The economic uncertainty that defined 2025 is beginning to ease. Last year’s tariffs, immigration restrictions, and legislative overhauls left businesses cautious, as they paused investments while awaiting clarity. Now, the transition from ambiguity to established policy frameworks is creating a more stable environment, setting the stage for renewed growth in 2026.
Despite turbulence, some sectors thrived. Technology, including AI investments, and communication services contributed to over 30% of earnings growth, with data center spending skyrocketing to $40 billion—three times 2022 levels. With AI adoption only at an estimated 10%, the focus in 2026 remains on building infrastructure to support future expansion.
Looking ahead, the drivers of capital expenditure are expected to broaden beyond the tech sector. Reduced uncertainty is supporting a more favorable investment climate, while fiscal incentives, such as 100% depreciation allowances, have lowered effective tax rates for capital-heavy firms. Additional tailwinds include eased regulations in the energy and finance sectors, as well as labor shortages that continue to push firms toward productivity-enhancing technologies.
While business investment gains momentum, the outlook for consumers is mixed. High-income households are benefitting from the wealth effect, while lower-income groups face inflation near 3%. However, healthy balance sheets and potential liquidity boosts, via legislative tax refunds and proposed “tariff dividend” checks, could stabilize spending. Risks remain, including the possible loss of Affordable Care Act subsidies. Inflation expectations remain a key area of focus. Markets predict inflation will fall to 2.3%, but tariffs, fiscal stimulus, and the inflationary phase of AI development suggest it could remain elevated. This limits the Federal Reserve’s ability to make multiple rate cuts, likely capping adjustments to a single reduction despite market hopes for more.
High equity market valuations leave little room for price-to-earnings (P/E) expansion, making earnings the primary driver of returns. Diversification will be critical in navigating the market:
- Mid-Cap Stocks: Well-positioned to benefit from economic expansion, offering strong growth at attractive valuations
- Industrials: Expected to recover as capital investment accelerates
- Financials: Poised to gain from deregulation and stability
The 2026 outlook is cautiously optimistic. Reduced uncertainty, a robust innovation cycle, and strong corporate fundamentals present a promising environment for risk assets. However, vigilance will be essential as inflationary pressures and policy risks linger. Thoughtful sector and capitalization strategies will be key to successfully navigating the shifting economic landscape. For more information on related investment opportunities and insights, please listen to our William Blair Thinking podcast, Monthly Macro: 2026 Macro Outlook, featuring William Blair Macro Analyst Richard de Chazal.