Economy

The neutral rate in the US is being propped up by a variety of forces that are at risk of reversing. These include the AI capex boom, large budget deficits, and the extraordinarily high level of household wealth. As such, interest rates are likely to surprise to the downside over the next few years.

The annual benchmark payrolls revisions revealed that the labor market has been weaker for longer than initially reported. The probability that a crack in consumption is just around the corner is much reduced and we have therefore dialed back our recession expectations. Though our asset allocation recommendations remain neutral across the board, we are more optimistic than we were at the beginning of the year.

Core inflation will get close to the Fed’s 2% target by the end of this year.

If humanoid robots were to become substitutable for workers, the AI age could lead to rapid growth in the size of the effective global labor force. The result could be a larger version of the “China shock,” which followed China’s entry into the global economy.

President Donald Trump’s political capital is moderate, as he frontloaded his most disruptive policies within the first year. 

The labor market tightened in January, significantly lowering the odds of a H1 2026 rate cut. Rate cuts driven by lower inflation are still likely in H2 2026.

China is providing limited stimulus, promoting tech and trade, and maintaining a tariff truce with the US in 2026. Structural flaws and great power struggle continue to cast dark clouds over the long run.

The US residential real estate market remains soft. While the decline in mortgage rates is a positive, it is too early to bet on housing becoming the engine of growth for the US economy this year.

Our Portfolio Allocation Summary for February 2026.

It appears that households have been able to spend more than they’ve earned since May by dipping into their swollen brokerage accounts. Bulked-up equity holdings could herald a future where consumption is more sensitive to stock market ups and downs. That’s great in bull markets but could be an unexpected drag on activity when the next bear arrives.