Wall Street strategists predict that driven by factors such as Federal Reserve interest rate cuts, tax incentive policies, and lower-than-expected inflation, investors may experience a "best of both worlds" scenario in 2026, with the stock market poised for gains.
This week's highly anticipated monthly Consumer Price Index (CPI) report is due for release, with the market expecting the year-on-year increase to hold steady at last month's rate of 2.7%, unchanged from before. Strategists point out that current lower oil prices and moderating housing costs are signals of cooling prices.
"Our view is that the inflation rate for 2026 may see an unexpected downward move," Chris Watling, Global Economist and Chief Market Strategist at Longview Economics, stated in an interview with Yahoo Finance last week.
However, not all economic news is positive. The employment report for last month, released on Friday, showed that the number of new jobs created fell short of expectations, capping off a weak 2025.
But the cooling labor market precisely provides a rationale for the Fed to cut interest rates this year, which is expected to push bond yields lower. This trend is likely to be more pronounced, especially after Fed Chair Jerome Powell's term ends in May, if a successor nominated by President Trump can steer the Fed towards a more accommodative policy stance.
Lower yields mean reduced borrowing costs, which can both stimulate economic activity and support businesses in maintaining high levels of capital expenditure.
Watling added, "As the year progresses, the U.S. economy is likely to experience strong growth. The reason is that business capital expenditure will continue to be a driving force, while the consumption sector will gradually recover as the housing market stabilizes and bond yields fall. This is what I refer to as the 'best of both worlds' scenario."
Wall Street is already detecting "early signals" of economic recovery—businesses are actively utilizing the depreciation tax incentives provided by the "Better Vision Omnibus Act" signed by the Trump administration last July.
Charlie McElligott, Nomura's Equity Derivatives Analyst, wrote in a report last week, "If you are a company CFO, and the Better Vision Act allows you to expense 100% of your capital expenditure for tax purposes in the current year... you would absolutely want to pull forward as much capex from future years into 2026 as possible, otherwise you risk being fired for missing out on the tax benefit."
It is noteworthy that alongside economic growth, livelihood pressures stemming from the "K-shaped recovery" persist, with low-income groups still struggling to meet basic needs. To address public demands for "affordability" ahead of the midterm elections, Trump recently criticized companies like Blackstone for bulk purchases of single-family homes as investments, an issue that has become a major focus for voters.
After years of continuous increases, rental prices have begun to decline. Goldman Sachs Group notes this is one reason why the core Personal Consumption Expenditures (PCE) index is expected to gradually converge towards the Fed's 2% inflation target. The firm also mentioned that the one-off price increase effects from last year's tariff policies are fading, which will further alleviate inflationary pressures.
Goldman Sachs analyst Ben Snider wrote in a note on Wednesday, "Solid economic and revenue growth, continued strength in earnings for large U.S. companies, and productivity gains from the application of AI technology are expected to drive S&P 500 earnings per share growth of 12% in 2026 and 10% in 2027."
Recent data shows that U.S. worker productivity growth in the third quarter hit a two-year peak, as companies increased investments in AI and slowed their pace of hiring.
Market participants expect that productivity gains will broaden the market's rally. Last week, both the S&P 500 and the Dow Jones Industrial Average reached record highs. As investors reduced exposure to the technology sector, materials, industrials, energy, and consumer discretionary sectors led the gains.
"We are producing more with fewer people," said Joe Brusuelas, Chief Economist at RSM, in an interview with Yahoo Finance on Friday, although he believes the full effects of AI will take another two to three years to fully materialize.
Against this backdrop, strategists are closely monitoring industries and companies poised to benefit from the trends of "leaner staffing" and "AI adoption."
"Focus on human capital-intensive businesses, such as financial institutions, retailers, consulting firms, and accounting firms," Sean Clark, Chief Investment Officer at Clark Capital, recently told Yahoo Finance.
He further added, "High-quality value stocks are beginning to benefit from this AI revolution, seeing boosts to corporate earnings, productivity, and profit margins."
However, some market voices are sounding a warning: if AI technology replaces labor too rapidly, it could pose a sudden threat to the overall economy.
"We call it the 'dark side' of AI," said Tim Urbanovich, Chief Investment Strategist at Innovative Capital Management, in an interview with Yahoo Finance. He estimates that 15% to 20% of job cuts towards the end of last year were directly related to the application of AI technology.
He also stated, "Once signs emerge of the labor market being displaced on a large scale by AI, we believe this will evolve into a challenging economic problem."
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