Why 2026 could be a turning point for the US economy
By Simon French, Chief Economist and Head of Research
At this time of year City economists are tasked with staring into their crystal ball, and to publish their year-ahead forecasts. Some forecasts are useful. Most forecasts, candidly, are not. That candour is not to besmirch the forecasting profession. Investors often seek a hook on which to hang their investment decision, and an economic forecast - however flawed - is one such hook.
My own experience of the last month has been an extraordinary level of investor interest in forecasts for the US economy. Even allowing for the fact that the US is the world’s largest economy and has a huge impact on the global growth, this year’s interest in what happens next in the US been particularly high. The time-honoured metaphor to roll out at this point is to note that when the US economy sneezes, the world economy catches a cold. Updated for 2026 I would suggest when the US economy whistles, the world economy takes note. Right now that whistling is both shrill, and getting louder. Heads are popping up all over the world.
In the UK, an estimated 55% of assets held in workplace pension schemes are in the stocks of US-listed companies, or in US Dollar-denominated debt. It remains a remarkably underappreciated fact that the future retirement incomes of UK savers are more directly geared to the performance of the US economy than any other, including the UK itself.
That exposure is both a function of, and amplified by the historic growth of US corporate earnings, US economic growth, US productivity - and the relative strength of the US Dollar. But that performance, stellar as it has been, is now in the rear-view mirror. What happens now is relevant for future investment returns.
2025 was a year that saw the value of the US Dollar - against a broad basket of other fiat currencies - fall by 9%. Returns on the US stock market underperformed the Rest of the World by 11%. That was its biggest such lag since 2009. Are those data points blips in an extraordinary era of US financial market dominance, or are they telling investors what partisan Op-Eds and social media often seek to obfuscate? In short, what is going on under the hood of the world’s pre-eminent economy?
At times like this, timely and reliable economic data should provide helpful clues. Alas, two problems abound. First, there has recently been a lack of such data as the US government was shut down for 43 days at the end of last year - the longest period in America’s history. This disrupted data collection and publication. It obscured what was already a hazy vista.
Second, what economic data there has been published has thrown off conflicting signals. Just last week pessimists could point to the slowest growth in US jobs – outside the COVID-19 pandemic – since 2003. In adding just 584,000 jobs across the whole year, compared to 2.2million in 2024, the US economy may be softer than reported in the GDP dataa. It would be easy to pool together the impact of import tariffs, immigration control, and the generational disruption to labour markets posed by AI and construct a very cautious economic outlook. However at the same time productivity achieved a stunning annualised growth of 4.9% in the third quarter of last year. This was up 1.9% on a year ago. These are productivity growth rates that European economies can only dream of right now. The fourth quarter of the year also looks set to see a bumper jump in economic output as imports volumes shrink – even though this looks to have been heavily influenced by erratic volumes of pharmaceutical and gold imports.
What can safely be concluded, nine months on from the President Trump’s self-styled “Liberation Day”, is that the most acute fears surrounding growth and inflation in the US have failed to crystallise. This is still an economy with a huge fiscal deficit underwriting economic activity. Still with a corporate sector at the vanguard of AI investment and innovation. Still an economy served by deep capital markets, enviable network effects, and a pipeline of intellectual property that is the envy of the Western world. And now it is poised to have a new chair of the Federal Reserve rather more amenable to the President’s boosterish tendencies, and lower interest rates.
What 2026 looks set to test is whether that most contemporary of political traits - economic cakeism - can be pursued without substantial collateral damage. The Trump administration would like the US Dollar to remain at the epicentre of global commerce, but rhetorically it is threatening to weaponise Dollar swap lines, Treasury debt markets, potentially even global payment systems. It is hard to see how those dual objectives are simultaneously achievable. A range of commodities including Gold, Copper, and cryptoassets are the canaries in the mine all gasping for breath.
The current US administration also favours shrinking the US trade deficit but also retain a highly competitive cost of capital for its corporate base. It is hard to see such favourable financing conditions persisting if fewer export dollars are sent around the world for reinvestment back into the US stock market, and to buy US Treasuries.
The administration would like to retrench its security role in the Eastern hemisphere, and yet retain technology primacy, including in defence, across those jurisdictions. It is hard to imagine the grand strategic bargain of the last thirty-five years since the end of the Cold War be allowed to break down on only one side.
If any modern economy can achieve these three seemingly mutually contradictory positions, it is the US. This is one of the reasons why, despite all the reasons to be fearful, the US stock market continues to trade close to its all-time high, maintains valuations at multiples well in excess of other major bourses, and US debt remains well bid in auctions, and in the secondary market.
It is however likely that economic historians will look back at this period as a turning point for US exceptionalism. Quietly, yet steadily, investment committees will meet across the world and trim their exposure to the US economy. Gradually, government procurement activities and policy will factor in a less reliable US counterparty and begin the journey of reducing reliance on the US technology stack and defence architecture. The sheer dominance of US economic power means these trends will be unobservable for quite some time. But the world order is now changing fast. And it follows that the flow of capital will change with it
