Market Commentary

• We do not see the U.S. economy dipping into a recession this year as consumer spending should continue to grow modestly with growth in real incomes.
• We also still see plenty of up and down in equity prices but ultimately a higher S&P 500 Index by the end of 2026.

It’s that time of year when we begin to look beyond just what we think is going to happen over the balance of the current calendar year and make economic and market projections for the next year-end, in this case, 2026. As we have in recent years, we published our targets and projections ahead of when our Midyear Outlook report is due to be published.

From a high-level economic standpoint, after a continued growth slowdown over the next couple of quarters, we expect a modest rebound in gross domestic product (GDP) from the 1% we are projecting for this year to an improved 1.8% next year. We do not see the U.S. economy dipping into a recession this year as consumer spending, while weaker than the second half of last year, should continue to grow modestly with growth in real incomes (income adjusted for inflation). Unemployment should rise under below-average economic growth, but our 5.3% projection for 2026 is far below a recessionary level.

We also took the opportunity to make a few adjustments to 2025 targets. The U.S. dollar has been a big topic of discussion in recent months as some financial pundits have predicted that part of the longer-term tariff impacts would be less demand for U.S. assets and a “de-dollarization” of the global economy. But we view the dollar’s demise as unlikely, and we continue to see broad international buying of U.S. Treasury securities — and a stronger dollar over the next 18-plus months.

We also adjusted down our 2025 targets for oil as the Organization of the Petroleum Exporting Countries and their allies (OPEC+) recently decided to continue unwinding its production cuts, which will add to the already ample global supply of crude. This year’s targets move to $60 – $65 per barrel for West Texas Intermediate crude versus the previous $65 – $75 and $65 – $75 for Brent crude versus the previous $70 – $80. We believe better global growth in 2026 should carry crude oil prices modestly higher next year.

What hasn’t changed is our focus on quality and selectivity while financial markets are likely to show lots of up and down. We still see plenty of up and down in equity prices but ultimately a higher S&P 500 Index by the end of 2026. Our year-end 2026 target range is 6,400 – 6,600. And we see quality as a way to potentially play defense and offense in a noisy uptrend. In our view, quality companies can help defend against market pullbacks by virtue of strong and stable profit margins, low debt, and steady cash flow. They also have the size and earnings potential to possibly outperform (“play offense”) through choppier economic periods that put smaller peers under earnings pressure. Fixed-income markets are also likely to be volatile, and we favor selectivity. We favor high-quality investment-grade corporates and general-obligation and essential-service municipals. And we would be choosy on maturities, preferring the range of three to seven years.

Look for our Midyear Outlook report to be published on Tuesday, June 10, and refer to our Institute Alert titled “Introducing Our 2026 Targets” that was published last Thursday, May 15, for more detailed discussions.

Forecasts, estimates, and projections are not guaranteed and are based on certain assumptions and views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing.

Investment Grade bonds - A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

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