The 2026 Resilience: JP Morgan Forecasts a "Pro-Growth" Expansion for the US Economy

JP Morgan's central thesis for 2026 is one of resilient, if uneven, expansion. The firm forecasts a 2026 U.S. real GDP to expand at a similar 1.8% pace as 2025, but with a distinct "tale of two halves." Growth is expected to be stronger in the first half, buoyed by personal income tax refunds and sustained AI-related capital spending, before moderating toward the year-end. This setup defines a "pro-growth" expansion: one where economic momentum is supported by structural investment and fiscal stimulus, even as it slows from its initial peak.

The defining characteristic of this expansion is its inflation profile. JP Morgan expects inflation to remain rangebound, still above target, but not broadening to the stickier components. Specifically, PCE inflation is forecast in a 2.4-2.5% range. This persistent overshoot is driven by a mix of factors: the initial impact of tariffs, a weakening dollar, and fiscal stimulus in the first half of 2026. The interplay is key. Elevated inflation, even if not accelerating, is expected to keep the Federal Reserve on a cautious path, maintaining an easing bias but limiting the pace of cuts.

This creates a unique macro environment. The expansion is not a typical low-growth cycle. It is powered by the convergence of three forces: ongoing fiscal stimulus from the One Big Beautiful Bill Act, a monetary policy stance that is easing but not aggressively so, and a structural investment boom in AI infrastructure. The result is a forecast of stability with elevated price pressures, not a return to the disinflationary trends of the past decade. The firm puts the odds of the U.S. staying in expansion mode at 80%, with a 20% chance of reacceleration-a call that reflects confidence in this resilient setup.

The Policy Engine: Fed and Fiscal Dynamics

The 2026 expansion is being powered by a deliberate, if cautious, policy engine. The Federal Reserve has already delivered a total of 75 bps in cuts this year, but its forward path is defined by division and data dependence. The recent 25-basis-point reduction to a target range of 3.50%-3.75% was the final cut of this easing cycle, with the committee's statement now suggesting a January reduction is unlikely. This reflects a Fed deeply split on the inflation outlook. While the median projection calls for just one more cut next year, the range of views is wide: some governors voted for no further reductions, while others advocated for a larger half-point cut. This internal tension means the pace of any future easing will be slow and contingent on incoming data, not a pre-announced script.

Fiscal policy is providing a targeted, front-loaded boost. The One Big Beautiful Bill Act (OBBBA) is expected to deliver modest stimulus through the first half of 2026, primarily via personal income tax refunds. These refunds are a key pillar in JP Morgan's "tale of two halves," designed to buoy consumer demand and support growth momentum as the economy begins to slow. However, this fiscal tailwind is temporary. As it fades, it will not fully offset the broader headwinds of moderating job growth and the eventual phasing out of the stimulus. The policy mix, therefore, is one of easing monetary policy meeting temporary fiscal support, creating a setup where financial conditions remain accommodative but not aggressively so.

The bottom line is a policy environment calibrated for stability, not a rapid acceleration. The Fed's easing bias is intact, but its pace is constrained by persistent inflation and internal disagreement. Fiscal stimulus provides a useful first-half lift, but its transitory nature means the economy must increasingly rely on its own structural drivers-namely, sustained AI-related capital spending. This combination is likely to keep financial conditions supportive, but it also means the risk of a sharper slowdown in the second half is elevated. The policy engine is running, but it is not designed to push the economy into overdrive.

Corporate and Market Implications

The macro forecast of a "pro-growth" but moderating expansion sets a clear, if challenging, stage for corporate America. The investment environment is defined by a critical disconnect: while business leaders remain optimistic for their own companies (71%), their view of the broader economy is subdued, with only 39% optimistic. This gap suggests a focus on internal resilience and AI-driven efficiency, but a cautious stance on external demand.

For earnings, the setup points to softer growth. JP Morgan's forecast of GDP moderating to a 1.0-1.5% pace in the second half implies a softer economic growth implies softer earnings growth. This is the primary headwind. Yet, a powerful offset is emerging: sustained AI-related capital spending. This structural investment is becoming a key growth anchor, fueling both higher imports and domestic capital expenditure. For core AI businesses, this trend provides a partial substitute for broader demand, allowing them to maintain momentum even as the macro economy slows. However, for the broader corporate sector, this investment is a cost, not a direct revenue driver, and it will likely pressure margins in the near term.

Persistent inflation is the other defining feature. With PCE forecast in a 2.4-2.5% range, the Fed is expected to keep rates from being truly restrictive. This supports asset prices and limits the risk of a severe financial shock. But it also means the cost of capital remains elevated by historical standards, capping the potential for a massive re-rating of equities. The inflation overshoot, driven by tariffs and fiscal stimulus, creates a complex backdrop. While businesses have absorbed some tariff costs, 61% report a negative impact on their costs, pressuring profitability. The weakening dollar adds to input cost pressures, further complicating the earnings picture.

The bottom line for investors is a market in search of quality. The combination of stable growth and elevated rates favors companies with durable pricing power and efficient capital allocation. The AI investment boom will continue to be a theme, but its benefits will be unevenly distributed. The risk to the baseline outlook is tilted to the downside, with the potential softening of the labor market and ongoing policy uncertainties creating a zone of persistent volatility. In this environment, the investment case shifts from chasing broad growth to identifying those firms that can navigate the "tale of two halves" with resilience.

Catalysts, Scenarios, and Key Watchpoints

The baseline forecast of a resilient, "pro-growth" expansion is not a guarantee. It is a scenario that depends on a delicate balance of forces, and several forward-looking factors will determine whether it holds or breaks down. The primary upside catalyst is a reacceleration of inflation. JP Morgan itself assigns a 20% chance that the economy exceeds expectations and leads to a reacceleration of inflation. If persistent price pressures broaden beyond the current rangebound profile, it could force the Federal Reserve into a more aggressive pivot. This would be a powerful market catalyst, as it would signal that the disinflationary trend has ended and that the Fed's easing bias could be sustained for longer, potentially boosting asset prices.

The main downside risk, however, is a sharper-than-expected softening of the labor market. The forecast already assumes a moderation in job growth, but the economy's resilience hinges on the labor market not deteriorating further. As noted, the current setup is supported by margins near historic highs and limited talk of job cuts, which should help stabilize conditions. Yet, if hiring slows more abruptly than anticipated, it would provide a stronger case for the Fed to cut rates more aggressively to support growth. This would be a signal that the "tale of two halves" is tipping toward a more pronounced slowdown in the second half, invalidating the baseline stability.

For investors, the path of the economy will be revealed through specific data points. Three metrics are critical to monitor. First, housing starts are a key leading indicator of the broader economic cycle and a major driver of inflation, particularly through shelter costs. Second, AI capital expenditure data must be watched for signs of sustained momentum. This structural investment is the primary anchor for growth in the second half, and any deceleration would directly challenge the forecast. Finally, the path of shelter inflation is essential. It is a key component of the Fed's target and a major source of stickiness; its decline is central to the forecast of inflation remaining rangebound.

The bottom line is that the 2026 outlook is a story of forward-looking validation. The policy engine is in place, but its effectiveness depends on how these specific catalysts and watchpoints unfold. The market must remain vigilant for the first signs that the labor market is losing its grip or that inflation is breaking out of its expected range.