K-Shaped Growth And Policy Volatility, JP Morgan's 2026 Outlook

Benzinga · 1d ago

A resilient market at the headline level, yet with an uneven, policy-driven underlying economy. This is the reality that JP Morgan Asset Management sees for 2026

The firm expects another year of U.S. economic expansion, yet describes it as a K‑shaped path. Wealthier households and capital-rich corporates pulling away, while middle‑income consumers and rate‑sensitive sectors like housing remain "soggy."

The bank's analysts see heavy fiscal support from the One Big Beautiful Bill Act. The real GDP forecast stands resilient, at above 3% in the first half, before fading to roughly 1 to 2% later. Inflation could follow growth, rising toward but not exceeding 4% year-over-year before sliding back to 2% by year-end.

Policy is at the heart of the volatility story. JP Morgan points to three key forces:

Tariffs: "Dramatic increases" in U.S. tariffs are already raising over USD 29 billion in monthly revenue (June–October). To date, retailers have eaten much of the cost, but the bank expects more of it to be passed on to consumers in late 2025 and early 2026, temporarily boosting inflation while eroding real spending.
Immigration policy: A "dramatic decline" in net immigration is likely to mean outright contraction in the working‑age population. That development keeps unemployment roughly stable but caps job growth and long‑run real GDP.
AI investment: Data‑center and AI capex is projected to reach roughly USD 588 billion in 2026 (about 1.2–1.3% of U.S. GDP). AI remains the primary driver of U.S. earnings strength and an increasingly important global growth engine. Still, it has clear downside risks if adoption or input constraints (power, chips) disappoint.

Bonds and Equities

The bank is rather conservative regarding interest rate cuts. With inflation still around 3% and tariff effects in play, the bank expects a "more patient" Fed than markets would like. Their range: 2‑year Treasuries around 3.5%–3.75% and 10‑year yields in a 4.0%–4.5% band, with modest curve steepening. It is an interesting take given President Donald Trump's persistent pressure for lower rates.

Going into 2026, the bank advises market participants to focus on duration rather than direction and expect rate volatility.

“More than trying to perfectly capture yield levels, investors should lean into the income in fixed income, especially tied to solid corporate, consumer, and municipal balance sheets,” the bank said. iShares 10 Year Investment Grade Corporate Bond ETF (NYSE:IGLB) has gained 3.28% year-to-date.

In its view, inflation hedges such as TIPS and commodities still have a role. Owing to rising domestic debt and inflation uncertainty, non‑U.S. sovereigns and EM local‑currency debt are valuable diversifiers.

On equities, JP Morgan acknowledges stretched valuations but stops short of calling a bubble. The "Magnificent 7" still dominate earnings and capex, though the bank expects some "broadening" of profit growth.

Globally, international equities outperformed the U.S. by about 1,520 bps in 2025, and the bank thinks that catch‑up has more room. First, it notes that the U.S. dollar is still 10% over what it deems as fair value. Then it points to the U.S. equity premium over international markets, which remains at 34% (vs. a 19% long-run average).

Finally, with the U.S. still accounting for over 65% of global benchmarks and 40% of the domestic market cap in just 10 names, there is support for a gradual rotation. Tilting toward select value and international markets while maintaining core exposure to secular AI winners. Investors heading this advice might keep an eye on ETFs such as Core MSCI Emerging Markets ETF (NYSE:IEMG).

Four Themes That Are Hard to Ignore

Going forward, the bank sees four structural themes too compelling to sit out.

Positive nominal growth and the end of negative rates are revitalizing European and Japanese companies, particularly in financials. The AI theme continues to broaden, extending from U.S. tech giants to semiconductors, cloud services, and robotics across Asia and emerging markets.

Furthermore, significant fiscal spending, particularly in the Eurozone and Japan, is boosting government investment in infrastructure and defense, favoring domestic companies.

Finally, a growing focus on shareholder returns, including buybacks and higher dividends, is spreading globally, as Europe and Asia increasingly adopt policies once unique to the U.S.