of the levies may soon begin to prioritize their profit margins. Furthermore, the Trump administration’s severe tightening of immigration, coupled with record baby boomer retirements, has tightened the labour supply in the U.S. This has allowed unemployment figures to remain reasonably healthy but increases the risk of upward pressure on wages.
In our view, the injection of considerable fiscal stimulus (in the range of US$3.4 to US$3.8 trillion over the next decade) via the OBBBA, serves as a de facto rate cut. It also disproportionately favours the wealthy (at the expense of lower-income households). To the extent that the stimulus compounds the favourable wealth effects and boosts demand for higher-income households, this could have an outsized impact on consumption against the backdrop of a K-shaped economic recovery in the U.S. Yet in the dovish camp, the transition of the AI boom from builders to adopters suggests broad-based productivity gains and cost-savings for corporations. This could provide an important offset to a greater expression of the tariff impact on overall price levels. A desire to proactively address a potentially more precipitous increase in unemployment may also be an argument for those in favour of rate cuts.
The current lack of uniformity across the FOMC members is, in our view, less indicative of diminished independence of the Fed, but rather a mirror to the lack of visibility around the state of the labour market and inflation for the year ahead. Still, the installation of a new Fed chair in May may complicate the narrative further. The current frontrunners for the role (Kevin Hassett and Kevin Warsh) are Trump loyalists who seem sympathetic to the president’s view that the Fed should be cutting rates faster and more forcefully. The potential for waning Fed independence under a new chairman allied with Trump may yet be put into check by a bond market revolt. Higher bond yields in response to concerns of an upward inflection in inflation later in 2026 is unlikely to be in the Trump administration’s favour, both economically and politically.
By the end of last November, the S&P 500 was up in the mid-to-high-teens. While this is a very respectable result, it marks a deceleration from the more than 20 percent increase in 2024. It also represents an underperformance versus other major equity markets such as Europe, Canada, Japan and the emerging markets.
It is worth noting that the relatively slower pace of returns for the S&P 500 comes after a near half decade of outsized returns for the index, but particularly for the “Magnificent Seven” (see below).
Global equity valuations have generally moved higher with this healthy performance, but they are particularly high in the U.S., where equity markets have been disproportionately propelled forward by narrow (mostly large-capitalization tech stocks) leadership. The weight of the “Magnificent Seven”—made up of Nvidia, Alphabet, Tesla, Microsoft, Apple, Meta and Amazon—in the index has grown to more than a third from 15 percent a decade ago.
The S&P 500 currently trades at more than one standard deviation above its long-term average.
If one strips out the “Magnificent Seven” from the index, the multiple becomes somewhat more palatable at ~16.7X, which is modestly below the historical average.
As valuations have inflated over the last few years, concurrent with the expansion of AI-related capital spending, the “airwaves” have been increasingly preoccupied with concerns of a stock market bubble. Such disquiet is not unreasonable in our view.
Earnings expectations for the S&P 500, and particularly the “Magnificent Seven” and other AI-related companies, have been revised higher as profits have broadly come in better than expected over the last two to three years. Recent consensus estimates call for just over 14 percent earnings per share growth in 2026, following expectations for 13 percent last year. As has been the case over the last few years, the “Magnificent Seven” is likely to power the earnings growth with consensus expectations of ~23 percent in 2026 (more or less in line with expectations for 2025). This represents a meaningful slowdown for the AI-bloc from a breakneck pace of earnings growth in 2024 in the range of 35-40 percent.Yet a higher hurdle for expectations, coupled with lofty valuations, leaves little room for disappointment.
This year, we expect the focus of AI will shift from capital expenditures by the producers to a return on these massive investments. Greater attention will be placed on the associated efficiencies, productivity gains and cost-savings promised to the AI adopters. Consensus estimates for the aggregate AI-related capital expenditures for major tech companies were revised a number of times during 2025, with final estimates exceeding $400 billion by the end of the year. To the extent that the market perceives that the value creation implicit in such colossal investments in AI is not unfolding fast enough, we believe that this could adversely impact market sentiment, at least on a temporary basis, creating an air pocket in valuations. The more recent phenomenon of circular financing (i.e. a funding model where investments flow between companies in a closed loop, allowing them to finance their operations while simultaneously purchasing each other’s products and services) within the AI arena is somewhat disconcerting, and raises concerns with regards to any potential spillover effects to the extent such a financing loop is broken.
Notwithstanding the above arguments, we are hesitant to definitively make any declaration of a bubble at this juncture. Though high price-earnings (P/E) valuations have often accompanied bubbles in the past, they are not in and of themselves necessarily indicative of one. One distinction between current market conditions and previous bubbles is how valuations for the AI-bloc have been disproportionately driven by earnings growth, rather than multiple expansion. Capital expenditure outlays have been predominantly funded through free cash flow. And balance sheets for the major AI players are solid, with generally low leverage, and therefore show little signs of excessive risk-taking, which has typically been a hallmark of past bubbles.
Even if one were to assert that this is indeed a bubble, it is near impossible to know what stage of the bubble we are in, and how long the bubble will remain intact. We do believe that the investments and subsequent adoption of AI will likely drive value creation and structural change, but that we could very well be in the early stages of this cycle. Historic paradigm shifts (e.g. the railroads or internet adoption) often transpire over a multi-year horizon. As such structural transitions take time, and as much as there is a risk of over exposure in portfolios, there is also a risk of under exposure to the extent that valuations remain supported over time by robust earnings growth.
By the same token, we believe investors should remain mindful of high-valuation exposure within portfolios, and that prudent rebalancing is warranted in this regard. Geographic diversification also remains prudent. Although Canadian equities have outperformed their American counterparts for 2025, they are still trading at a healthy valuation discount to U.S. equities.
Similarly, equity valuations for international equity markets still appear less expensive versus their U.S. counterparts. As such, we believe an opportunistic, albeit modest, tilt towards non-U.S. equity markets within portfolios may be warranted where risk appropriate.
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