William Blair macro analyst Richard de Chazal discusses why 2026 looks brighter for the economy, exploring the impact of AI-driven investment, evolving policy risks, and the surprising strength of the American consumer.
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Podcast Transcript
00:21 Chris T
Hi everybody. Welcome back to Monthly Macro. Today is Tuesday December 16th, 2025. I am joined by William Blair macro analyst Richard de Chazal. He's here to walk us through his 2026 economic outlook, which is been aptly titled “Glass Half Full: Positives > Negatives.” Richard, welcome.
00:29 Richard D
Hi, Chris. Great. Nice to be back. The last podcast of the year.
00:42 Chris T
It is, it is, I know. Let's start at the top. You know, 2025, you described as a year of heightened uncertainty, or at least I think that's, kind of, been, like, the universal description of 2025. Can you give us a high-level overview of what drove that uncertainty, and why do you think the outlook is improving for 2026?
01:00 Richard D
Sure. Yeah, I mean, I think that, for me, that was, sort of, the one word that obviously personified 2025. And, I think that was, really, the big restraining factor for growth this past year. I mean, I think what we had was a president, sort of, storming into office with, I think, quite a radical agenda for change.
You know, he had, or has, control over both houses of Congress, and it really felt like the strategy was to, kind of, flood the zone and try and get as much policy passed as he could before any kind of opposition could gather its momentum and, kind of, retaliate. And, so, I think that's what we got.
We’ve got DODGE, we’ve got very big immigration restrictions, we’ve got lots of pressure on foreign foes and allies alike, we’ve got the One, Big, Beautiful, Bill. And obviously the biggest of all is, you know, we’ve got these huge tariffs. And, I think all of that came with perhaps one big unintentional consequence which was, you know, major uncertainty.
And I think all of that seemed to be a lot for corporate America to swallow. I think a lot of companies, you know, were sitting back and say, whoa, you know, what the heck is happening here? It's hard for us to kind of see which way the wind is blowing, you know? So, what are we going to do? Nothing. Let's just wait. Let's just sit on our hands. Let's wait until we get some clarity over where this thing is going.
So, you’ve got, sort of, very limited investment and you’ve got low hire, low fire. And, you know, the only thing that was firing on all cylinders was this sort of AI related CapEx, which, kind of, supersedes anything that that's going on in Washington.
And I think looking into 2026, I think that uncertainty starts to come down. Why? Because I think we've had the big shock and awe. So, presumably, all of the big, you know, announcements coming out of the White House have really been made. And now it feels like it's more about consolidation, so the Trump administration is trying to get those policies solidified and past blockages from the courts, etc..
And, I think for companies, at the very least, they, kind of, have a better idea of the lay of the land. And, I thought it was actually funny reading in, I just saw an article in the Wall Street Journal, basically saying that exactly that. Companies are learning to live with, you know, Trump's version of capitalism.
And so, I think from that perspective, the cards at least seem to be on the table. You can make them what you will, but, you know, at least, you know, we're seeing them face up. Whereas before, you know, you couldn't even do that. So, I think that is going to be helpful for the corporate sector going into next year.
04:36 Chris T
So, the report highlights the role of AI investment in countering policy uncertainty. How significant has the AI boom been for the economy, and what does it mean for capital investment in 2026?
04:48 Richard D
Yeah, I mean, I think for this past year, it is clearly being the major story. I think that continues into ‘26 and probably beyond, as well. I think we're quite clearly in the midst of a major innovation boom. And, again, one that is superseding a lot of the noise that's going into or coming out of DC.
You know, we saw that in corporate earnings where more than 30% of earnings growth is expected to come from just technology and communication services. Aggregate spending on data centers in the past year was basically 40 billion, which is three times higher than it was in 2022. And, you know, we see estimates from the likes of McKinsey saying that, you know, spending in this area globally is going to continue, or there's a need for, sort of, $5 to $7 trillion in continued spending over the next five years to just to meet the demands for AI.
So, I think we're still in the, you know, the build out phase, where, again, we're still enabling the infrastructure of AI, haven't yet moved fully into the adoption phase. If you look at data from the Census Bureau, adoption rates are still only about 10%, which I think is quite low. And, I think what we need to see in ‘26 is a broadening out in that CapEx.
And I think we are going to start to see that. And I think that's for a few reasons. One, we just talked about, you know, the declining uncertainty. I think that interest rates have been coming down. So, you know, some people are expecting them to come down further, this year. I think get a lot of benefits from the One, Big, Beautiful Bill.
So, for any capital-intensive companies, you know, they have 100% depreciation allowance, you know, that, you know, the estimated effective corporate tax rate for those companies moves from 21% to 16%, so that's pretty significant. You've also got deregulation kicking in. I think we're seeing it pretty clearly in our industry and in the financial sector.
You know, again, you can agree, whether you like it or not, but we are seeing it around environmental restrictions in the energy sector. We may be starting to see some coming through in the housing sector. So, I think, again, these are all sort of levers that the Trump administration is trying to pull to encourage growth. And, I think more broadly outside of that, things I think we've talked about here in the past is, you know, we're seeing a structurally tight labor market.
