A resilient market at the main level, but with an uneven, policy-driven underlying economy. This is the reality that JP Morgan Asset Management sees for 2026
The company expects another year of economic expansion in the US, but still describes this as a K-shaped path. Richer households and capital-rich companies are retreating, while middle-income consumers and interest-rate-sensitive sectors such as housing remain “damp”.
The bank’s analysts expect heavy budget support from the bank One big, beautiful bill. The real GDP forecast remains resilient, at well over 3% in the first half, before fading to roughly 1 to 2% later. Inflation could follow growth and rise to but no more than 4% on an annual basis before falling back to 2% by the end of the year.
Policy is at the heart of the volatility story. JP Morgan points to three key forces:
- Rates: “Dramatic increases” in US tariffs already generate more than $29 billion in monthly revenue (June-October). So far, retailers have eaten up much of the cost, but the bank expects more of this to be passed on to consumers in late 2025 and early 2026, temporarily boosting inflation and eroding real spending.
- Immigration Policy: A “dramatic decline” in net immigration is likely to mean an outright contraction of the labor force. This development keeps unemployment more or less stable, but limits job growth and real GDP in the longer term.
- AI investment: Investments in data centers and AI are expected to reach roughly $588 billion by 2026 (approximately 1.2% to 1.3% of US GDP). AI remains the primary driver of U.S. earnings power and an increasingly important global growth engine. Still, there are clear downside risks if adoption or input constraints (power, chips) disappoint.
Bonds and shares
The bank is quite conservative when it comes to interest rate cuts. With inflation still around 3% and rate effects at play, the bank expects a more ‘patient’ Fed than markets would like. Their range: 2-year government bonds around 3.5%–3.75% and 10-year yields in a range of 4.0%–4.5%, with a modest steepening curve. This is an interesting angle given President Donald Trump’s continued push to cut interest rates.
Looking to 2026, the bank advises market participants to focus on duration rather than direction and expect interest rate volatility.
“More than trying to perfectly capture return levels, investors should focus on fixed income income, especially linked to solid corporate, consumer and municipal balance sheets,” the bank said. iShares 10-year investment grade corporate bond ETF (NYSE:IGLB) is up 3.28% this year.
Inflation hedges such as TIPS and commodities still play a role, she said. Due to rising domestic debt levels and uncertainty about inflation, non-US Treasuries and emerging market local currency debt are valuable diversifiers.
As far as equities are concerned, JP Morgan acknowledges the high valuations, but does not dare to call it a bubble. The “Beautiful 7‘ still dominate profits and capital investments, although the bank expects some ‘broadening’ of profit growth.
Globally, international equities will outperform the US by about 1,520 basis points in 2025, and the bank thinks there is more room to catch up. First, it notes that the US dollar is still 10% above what it considers to be fair value. It then points to the US equity premium over international markets, which remains at 34% (versus a long-term average of 19%).
Finally, there is support for a gradual rotation, with the US still accounting for over 65% of global benchmarks and 40% of domestic market capitalization in just ten names. Choosing select value and international markets, while maintaining core exposure to secular AI winners. Investors who follow this advice may want to keep an eye on ETFs like ETFs Core MSCI Emerging Markets ETF (NYSE:IEMG).
Four themes that are difficult to ignore
For the future, the bank sees four structural themes that are too urgent to ignore.
Positive nominal growth and the end of negative interest rates are revitalizing European and Japanese companies, especially in the financial sector. The AI theme continues to broaden, reaching from US tech giants to semiconductors, cloud services and robotics in Asia and emerging markets.
Moreover, significant fiscal spending, especially in the Eurozone and Japan, boosts public investment in infrastructure and defense, favoring domestic companies.
Finally, the growing focus on shareholder returns, including buybacks and higher dividends, is spreading globally as Europe and Asia increasingly adopt policies once unique to the US.
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