As we begin the new year, it is natural to take stock of the investment landscape. It is especially true since markets have delivered strong gains for three consecutive years. The question now is whether the economy can support a fourth consecutive year of positive market returns. The following outlines our assessment of the forces shaping the path forward. 

Consumer Spending: The Economy’s Primary Growth Engine 

Despite significant attention on AI-driven growth, consumer spending remains the backbone of U.S. economic expansion: 

  • Spending remains strong: Both headline and inflation-adjusted retail sales continue to grow at healthy rates relative to pre-pandemic norms. 
  • Key GDP input accelerating: Retail sales in the “control group” (excluding autos, gas, and building materials) are up 6.1% on a 3-month annualized basis, nearly double the pace seen in the two years before COVID. 
  • Growth is real, not just inflation-driven: After adjusting for core inflation, control group spending is growing at 2.5%, well above the 1.1% pre-pandemic average. 
  • Driving economic growth: Consumer spending has been the largest contributor to GDP growth in recent quarters and has exceeded its pre-COVID average in five of the last six quarters. 
  • Durable foundation: As long as labor markets remain stable, consumer activity should continue to provide a resilient base for economic expansion heading into 2026. 

AI: Still in the Early Innings  

Evidence suggests the AI cycle remains in an early phase, with meaningful runway ahead: 

  • Compelling historical parallel: Since the release of ChatGPT, the Nasdaq’s performance has closely tracked its path following the launch of the Netscape browser in late 1994, which helped spark the Internet Boom. (See the chart below.) 
  • Nearly identical market performance: 
  • 767 days after Netscape’s release: Nasdaq return was 114% 
  • 767 days after ChatGPT’s release: Nasdaq return was 111% 
  • Cycle positioning: If this historical analogue continues, the current market environment may resemble the late-1997 stage of the Internet Boom, rather than the eventual peak that followed years later. 

Productivity: A Powerful and Underappreciated Growth Engine 

Productivity has been a meaningful tailwind and remains important for the 2026 outlook: 

  • Strong recent gains: Over the past three years, real output per hour (labor productivity) has increased at an annualized rate of more than 2%, nearly double the pace seen during the 2010s. (See the chart below.) 
  • Comparable to prior expansion cycles: This is similar to productivity growth during the 1990s technology-driven expansion. 
  • Supports higher living standards: Higher productivity increases total output and income over time as capital and technology improve efficiency. 
  • Disinflationary impact: Strong productivity can help ease inflation pressures by allowing growth without proportionate cost increases. 
  • AI as an accelerant: As AI adoption broadens, productivity gains may continue supporting growth while helping contain inflation. 

Wildcards to Watch 

While the backdrop for 2026 remains constructive, several developing factors bear watching.  

  • Reindustrialization and Capital Investment: Bankers are indicating some level of loan volume is going to support expanded factory output. Others are reporting the largest increase in non-residential construction is associated with manufacturing. This means reindustrialization has begun and is an important emerging theme. While hard to quantify the impact in 2026, it is more than $0, and potentially more than investors expect. 
  • Labor Market Dynamics: Recent reports have signaled pockets of labor market weakness. For the reasons outlined above, the labor market does not appear likely to collapse, but if it did, it would weaken the consumer and pose a risk to the broader growth story. 
  • AI Monetization and Market Concentration: High market concentration in technology and communication services can be either a risk or an opportunity. The outcome depends on whether AI infrastructure and implementation firms can turn AI investment into sustained revenue growth. The elevated market concentration means AI-related performance will continue to have an outsized impact on overall market returns. 

What This Means for Investors Heading Into 2026 

As we move through 2026, the economic outlook is being shaped by several forces. Consumer spending continues to provide a durable foundation, productivity gains are supporting growth while easing inflation pressures, and AI remains a powerful long-term driver, still in its early stages of adoption. While the economy is not without risks, these engines of growth are tangible and help support the case for continued expansion.  

At the same time, elevated market concentration, particularly around AI-related activity, means that any performance weakness could pose a risk to market returns in the year ahead.