Optimistic Outlook for US Equities and Economy in 2026 from RBC Wealth Management

Optimistic Outlook for US Equities and Economy in 2026

Recent insights from RBC Wealth Management suggest a cautiously optimistic outlook for the U.S. stock market and the broader economy in 2026. While several hurdles remain, the firm identifies key factors that could facilitate sustained growth in American equities.

According to the report titled Global Insight 2026 Outlook, there is room for positivity regarding U.S. equities in the upcoming year, although for a bullish market to flourish, multiple elements must fall into place. Kelly Bogdanova, Vice President and Portfolio Analyst at RBC Wealth Management–U.S., emphasizes the necessity for the U.S. economy and corporate profits to continue exhibiting strong growth. Moreover, advancements in artificial intelligence, or 'AI 2.0', must yield tangible results that can bolster investor confidence. Additionally, historical trends indicate that midterm elections generally lead to market corrections; overcoming this cycle could significantly influence the market's trajectory.

Balancing Opportunities and Risks

RBC notes that while the consensus earnings growth estimate for the S&P 500 stands at an ambitious 12.8% year-over-year, there is potential for growth to reach low double-digit levels. The report anticipates a modest 2.2% increase in U.S. GDP for 2026. However, discussions around the possibility of an 'AI bubble' continue, particularly as concerns grow over circular financing arrangements and potential limitations linked to regulatory frameworks in industries associated with technological advancements. Despite these hesitations, Bogdanova suggests that the current situation presents 'yellow warning signs' rather than indicating a fully developed bubble.

Investors are urged to maintain flexibility in their strategies, continually reviewing their portfolios to avoid excessive risk concentration in any sector. Bogdanova particularly recommends a cautious focus on healthcare and defensive dividend growth stocks as potentially solid starting points for the year.

U.S. Fixed Income and Bond Market Pressures

On the fixed income front, RBC anticipates a less favorable environment for bond holders in 2026. After a robust performance in 2025, bond market returns are expected to be more subdued moving forward. The Federal Reserve is predicted to maintain interest rates during most of the year, especially with core inflation expected to remain above 3.00%. Furthermore, a slight rise in the unemployment rate to 4.60% may limit the scope for significant interest rate reductions.

Given the lack of anticipated rate cuts, the increasing economic growth, and ongoing elevated inflation, RBC forecasts slightly higher yields for bonds, leading to downward price pressures and affecting total returns negatively. The report suggests the 10-year Treasury yield could rise to approximately 4.55%, up from 4.06% currently.

In addition, credit markets are expected to encounter challenges in 2026. There will likely be minimal yield growth over Treasuries and an increase in bond supply as tech companies seek to finance AI-related expenditures. Although municipal bonds may lose some allure after a rally at year-end, they may still hold value in the longer-term investment horizon.

Looking Ahead: Key Economic Trends

The report also discusses significant economic themes that have shaped the past 25 years and will continue to do so in the upcoming quarter-century. Key themes from the first 25 years include the rise of China, globalization, and technology dominance, whereas the next 25 years may see a multipolar world and climate change concerns gain prominence.

In conclusion, RBC Wealth Management's analysis highlights both the opportunities and risks that lie ahead for the U.S. economy and equities in 2026. Investors will need to navigate these nuances carefully to position themselves for success in the increasingly complex financial landscape.