So, companies are complaining that they can't find workers, so they need to invest more in CapEx to yield better productivity. Again, we have fairly old capital stocks, so that needs to be renewed. And that's becoming even more important in light of this innovation wave that that we're seeing. So, I think, on top of that, we have these continued massive demands for energy, for AI.
So again, that's pulling greater investment forward, as well. So, I think where we are going into next year is still in the early innings of what I think is going to be a pretty substantial CapEx boom going forward.
08:53 Chris T
So, let's talk a little bit about the consumer. You know, the narrative has been mixed. But you see the aggregate consumer is solid in 2026. So, what's driving this resilience?
09:04 Richard D
Yeah, I think this is definitely the part of the economy that's more mixed. I think we're continuing to see this k-shaped recovery where higher income households are doing very well because they're the owners of assets. So, they own stocks and real estate, so their asset portfolios are doing pretty well. But those lower income households are not benefiting from that.
They don't own those assets. And they're being adversely impacted by inflation that's still hovering around 3%, so that's not great. I think in aggregate for the consumer, we're looking at real wage growth that is still positive, and it's still above the historical average. And, even for lower income groups, you know, that real income growth is still positive.
It's only a little bit below the historical average. It's just what we've seen is a very sharp deceleration in growth for this group from an unsustainably high rate, in the few years post COVID. The other thing I'll say that, you know, for the consumer as a whole, their balance sheets are in very good shape.
So, I think that helps imbue them with a, you know, a certain amount of resiliency. I think they would also be more receptive to lower interest rates because they don't have very high levels of debt. And if you listen to what the corporate sector is saying, so in the latest earnings season, if we're listening to the financials, they're not seeing any major signs of credit stress, even amongst the lower income households.
And if we look at the consumer companies, it's a little bit more mixed here. So, we are seeing pockets of weakness and definitely some areas of trading down. But other areas, other consumer related companies, are still seeing a pretty solid consumer. And, I think, you know, going into ‘26, we're also going to start to see the benefits of the One, Big, Beautiful Bill. So, you know, no tax on tips, no tax on overtime, all of that stuff kicked in in 2025. But households or workers were still getting that deducted off of their monthly paycheck, which they're going to get refunded to them when the April tax refunds kick in. So, those coupled with no tax on auto loans, child care tax credits are increasing and the salt cap deductions are also increasing.
So, I think those are going to be quite supportive for consumer spending in the first half of the year. And then on top of that, there's the potential for these so-called tariff dividend checks that the Trump administration wants to hand out. And those, they're purporting to be, say, $2,000. I think that's unlikely. They do have to be passed through Congress.
So, even if there's something like $800, that's still significant and supportive of consumption through ‘26. So, my point is, is that it's still kind of a mixed picture, but it's one where the consumer is not collapsing. And, I don't think it's going to be the area that's the most attractive for 2026.
But I don't think it's one we're seeing them sort of, the whole economy being pulled down by the consumer.
12:50 Chris T
Right. So, what are the main risks? The consumer outlook next year?
12:54 Richard D
Yeah, I mean definitely that's where the risks are. I think the probably the biggest is if Congress decides not to extend these so-called temporary subsidies for the Affordable Care Act's health care premiums. So, those expire at the end of this year, and if that happens, you have 24 million Americans seeing anywhere from 100% to 500% increases in their monthly health care premiums.
So, that is pretty chunky. You know, there's estimates from the Congressional Budget Office that maybe four or five million Americans would just drop out of coverage altogether, which is quite concerning. So, I think that's it's a bit of a fiscal cliff. And, I think given that it's a, you know, midterm election year, which I think should help to concentrate the minds of politicians, I think you're going to get something done.
We've had a few bills that have been presented that have so far failed. But, I think it is interesting that you are seeing some of the MAGA type players say, Josh Hawley from Missouri, crossing the aisle and saying, look guys, we really need to get something done here, so I'm hopeful on that. But certainly, it's if nothing passed there, then I think it would be a more difficult situation for the consumer next year.
If we saw any kind of correction in the financial markets, so a lot of talk about bubbles we've heard over the last year, that would certainly damage the top of the K. And I think what we have been seeing is a bit of a wealth effect going on, where those higher income consumers have been spending on the back of what they see as, sort of, banked earnings with their unrealized capital gains in their portfolios, so that could dampen consumption, obviously, if that happened.
And of course, if the employment picture turned much weaker, you know, I think, at the moment, we're seeing some moderate layoffs. You know, I think the aggregate employment numbers are still just moderately positive. But, if we saw some momentum gathering in layoffs, where layoffs beget more, more layoffs, obviously, those would be a major risk for the outlook as well.
15:27 Chris T
Inflation remains a key vulnerability. What's your take on the inflation outlook for 2026. And then, you know, how does it shape Fed policy?
15:36 Richard D
I think this is probably the area where maybe the market is anticipating too benign a scenario, if you will. I think inflation this past year didn't fall as much as it was expected. And, I think in 2026, inflation is again expected to fall from the current three-ish percent to two and a half, 2.3% somewhere, somewhere around there.
