Now what?

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   By Guest Blogger Ryan Lewenza

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2025 was a tale of two halves. The first half was defined by President Trump’s sweeping tariff announcements and his bold attempt to reshape the global trading system. Historically, the U.S. and the Republican party championed free trade and lower tariffs, but Trump shattered that long-standing orthodoxy by imposing the largest tariffs on U.S. imports in decades. As trade negotiations progressed, the average tariff rate on U.S. imports surged from just 2.4% before Trump’s second term to over 14% today – the highest level since 1934 (Smoot-Hawley tariffs).

U.S. effective tariff rate (%)

Source; Yale Budget Lab, Charlie Biello

Economists and investors were rattled after Trump’s “liberation date,” when he unveiled far higher “reciprocal rates” than anyone expected. The reaction was understandable – such steep tariffs threatened to deliver a major blow to global trade and, by extension, economic growth. We saw several economists lower their GDP forecasts following these announcements.

Then came the so-called “TACO trade” – Trump Always Chickens Out – as he reversed course and sharply reduced the initial tariff rates. This pivot eased fears, prompted a reassessment of economic risks, and fueled a second half market rebound.

The shift is evident in GDP forecasts for 2025 and 2026: estimates plunged from roughly 2% at the start of the year to 1.3% in early spring, before steadily climbing again. The second half of the year was defined by fading tariff concerns and a broad economic and market recovery.

US GDP forecasts plunged following Trump’s tariff announcements

Source: Bloomberg, Turner Investments

Despite all the negative headlines and lingering risks, the U.S. and global economies are expected to continue growing in 2026, with recession odds remaining low. That said, we must monitor key economic indicators closely for any signs of emerging weakness.

Currently, the U.S. economy appears resilient: GDP grew 4.3% in Q3/25, unemployment stands at 4.7%, AI-related capital expenditures are projected to reach $550 billion this year, and consumer spending – two-thirds of the U.S. economy – remains healthy.

And we see several factors that could support growth in 2026.

First, are interest rate cuts from the U.S. Federal Reserve (Fed). The Fed lowered rates three times in 2025, and markets anticipate one or two additional cuts this year. Lower borrowing costs typically boost consumer spending, housing activity, and business investment.

Second, the recently passed One Big Beautiful Bill (OBBB) introduces significant tax cuts, including eliminating taxes on tips and Social Security. Economists estimate these measures could inject over $300 billion into the economy as larger tax refunds translate into higher household spending.

Finally, tech giants such as Meta, Amazon, and Google are expected to invest more than US$550 billion in AI initiatives in 2026. AI-related capital spending accounted for 1.1% of U.S. GDP in 2025 and should remain a meaningful growth driver.

However, risks persist. Chief among them is the slowdown in the labor market. In 2024 U.S. job growth averaged 170,000/month and in 2025 this slowed to just 55,000/month. In fact, the U.S. economy posted three months of job losses since the summer. As a result, unemployment has climbed from 4% in January 2025 to 4.6%. This weakness appears linked to both Trump’s tariffs and AI-driven disruption. The key question: is this a temporary setback – or the start of a deeper trend?

U.S. labour market has weakened with unemployment rising to 4.6%

Source: Bloomberg, Turner Investments

Second, could inflation reaccelerate in 2026? According to JP Morgan, roughly 80% of businesses absorbed tariff costs in 2025, but that figure is expected to fall to just 20% this year. So far, President Trump has been vindicated – his tariffs have not triggered a major inflation spike, with current inflation at 2.7% yoy, only slightly above the Fed’s 2% target.

However, if inflation picks up meaningfully in 2026 with tariffs now firmly in place, the new Fed chair may be forced to consider rate hikes. President Trump is expected to announce his choice for Fed chair soon, and his two leading candidates – Kevin Warsh and Kevin Hassett – have signaled strong support for lower rates, partly to align with Trump’s agenda. The question is whether the Fed will remain independent and data-driven, or whether politics will influence monetary policy. This is a key risk to watch.

US inflation levels are approaching 2%. Will it last?

Source: Bloomberg, Turner Investments

For the Canadian economy, we expect growth to remain subdued, where strength in certain sectors is offset by weakness in others, such as autos and steel. Consensus GDP forecasts calls for a slowdown from 1.7% yoy in 2025 to 1.3% in 2026. But like the US, Canada should avoid a recession.

While our base case assumes the global economy will continue expanding, albeit at a slower pace than in 2025, several factors could disrupt this outlook. As such, we need to remain flexible and vigilant, ready to adjust as conditions evolve.

GDP growth forecasts

Source: Bloomberg, Turner Investments

Turning to the stock market outlook.

After three strong years for equities, a more cautious approach and reduced risk-taking is prudent. We remain cautiously optimistic on global equity markets and see potential for further upside in 2026, though returns are likely to be more muted.

Several factors support this outlook:

• Continued Economic Growth: As discussed, both the U.S. and global economies are expected to expand in 2026, with recession risks remaining low.
• Fed Rate Cuts: The Federal Reserve is expected to continue lowering interest rates, which historically provides a tailwind for equities. One notable analysis examines S&P 500 performance after the Fed resumes rate cuts following a pause – similar to the current cycle. Historically, the index rallied an average of 20% over the following year during non-recessionary periods. Given our view that a U.S. recession is unlikely in 2026, this pattern suggests further gains if the Fed continues easing policy.
• Earnings: The outlook for corporate profits remains strong – historically the primary driver of stock prices over the long run. Analysts are projecting S&P 500 earnings to rise by 15% this year and an impressive 17% for the TSX. With valuations already elevated (i.e., high P/E ratios), earnings growth will be critical for sustaining market momentum. If profits continue to trend higher, we could see a fourth consecutive year of gains.
• AI: AI capex investment should remain a powerful tailwind for both the economy and equity markets in 2026. Continued spending by major tech firms is expected to support growth and potentially drive further upside for stocks.

S&P 500 performance following Fed rate cuts

Source: Raymond James US Strategy

Finally, as we highlighted last year, we anticipate heightened market volatility throughout 2026, driven by an aging bull market, ongoing geopolitical uncertainty, and the U.S. mid-term elections.

The chart below illustrates the typical performance of the S&P 500 over the four-year presidential cycle. This year marks Year 2 of the cycle, which coincides with the mid-term elections. Historically, the S&P 500 tends to weaken heading into the fall, just before mid-terms, but then rallies strongly afterward. In fact, based on our analysis, the index has delivered positive returns six and twelve months following mid-term elections every time since 1945. This suggests we could see some softness during the summer and fall, followed by a strong rebound into year-end and into 2027.

Average S&P 500 performance over 4-year cycle

Source: Bloomberg, Turner Investments

In summary, our base case is that the U.S. and global economies will continue to grow in 2026, supporting higher corporate profits and stock prices. However, after three years of strong gains and with risks elevated, it’s critical to stay vigilant and ready to adjust if signs of an economic slowdown or a potential bear market emerge. Maintaining a balanced and globally diversified portfolio remains essential to navigate potential volatility and protect portfolios while positioning for long-term growth.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2026/01/10/now-what-13/