Markets Higher in 2026:  At the Intersection of Tariffs, AI and Manufacturing

For investors, we see an unusual mix of events bolstering markets, even as employment gains are weak. 

First, Powell intentionally raised uncertainty about further rate cuts in the near-term.  But we believe the evidence suggests the Fed will still be cutting rates amidst a hiring slump.

Second, we expect employment growth in construction and trade-sensitive industries to recover modestly in 2026.  Business caution over tariffs and abrupt changes government policy is likely to abate next year, at least compared to the sharp deterioration in 2025. At the same time, investment spending on AI infrastructure should remain at a very strong pace for the year ahead amid rapid technological advancement and obsolescence. Fed rate cuts are helping to cement strong credit market conditions allowing tech firms to borrow and invest more cheaply. 

Third, employment will slow in other sectors as AI impacts certain white-collar elements of the US economy.  Entry level college employment is one example.

We expect three more 25 basis point rate cuts with the cuts ending in 1H 2026.  Therefore, we see the funds rate bottoming in the 3%-3.5% range from 3.75%-4% today.