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The Macro Brief – The US in 2026
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Our US team identifies key issues to watch in 2026 – from what the Federal Reserve will do next, to whether the AI bubble will burst, to US fiscal friction.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast:https://www.research.hsbc.com/R/101/mVlwHgW
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Transcript
Introduction to HSBC Global Viewpoint
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto to today's show.
Major US Economic Issues for 2026
00:00:29
Speaker
Hello and welcome to the Macro Brief from HSBC Global Investment Research. I'm Aline Van Dyne in New York and today we have a jam packed episode to discuss the big US economic issues that we all should be thinking about for 2026.
00:00:45
Speaker
So what's gonna happen at the Federal Reserve? Will the AI bubble burst? And how worried should we be about the US's $30 trillion dollars in debt?
00:00:57
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So to get into what matters for the US s next year, I'm joined by three of my New York colleagues with fantastic insights into all these issues. So our US economist Ryan Wang.
00:01:08
Speaker
Hi, Eileen. Our global equity strategist Alastair Pinder. Hello. And our US rate strategist Deiraj Narula. Good morning. Welcome to all of you to the podcast. Now, I should say it's absolutely freezing in New York, but we are quite cozy here in our podcast studio. So let's get right to it. As I said, key issues for the US s in 2026. But first, let's start with a quick recap of what were some of the big developments from your perspective in 2025.
Impact of Tariffs on US Economy
00:01:39
Speaker
Ryan, tariffs, quite a big story this year. Yeah, absolutely. I mean, we have learned over the course of this year that tariffs can have a big impact on on economic activity and expectations. and And of course, coming into this year, the the the level of tariffs in the United States was relatively low at less than 3%. And now we're talking about a number far greater than that.
00:02:01
Speaker
One thing that I've been very interested in is what impact would that would have on consumer prices. Of course, tariffs can affect both business margins and price levels. And we've seen a mix this year where there has been some upward movement in in particularly items that have seen higher tariffs. And one thing we'll be asking is whether that continues and to what extent there are further effects in 2026.
00:02:22
Speaker
But the big picture, to some extent, has been the surprising resilience of the economy and inflation to tariffs so far, right? Right. And ah businesses, I think, have adopted different strategies. Some businesses have refrained from passing along some of those price hikes, which means that the impact needed to have been absorbed through margins. And, of course, we know at the very beginning of the year, there was a lot of front-loading of imports, and that may have also reduced some of the economic effects. But I don't think the story is over yet.
00:02:50
Speaker
You know, we will see some further effects from this rise in tariffs, significant rise in tariffs in 2025, even in 2026. And I think one thing that will be crucial to see is does inflation, in fact, peak in the early part of next year and start to decline later on?
Federal Reserve's Inflation Response
00:03:05
Speaker
Or does it surprise stay elevated or even go higher?
00:03:09
Speaker
Which, of course, bringing in Deirage, that inflation picture is key to what happens next for Treasuries and the Fed, of course. Exactly, exactly. So just looking back at what happened across 2025, we came into this year with the Federal Reserve having already delivered 100 basis points of rate cuts. But given the transition in administration, given a number of key policy uncertainties, and on top of that, inflation still well above the Fed's 2% target,
00:03:38
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they decided to pause for much of the first half of this year until the September FOMC meeting. ah With increases to downside labor market risk starting to come through in the unemployment data and the jobs reports, this did motivate the Fed to resume rate cuts. But as the year comes to a close now, the Fed's policy setting is, by Chair Powell's own admission, closer to most estimates of neutral. So given inflation risk could still be to the upside, given risk to the employment market could be to the downside,
00:04:06
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the Fed is in a position where they are likely to respond to whichever of those two risks really become more salient going into the new year. And we can get into this more. But of course, I should say that, Ryan, your forecast is for a no further rate moves in 2026 or 2027. But we'll get into that in a minute. Alistair, over to you.
00:04:26
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What was the big story from your perspective
AI Trade and Equity Market Bubble
00:04:29
Speaker
today? Going back to what everyone else has been discussing, if you thought it was going to be tariffs or or rate cuts you know and and all of this geopolitical noise that's happened this year, but actually the the biggest thing that's overridden everything is just the AI trade.
