2026 Market Outlook: AI Euphoria Masks Deeper Cracks
The consensus for 2026 is decidedly bullish, or at least, "risk-on with hedges," as Societe Generale put it. We're looking at a market buoyed by the artificial intelligence boom and the expectation of falling interest rates. JPMorgan estimates that U.S. household net wealth has jumped by over $12 trillion since the start of the year. That's a lot of fuel for consumer spending. But is this optimism justified, or are we ignoring some critical warning signs?
The AI Mirage and the Missing Jobs
The biggest head-scratcher, as JPMorgan's economists point out, is the divergence between the AI-driven capital expenditure explosion and the stalling labor market. This isn't something we've seen in previous economic expansions. Usually, increased investment leads to increased hiring. Not this time.
AI is supposed to boost productivity, but the gains so far have been modest. Immigration restrictions and a shrinking labor pool are also factors. However, the disconnect is still unsettling. It raises the question: Are we building a future where wealth is concentrated in the hands of a few, while the majority struggle to find meaningful work? If AI starts to work in full, its promise of higher productivity must dampen hiring and could eventually lift layoffs considerably - good for stock prices, wealth and spending, but lousy for jobs and incomes.
The "wealth effect" – the idea that rising stock prices lead to increased consumer spending – is supposed to offset the impact of slower wage growth. But that assumes everyone owns stocks. The reality is that the benefits of the AI boom are disproportionately flowing to the top. And this is the part of the report that I find genuinely puzzling; why are we so willing to bet on a consumption-based economy when the foundation of that consumption is eroding for a significant portion of the population?
Delinquency Data: A Half-Full or Half-Empty Glass?
The article from Reuters points to conflicting signals in consumer delinquency data. While some measures show elevated delinquency rates, others suggest they are leveling off or even declining. Credit card debt is high, around $1.23 trillion, with interest rates averaging above 20%. Yet, the aggregate delinquency rate stood at 2.98% at the end of September, down from 3.22% in June of last year.
John Silvia, CEO of Dynamic Economic Strategy, notes that credit card delinquency rates at smaller U.S. commercial banks (excluding the top 100) are below 7%, down from a peak of nearly 8% a couple of years ago. He sees this as a positive sign. But let's be clear: 7% delinquency is still significant. It means that a substantial number of people are struggling to keep up with their credit card payments.
And let's not forget about student loans. Defaults have spiked after the moratorium on payments expired. These loans total $1.65 trillion, a third of all non-mortgage household debt. If the labor market weakens, this debt burden could become crushing. The Reuters article suggests grounds for cautious optimism, but a closer look at the numbers reveals a more precarious situation. Are we really out of the woods, or are we simply kicking the can down the road?
The Fiscal Elephant in the Room
Eric Lascelles, chief economist at RBC Global Asset Management, raises concerns about government debt. He notes that long-term interest rates remain high, a sign that bond markets are still worried about inflation. "Implicitly, then, bond yields are pricing in some fiscal excesses," he says.
The U.S. is running massive deficits, and the Trump administration's tax cuts and spending boosts are expected to add to the debt pile. While fiscal stimulus can provide a short-term boost to the economy, it can also lead to higher inflation and higher interest rates in the long run. And remember that the Fed has been cutting policy interest rates since 2024—to 2.25% here and a target of 3.75% to 4% in the United States. “Our forecast is 2%” in Canada, Lascelles says. The Fed may have more wiggle room. “They’re going into the threes. Could they touch the twos?” he asks. Quite possibly. It's a delicate balancing act, and the risk of a policy error is high.
The "Buy, But..." Market
The 2026 market outlook is undeniably bullish, but it's an optimism tempered by caution. The AI boom is real, but its benefits are not evenly distributed. Consumer debt levels are high, and government debt is even higher. The Federal Reserve faces a difficult task in managing inflation and interest rates.
As Societe Generale put it, it's a "risk-on, with hedges" scenario. Investors should be paying particular attention to diversifying right now, as Lascelles advises. And they should be wary of taking big swings. The market may be heading higher, but the road ahead is likely to be bumpy. The U.S. tech sector has a market cap of $21 trillion—to be more exact, closer to $20.8 trillion—and that is a hefty price tag to justify.
Data-Driven Delusions
The numbers paint a picture of an economy riding a wave of AI euphoria, but with some deep, underlying cracks. It's a market to participate in, but with eyes wide open and a healthy dose of skepticism.
