Economic outlook: Sunny skies with some gray seen for 2026

It should be a good 2026 for the economy, with analysts citing various reasons for positivity, including the One Big Beautiful Bill Act, but the optimism is tempered by some reservations.

"We think it will be a good year," said Wells Fargo Investment Institute President Darrell Cronk. "Trend lines (not just technicals) look positive and durable."

The positive trend line can be attributed to "monetary conditions easing more and faster than people realize," he added. Fiscal policy is "sustainable as the One Big Beautiful Bill Act provides "consumer-friendly stimulus," Cronk said.

Still, "a fair amount of volatility is possible," he said, with tariff uncertainty and mid-term elections at the end of the year.

"The combination of lower interest rates, a rebound in job growth and ? the One Big Beautiful Bill Act" will provide "front-loaded stimulus" in early 2026, according to Scott Colbert, chief economist and director of fixed income management at Commerce Trust.

"So, we wouldn't doubt that economic growth beats (2025)'s economic growth by maybe 0.5% or so."

Commerce sees inflation "closer to 2.5%" in 2026, "which probably also means that the Federal Reserve will come along with at least one or two interest rate cuts as they see inflation peak and roll over."

State Street Investment Management suggests "cautious optimism" in 2026, as "tariff-related uncertainty" brings "more upside than downside risk, and markets (are) buoyed by factors including the rise of AI and increasingly supportive fiscal policies in many major markets."

In fixed income, State Street prefers "government bonds over credit across most advanced economies, given tight spreads, the policy backdrop, and ongoing concerns" that additional shocks may surface.

"While our optimism is tempered by prudence, we believe that markets are generally well-placed to see healthy growth in the year ahead," said Lori Heinel, global chief investment officer for State. "We expect to see increasingly stimulative policy measures implemented across developed markets and a normalization of monetary policy, generating tailwinds for equities."

Still, she added, "navigating fixed income markets will require finesse and we have a preference for sovereign debt, while being opportunistic as credit opportunities arise."

Michael Hartnett, chief investment strategist at BofA Global Research, offers three reasons why yield could fall next year.

"One, it's contrarian. We still think that the market is not positioned for lower bond yields," he said. BofA has "over $4 trillion of private client money allocated in equities and bonds and" the like, with just 4% of that in Treasuries and 66% in equities. "It clearly is still contrarian, and often if you get the right catalyst, you can get a good result from contrarian trades."

The second reason is "the macro. We're going to have a negative quarter of growth in the fourth quarter of 2025, and I think in the first half of 2026," Hartnett said, citing labor market deterioration and sticky inflation. "There must be a risk that some of those tax cuts that everyone's looking forward to get saved and the macro doesn't deliver the boom that everyone feels it's going to deliver in the first half, and that'll be good for bonds."

Lastly, he cited policy. With the Trump administration understanding the need for a smaller budget deficit, Hartnett said, "the way to do that is a weaker dollar and lower bond yields rather than the opposite. For those positioning profit and policy reasons, I still think you could see the 30-year Treasury below 4% and the five-year treasury at around 3% before the end of the first half."

Rates will move sideways in 2026, according to Mark Cabana, head of U.S. rates strategy at BofA.

But the 10- and 30-year tenors will edge up slightly, with the 10-year moving to 4.25%, he said.

Those predictions are based on U.S. resilience in both growth and employment with "inflation that we think will be sticky high," Cabana added.

Still rates are "asymmetrically skewed to lower rates, not higher rates," he said. "The reasons for this are both rooted in macroeconomics as well as in changes in the Fed and Fed composition."

"We continue to believe the new Fed chair will have a strong bias to lower rates, dismiss inflation, and essentially take rates lower than fundamentals might otherwise suggest," Cabana said.

Rick Pederson, vice chairman, economist, and chief strategy officer at Bow River Capital, is "positive about the economy in 2026, with some reservations."

And while he doesn't expect a recession, "that doesn't mean there aren't risks. It's going to be an interesting year. I expect positive economic growth, but it won't be without a few micro-level surprises."

While rate cuts and "subdued inflation" will support fixed income, "scrutiny over policy motives will shape yield curve dynamics," said Janus Henderson Investors' 2026 Fixed Income Outlook, authored by global head of fixed income Alex Veroude.

Subadra Rajappa, head of research at Societe Generale (SCGLF), is also optimistic about next year, partly because consumers have showed resilience. In addition to momentum resulting from private-sector investment, "fiscal stimulus from the One Big Beautiful Bill is frontloaded," she noted.

In addition, expect a first-quarter rebound from the government shutdown, Rajappa said.

Possible negatives are Fed policy, which is on a downward path, she said, and while Societe Generale (SCGLF) expects just one or two cuts in 2026, they remain "concerned about a possible reacceleration of inflation, or at least inflation expectations."

Additionally, tariff uncertainty remains, she said, and mid-term elections late next year add "political uncertainty into the mix and raise the prospect of a gridlocked government." Which could end "what has been a clearly pro-business and pro-market economic policy," she said.

"The fixed income landscape presents a cautiously constructive backdrop," said Mike Goosay, CIO of global fixed income for Principal Asset Management. "While inflation is expected to remain above the Fed's 2% target for the foreseeable future, the central bank is likely to gradually adjust interest rates downward toward a neutral level, projected to be around 3%. Although achieving this target is a priority, the Fed will likely tolerate some inflation beyond this level without compromising price stability. Against this backdrop, the opportunity for attractive income and total return remains, especially for active investors prepared to navigate sector dispersion and policy nuance.

As rates decrease, "there is potential for a steeper curve, which is consistent with prior easing cycles," he said. "Such environments typically lead to appreciation across the yield curve, offering investors opportunities to capture gains alongside income generation.

"Municipal bonds have underperformed other fixed income sectors through most of 2025, resulting in a very attractive risk/return profile, particularly on a tax-adjusted basis," Goosay noted. "Heading into next year, we're in an environment where many coastal states, and parts of the Midwest are raising tax rates, and that's likely to continue. That, in turn, should feed demand and drive attractive returns in the municipal bond space."