I think the Fed is expecting on the PCE 2.3 to 2.5 in ‘26. But, I think a few things are happening to maybe make that less likely. And, I think the first is we're seeing some, albeit modest and temporary pressure from tariffs. Those are starting to come through. I think we're going to have some pretty substantial spending, which I've just outlined through that One, Big, Beautiful Bill.
And remember that, you know, consumers spend that. So, this is often seen as kind of free money. So, that's a big boost in the near term to consumer spending. So, we’ve got fiscal stimulus coming through. Again, we have this kind of structurally tighter labor market that's being made worse with aggressive immigration restrictions, so that could keep pressure on wages.
And the Fed has also been lowering rates, so monetary policy has been positive. Even if they do nothing in ‘26, we still have a, you know, policy acts with a lag from the past rate cuts. We’re in the early innings of this CapEx boom, and I think, also, because we're still in the, sort of, the build out phase of that AI, we're not benefiting from the adoption phase.
So, yes, further down the road, I think AI adoption will be more disinflationary, but because we're not really there yet, we're still in this, sort of, more inflationary build out phase, which is supportive for growth and supportive for inflation. And lastly, I think, you know, if we look at, any, sort of, gauges of financial conditions, they're extremely accommodative, as well.
So, financial markets are not out there screaming rates are too high, you know, the Fed needs to cut rates aggressively. So, you know, what would I do if I was on the Fed? At this point, I would not be voting for more rate cuts. I think I'd be on the side of Kansas City Fed President Schmid, who has opposed further cuts. I would not be in the Stephen Myron camp, who wants to see another 100 basis points of cuts next year. Now, is the Fed going to going to actually do that? Stay on hold, all the way through ‘26? Probably not. I think the way the Fed is talking now is they're guiding us to one more cut in ‘26.
The market seems to be pricing in two, maybe three, and then, of course, we also have to wait and see who the next Fed chair is, though both of the of the Kevins, Warsh and Harris, seem to be, you know, willing to lower rates. So, you know, I think the probability is that we do get one, even though looking out today it wouldn't necessarily be my preference.
19:08 Chris T
Right. And then how, would you say, this translates to the equity market and the investment landscape for 2026?
19:16 Richard D
I think not bad. I think, the thing is, is that valuation is high, right? So, it's not screamingly overvalued, I don't think. And I think this is different to the late 1990s. I think corporate profit margins are quite high. And, that wasn't the case in the late 1990s, where the PE was very high and margins were coming down quite rapidly.
We're not seeing that today, but it does suggest that if your total return is the sum of real earnings growth plus inflation and dividends and buybacks and multiple expansion, at the very least, I think it suggests that there's less room in that equation for multiple expansion to be additive to that total return.
So, I think your return is probably lower in aggregate from that perspective, which I think would suggest that you probably need to take a broader look across the equity market to get that multiple expansion as part of your return. And, I think, you know, areas that are attractive are still the mid-cap stocks.
I said the same thing last year. We only saw them really outperforming, from about, early April following the Liberation Day announcements. But, I think they have very attractive growth valuations still. And I think they should benefit if we do indeed see this, kind of, broadening out, in the real economy and in where growth is coming from.
So, I'm not saying that you should abandon, you know, these tech stocks that are performing well. But, I do think there's a good opportunity to get some more diversity in your portfolio now, particularly as bonds are now positively correlated with stocks, so they're offering less of that portfolio protection as they did previously. And I think you can get that by looking at more diversity across the markets.
So, the mids but also sectors. I think areas like industrials, some of the financials have been significantly under owned, where the industrials have, kind of, been in this recession for the last two to three years. I think these start to look more interesting in 2026.
21:56 Chris T
What should listeners watch for as indicators of how the outlook is playing out in real time, would you say?
22:01 Richard D
Unfortunately, we're still going to have to closely watch what's happening in Washington. So, we'll need to watch those ACA subsidies, how their issues are playing out. I think we need to, again, watch what's happening with inflation.
How much will the Fed tolerate? So, has it decided that 3% inflation is fine? You know, it's not 2%, but we can kind of live with 3%, as long as the labor market doesn't collapse. Or, does the thinking shift here? You know, and, I think, perhaps more importantly, what does the bond market think about that? And I think that's, kind of, a risk, too. Remember that the Fed really only controls the short end of the curve, not the long end, although, you know, it is making moves with its balance sheet potentially to try and get more influence there.
But the risk is, you know, does the long end of the curve start to worry more about inflation gets and deficits, and start to move a little bit higher. So, I would be watching that very carefully. And, obviously the labor market is incredibly important here.
23:21 Chris T
All right. Well, that's all the time we have for today, Richard. But, is there anything else you'd like to highlight from the report that we didn't cover?
23:27 Richard D
No, I’d just like to wish everyone a very happy holidays and a very prosperous 2026.
23:33 Chris T
And also to you. So, for those interested in reading the full report, “Economic Outlook 2026 Glass Half Full: Positives > Negatives,” you can request copy by reaching out to us at Williamblair.com/contact-us. Thanks for joining us, and we will see you next year.