2026 Economy Outlook: David Richards

Richards’ 2026 Projection: Anticipate a continued battle between inflation and unemployment, but corporate earnings will continue to rise at a faster than historically normal rates.

The S&P 500 was up 15% in 2025. That’s down from last year’s performance but still strong. Talk about stock market performance that you’re expecting in 2026 and then some of the biggest factors that will influence that.
We’re up in what would historically be considered an extremely good year, but given the returns of the last two years of 20-plus percent, it seems somewhat benign to be in the mid-teens. As we look out to next year, we think many of the factors that have driven the market over the last few years continue to drive it higher in ’26, specifically corporate earnings. Earnings [in 2025] have risen between 10% and 12%. That’s pretty robust. And right now, the anticipation is that earnings grow even more in ’26 ... between 13% and 17%. Even if valuations don’t expand at all and the market were to just appreciate with earnings, that would be a mid-teens earnings year for the market as a whole. So what’s behind those earnings growth? The One Big Beautiful Bill is very stimulative, both for individuals as well as corporations. The economy is growing very robust. The GDP numbers that came out (Dec. 23) and said the economy’s growing more rapidly than what we anticipated. AI and enhancement of productivity is a factor driving corporate earnings. Some of the other policies within the political environment, deregulation specifically, are driving some corporate growth. And then interest rates stabilizing and/or coming down are stimulative for the economy. All of those things put together, we think, continue to drive corporate earnings in the mid-teens for 2026.

At the end of 2025, we were seeing the U.S. labor market slowing. Maybe there haven’t been full-scale layoffs, but we’re seeing some reduction in force. As of mid-December, the economy added about half a million jobs in 2025. In that same time frame in 2024, we were looking at about 1.6 million jobs added. What does the labor market picture tell you about what we can expect going into 2026?
We’re Americans – if we have jobs, we’re going to spend that money plus a little bit normally, and we’re going to go out and consume goods and services. When we don’t have jobs, we don’t. And that would hurt corporate earnings. The labor market’s really unique because we have a very recency bias. The labor market has weakened substantially over the last four years in that the number of jobs created has slowly declined. And in fact, this year … it’s declined rather precipitously. So what’s behind that? We currently have an unemployment rate of 4.6%. It was about 4.4% just last quarter. I think we started the year in the low 4%. Four years ago, the labor market was at 3.3%. The natural rate of unemployment, as defined by the St. Louis Federal Reserve, is somewhere between 4.1% and 5%. That’s what they said is a good, healthy labor market. We’re really right in the middle of that range. As labor demand has decreased, the number of jobs created has decreased consistently throughout this year and over the last couple of years. Jerome Powell, when he gets on stage and gives a press conference about the Federal Reserve lowering interest rates in response to the weakening labor market, he’s quick to point out that labor demand has declined, but labor supply has declined as well. There are multiple factors that are going into that labor supply. Predominantly are the baby boomers retiring, and they’re retiring at about four million people a year that are still theoretically part of the labor force but they’ve chosen not to participate anymore because they want to retire. Domestically, new entrance into the labor force has actually declined and it’s declined because we had what our chief economist called the baby bust. Right about the time of the great financial crisis, families started having about half a kid less than what they did the previous two decades. And then of course also in the labor supply portion is the big story that we’ve all heard a lot about, and that’s immigration. We’ve not only constrained the illegal immigration in lower end of the labor market, but we put some constraints on the higher end and H-1B visas and providing inputs for those. So, labor demand has come down, but labor supply has come down as well. I don’t know that anybody’s real comfortable yet about where equilibrium lies between those two.

Retiring Federal Reserve Governor Stephen Miran said in December that the central bank is at risk of sparking a recession unless it continues to lower interest rates in the coming year. Do you agree with his assessment, and how many rate cuts are you expecting in 2026?
I would hate to be on the Federal Reserve Board right now. They’ve got the dual mandate to fight inflation and full employment. And the problem is, as we just quantified, the labor market’s probably still right in the middle of the band of what would be an acceptable employment rate, but inflation actually continues to tick higher because of many of these stimulative things we think will play in and help corporate earnings are driving prices higher. In fact, since April, core personal consumption expenditures has gone up every month. So, lowering the interest rate only enhances inflation, theoretically, but how far do you let the labor market deteriorate? You don’t want to be too reactive and we end up with the faltering labor market before we take any action at all because there are long and variable lags to all this. For 30 years, we had absolute unanimous votes on the direction and the magnitude of Fed cuts. And here over the last two meetings we’ve had dissent. Some still believe that inflation’s a larger concern and therefore we ought to maintain higher interest rates. Others are seeing labor markets deteriorate rather significantly and therefore think we ought lower rates and be a little more stimulative. The futures market was saying one cut in ’26. I think if we were to see more than one cut, it’s indicative of an economic problem and we’re starting to deteriorate in the labor market more substantially than what we would hope.

How will tax policy changes through the One Big Beautiful Bill Act, the elimination of capital gains tax in the state and then potentially in 2026 the elimination of income tax impact the economic picture?
All of that is why we’re so optimistic about corporate earnings in ’26. It’s all very stimulative. So when you give these tax credits or tax breaks to individuals, those filter straight to their bottom line and give them more purchasing dollars. There’s a massive number between the One Big Beautiful Bill and a few local things happening here in Missouri; all of those in conjunction are stimulative across all economic spectrums.

Are there other bright spots?
Deregulation. That hits the bottom line of corporations a whole lot. There are multiple industries that seem to be popping up. The market’s beginning to broaden out, and so we’re seeing areas that have underperformed for years, financials that have suddenly gained a bit, and they’re doing well. Pretty optimistic back to some of the legislation that’s passed about industrials and energy and the demand for their services because of some of these policies, but their pricing ability and their ability to enhance earnings here over the next year.