00:04:40
Speaker
And almost everything else hasn't really mattered for for the equity market this year. um you know The S&P 500 has been up 17% despite all all the the tariff volatility. And that's because the Magnificent Seven, these seven biggest stocks in the US equity market, which account for 33% the equity index, have gone up 23% because of all of this enthusiasm about AI. And this is now you know basically generating these fears about are we in an AI bubble, particularly because these seven companies alone have done $400 billion dollars of CapEx this year. They're expected to do $500 billion dollars of CapEx going into 2026. Ryan can double check my maths here, but i think that's like one and a half percent of of GDP, huge numbers.
00:05:23
Speaker
And it's really a question now is like, is this a bubble? Are we back in the 2000s? And you know what happens next for for the equity market? So let's look into 2026. there an ai bubble So our base case is not now. I mean, I think, you know, one of the things that that we highlight is that, at least from a monetization perspective, monetization of ai is coming through very aggressively. That, you know, I think gives us some comfort that we're not in an AI bubble. The other thing that I think is really important is that the Magnificent Seven that are doing all of this CapEx have huge amounts of cash.
00:06:00
Speaker
So this is not necessarily being totally financed through debt. They actually have means to pay for this. ah But I do think the big narrative going into next year is that we've you know deployed all of this CapEx. We have these new fancy AI models. The question will be, how do corporates and companies adopt this?
00:06:21
Speaker
Can they increase productivity? Can they generate more earnings from this? And we're a big believer that they can. And, you know, we think there could all but be almost $100 billion dollars of cost savings for the S&P 500 next year as a result of AI.
00:06:34
Speaker
Really interesting. Ryan, how does this impact the outlook? for monetary policy in the US in 2026, if at
AI's Impact on Productivity and GDP
00:06:42
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all? Well, there are so many interesting ways that this could be hugely important in 2026. As Alex just said, you know, the direct impact right now is the increases in capital expenditures that are boosting GDP growth. And And Alistair, yes, absolutely. If we're talking about $400 billion dollars of capital expenditures this year and possibly $500 billion dollars next year just from this subset of of firms, well, even that $100 billion dollars incremental increase should add at at least three-tenths to nominal GDP growth. So so so was Alistair's math correct? It was certainly right on target, and it is very substantial. And the question is, how long does it last, and is it sustainable? ah But then there's this other economic question, which is apart from the direct boost for now of the investments, and that question is, what does it do to productivity growth going forward? This actually was a huge theme at the FOMC's December meeting and Fed Chair Powell's press conference, where ah we have seen surprisingly strong productivity growth over recent years,
00:07:43
Speaker
um I don't think we can attribute all of it to AI. Some of it is related to automation following the pandemic and a lot of labor turnover, which can be disruptive during the pandemic, but can actually produce stronger productivity thereafter. This is very important because we're actually seeing a lot slower employment growth and labor force growth. But if we're seeing stronger productivity growth, well, then that's part of the reason why the GDP numbers have actually surprised the upside this year.
00:08:08
Speaker
Just sticking to the Fed forecasts for next year, and of course, there could be some quite significant personnel changes, not least a new Fed chair. But on the policy side, you're expecting no more cuts into 2026, correct?
00:08:24
Speaker
Yeah, that's right. And of course, as always, it's important to emphasize that there are double-sided risks to the outlook, which D. Raj explained. you know Some policymakers are more focused on these very slow job numbers. Others are more focused on this persistence of near 3% inflation and and what will happen next.
00:08:42
Speaker
Also, we do know that there's this broader question of what does represent a neutral rate for the economy. And maybe now with the 75 base points the Fed has delivered and in in the latter part of this year, we're at least closer to that number. But there's the one final point I would make, which is that – You know, there may not be one simple neutral rate for all parts of the economy. When we think about what type of rate restricts, let's say, the housing market versus what type of rate might be needed to kind of restrain some of that CapEx boom that we've been
Fed's Treasury Securities Purchases
00:09:14
Speaker
talking about. Well, those could be very different numbers. And that just, you know, makes the analysis even more complicated.
