'Inflation is likely to come in lower than expected in 2026': The reasons Wall Street anticipates a strong economy and rising stocks this year

Wall Street Eyes Stock Market Growth in 2026

Analysts on Wall Street are optimistic about the stock market's prospects in 2026, anticipating gains fueled by expected Federal Reserve interest rate reductions, favorable tax policies, and inflation coming in lower than previously forecasted.

Inflation and Economic Signals

This week, all eyes are on the upcoming Consumer Price Index (CPI) report, which is projected to show no change from the previous month, maintaining a 2.7% annual rise. Experts highlight declining oil prices and a slowdown in housing costs as indicators that inflationary pressures may be easing.

Chris Watling, chief market strategist at Longview Economics, shared that he expects inflation to fall more than anticipated in 2026.

Labor Market and Fed Policy

Despite some positive trends, recent employment data revealed that job creation fell short of expectations, capping off a lackluster 2025. However, a softer job market could prompt the Federal Reserve to lower interest rates, potentially reducing bond yields. This scenario is more likely if a new Fed Chair, appointed by President Trump after Jerome Powell's term ends in May, steers the central bank toward a more accommodative stance.

Lower yields translate to reduced borrowing costs, which can stimulate economic growth and encourage businesses to maintain robust capital spending.

Watling noted, "With lower bond yields and improving housing, both investment and consumer spending could pick up, creating a scenario where the economy enjoys multiple benefits at once."

Tax Incentives and Corporate Investment

Companies are already responding to new tax advantages from the One Big Beautiful Bill (OBBB) Act, signed into law in July. These incentives allow businesses to fully depreciate capital expenditures in a single year, motivating CFOs to accelerate their investment plans to maximize tax savings, according to Charlie McElligott of Nomura Securities.

Persistent Economic Divides

While economic growth continues, affordability remains a challenge for many Americans, with lower-income households struggling to meet basic needs. In response to voter concerns ahead of the midterm elections, President Trump recently criticized large investment firms, such as Blackstone, for purchasing single-family homes as investments.

Inflation Outlook and Housing

Rental prices have begun to moderate after years of steady increases. Goldman Sachs predicts that the Personal Consumption Expenditures (PCE) index will move closer to the Federal Reserve’s 2% target. The firm also points out that the inflationary impact of last year’s tariffs is fading, which should further ease price pressures.

Productivity, AI, and Market Performance

Ben Snider of Goldman Sachs forecasts that strong economic and revenue growth, sustained profitability among leading U.S. companies, and productivity gains from artificial intelligence could drive S&P 500 earnings per share up by 12% in 2026 and 10% in 2027.

Recent data shows that worker productivity grew at its fastest pace in two years during the third quarter, as companies invested heavily in AI while slowing hiring.

This surge in productivity is expected to broaden the ongoing stock market rally, with the S&P 500 and Dow Jones Industrial Average both reaching record highs. Sectors such as Materials, Industrials, Energy, and Consumer Discretionary have led the way as investors reduce their exposure to technology stocks.

Joe Brusuelas, chief economist at RCM, commented, "We're achieving greater output with fewer workers," though he believes the full benefits of AI are still a few years off.

AI’s Impact on the Workforce

Strategists are closely monitoring industries and companies that stand to benefit from leaner workforces and increased AI integration. Sean Clark, CIO at Clark Capital, advises investors to focus on businesses with significant human capital, such as those in finance, retail, consulting, and accounting.

Clark added, "High-quality value companies are beginning to see the positive effects of AI, with improvements in earnings, productivity, and profit margins."

However, some experts caution that rapid AI-driven workforce reductions could pose risks to the broader economy. Tim Urbanowicz of Innovative Capital Management estimates that 15% to 20% of layoffs at the end of last year were linked to artificial intelligence, warning that widespread job displacement could become a significant concern.

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