00:09:19
Speaker
Interesting. So the Fed, of course, all these various policy issues and the ai boom slash bubble feeds into that in in many ways, but also tariffs, as you mentioned before, the questions around inflation. But looking at the Fed, the question around policy and also um who's going to be leading the Fed, Fed independence, is that going to be relevant for for treasuries at all, Deiraj? Yeah. Absolutely. I think it is at the forefront of investors' minds. And even though our a base case broadly could just be that the path of the Fed ahead will remain very much in tandem with the developments in the economic data, what we do often see in financial markets and the Treasury markets in particular is that some of these broad policy uncertainties can make investors a little bit less comfortable taking risks. At the longer end of the curve, for example, locking in into 10 or 30 year maturity securities with a lot of uncertainty about the outlook can drive a little bit of necessity for more compensation. So higher yields on the back of these uncertainties can be a theme that we've seen in the past and could be something that emerges going forward as a lot of headlines come through, as a lot of uncertainties remain over all of these personnel changes, but also over the broader policy and economic outlook.
00:10:32
Speaker
And just to clarify, of course, Fed Chair Powell term ends in May. So one question from from my side, actually, is you know the Fed outlook is very important for the equity markets.
00:10:44
Speaker
Our view that there's going to be no rate cuts for 2026 is potentially a bit of a headwind. But on the flip side of that, we saw, I think, what was quite important changes to the Fed balance sheet um in this week's FOMC meeting. As an equity guy, I don't know the technicals, but how what does that mean for for the market as a whole?
00:11:02
Speaker
Yeah, absolutely. So at this week's December FOMC meeting, the Fed did announce that it will start net purchases of Treasury securities. So that's quite a pivot from the strategy that it employed over the last three and a half years, which was commonly referred to as quantitative tightening or QT, where it was reducing the buildup of Treasury securities that it purchased through the COVID-19 pandemic and through the global financial crisis. Now what it's announced is that it'll start buying Treasury securities concentrated at the very front end of the curve. What that means is unlike in the past when the Fed has stepped in the market to buy treasuries with the aim of bringing down long end, so your 10-year and 30-year treasury yields, today what we're seeing the Fed do is really provide some liquidity into the markets in order to reduce some pressures that we've seen in funding markets. So
00:11:48
Speaker
What that essentially means at a very basic level is because of the Fed's reduction of Treasury holdings, we've seen a little bit of strain in overnight borrowing conditions. And by purchasing Treasury securities, essentially what it means is that on tax dates, on period end dates, the end of the quarters, the end of the year, we do tend to see some liquidity pressure sometimes. But these measures are essentially targeted towards mitigating that.
00:12:13
Speaker
So does it essentially keep short term rates lower? At the very short term rate. essentially it is this overnight borrowing market that's kind of the foundation of financial market plumbing. But it is not what has been employed in the past, which is targeted at bringing down long end yields. That is not what these measures are aimed towards. And is that relevant for you, Alistair, from an equity perspective? I mean, it is relevant. I mean, I think, you know, whenever there's this liquidity issue, is something that is very important. And I feel like the market will, you know, take this as another sign that we've got more liquidity going into, know, potentially financial markets and the result equities going into next year. So I do think it reduces some of the downside tail risks that, you know, was concerning markets back in October.
00:12:58
Speaker
Yeah, I think in ah in a very broad sense, it it does show that the Federal Reserve is at least paying close attention to this corner of the financial markets. I mean, these funding pressures really only started to emerge in September. And so in a relatively short period of time, the Fed has actually taken decisions twice, both in October and now again in December.
00:13:15
Speaker
And that could have implications for actually both both markets on the on on the bond side and the equity side. Okay, so we've covered the AI bubble potentially bursting, we think not yet. The Fed outlook, so no rate moves, but some liquidity injections. And also we'll be keeping an eye on what happens in terms of ah the new Fed chair and other personnel
US Fiscal Dynamics and Future Concerns
00:13:41
Speaker
changes. What about the US debt, fiscal frictions, perhaps? Is that something to watch? Is that a story for next year, Dheerosh, perhaps kick it off? Absolutely. So we do see fiscal narratives tending to come in and out of the market, depending on the headline of the day. But going into the new year, the direction of travel of the U.S. fiscal position is really only in one path. And even though we've seen over the last few years, nominal growth has been relatively strong, boosted by factors such as productivity improvements, AI, e etc.,
00:14:12
Speaker
the direction of the deficit has actually outpaced that. So we've seen nominal growth in a 4% to 5% range, but the total deficit has amounted to the 6% or 7% range. And what that means is the debt stock that the U.S. federal government has is actually growing at a faster rate than GDP. So GDP at $30 trillion, the Treasury market is now there or thereabouts and is growing at a faster pace than GDP.
00:14:34
Speaker
And every year that means more and more interest costs are being incurred, and that is a self-fulfilling cycle of even more deficits that are needed to repay these interest costs that are outstanding liabilities of the U.S. federal government. And what we've seen that mean for the Treasury market in particular is that the supply of Treasuries that the the Department of the Treasury has to issue has to increase over time. And over the past year, what they've done is essentially say, We're going to keep supply of treasury coupons. So that's treasuries with a maturity of two years or more. We're going to keep that steady and only really issue in treasury bills. So those treasuries that are maturing in under one year.
00:15:11
Speaker
In terms of potential fiscal frictions, Ryan, any dates or or particular developments we should be watching out for is the budget, debt ceiling, government shutdowns, midterm elections. Could these all play into some of this fiscal friction?
00:15:28
Speaker
Well, we do have the the possible risk of of another government shutdown at the end of next January. So even though we just had the end of the record-long 43-day shutdown in the middle of November, um the risk has not been removed ah for for any length of time. And that could be disruptive. And also it raises questions about other issues.
00:15:51
Speaker
ah We should see also some big swings in GDP growth over the next few quarters where the mechanical impact of the government shutdown should weigh heavily on fourth quarter U.S. s GDP growth. But then actually you should get a big boost to the first quarter unless that government shutdown repeats itself at for first month of next year.
00:16:11
Speaker
And I would just say from you know an equity perspective, this fiscal dynamic is is a bit of a trade-off because on the one hand, you know higher fiscal deficit, things like the one big beautiful bill, you know supports consumption, supports investment, even to a certain extent, and we've discussed this before, Ryan, has actually supported ah the capex boom in the AI cycle because there's been some incentives there. But on the other hand, you know so you have this growth trade-off. The other flip is that if it starts to weigh on bond yields too much, then actually equities get freaked out a little about that and and they can get a valuation compression.
Focus for 2026: AI, Data, and Productivity
00:16:42
Speaker
So the key thing that we like to look at in the bond market is the level of bond yields which start to really hurt valuation multiples. And that's roughly 4.7, 4.8 percent. For the 10-year yield? For the 10-year yield. Thank you. Yeah. And so we're a little bit away from that at them at the time being. So we're kind of feeling relatively confident that it's not too much of an issue for the equity landscape at this point.
00:17:04
Speaker
Really interesting. Unfortunately, we're running out of time. So I will end with each of you just a quick one liner on kind of what your main focus is for 2026. Alistair. Mine's really easy. It's AI, AI, AI, and and who are going to be the next beneficiaries of AI. So this time it's really been about the Mag7, the data center beneficiaries. We're now looking at who from an adoption perspective can win.
00:17:30
Speaker
Sure. sure So for me, in the Treasury markets, we're looking at developments in the economic data. Do labor risks or inflation risks really remain at the forefront? And then on the fiscal side, what's the ultimate impact of tariffs? What's the ultimate impact of the one big, beautiful Bill Act? Does that mean the Treasury is going to give us more and more issuance of Treasuries at the long end of the curve?
00:17:49
Speaker
Ryan? For me, it's this composition between labor force growth and labor productivity growth next year. Can we really have another year where the economy grows solely on the back of productivity growth, or will slower employment growth become a restraint on consumer spending and maybe economic optimism will diminish as we go through next year?
00:18:09
Speaker
Well, the good news is we're going to have lots to talk about in 2026 and probably some things that are not on our radar yet. So it should be interesting. I want to thank you all for joining me today and wishing you all a good end of the year and ah look forward to continuing discussions next year. Thanks a lot. Thank you very much. Thank you very much, Aline.
00:18:35
Speaker
So that was Ryan Wang, Alistair Pinder and Deiraj Narula on the outlook for U.S. policy and economics in 2026. If you're an HSBC client, you can keep up to date on our latest research by downloading our mobile app, which features all of our key reports, videos and podcasts. It's available on Apple's App Store and Google Play.
00:18:58
Speaker
Also, don't forget to check out our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde put the region's markets and economics into context.
00:19:09
Speaker
If you have any questions or comments, you can get in touch with us at askresearch at hsbc.com. This episode of The Macro Brief was hosted by me, Aline Van Dyne, in New York and produced by Tom Barton.
00:19:24
Speaker
Thanks for listening and please join us again next week for our last edition of 2025.
00:20:00
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.