While election-year fiscal stimulus may boost 2026 growth, it sets the stage for a potential inflation problem in 2027. The combination of lagged effects from the stimulus, tariffs, and restrictive immigration could cause overheating. Due to policy lags, the consequences won't be fully felt until after the election year.

Regardless of the national deficit, expect more fiscal stimulus as politicians prioritize winning elections. The need to address voter concerns about 'affordability' ahead of midterms will drive spending, creating a 'run it hot' environment favorable to hard assets.

Despite weak underlying economic data, the probability of a recession is not over 50% due to anticipated policy stimulus. This includes Fed rate cuts, major tax cuts, and deregulation, which are expected to provide significant, albeit temporary, economic support.

Large, ongoing fiscal deficits are now the primary driver of the U.S. economy, a factor many macro analysts are missing. This sustained government spending creates a higher floor for economic activity and asset prices, rendering traditional monetary policy indicators less effective and making the economy behave more like a fiscally dominant state.

The 2026 US economic forecast is not a simple slowdown but a tale of two halves. A weaker first half is expected due to lingering effects of tariffs and policy. A recovery is projected for the second half as spending remains resilient and the economy adjusts.

J.P. Morgan highlights a confluence of factors in 2026 that could create significant inflationary pressure. These include planned tax cuts, major national events like the FIFA World Cup and America's 250th birthday, and potential shifts in immigration policy, creating a powerful fiscal tailwind.

The current expectation for legislative stalemate could be completely upended by a significant economic downturn. A recession would make fiscal stimulus more politically appealing to both parties, consistent with historical patterns, creating an environment for policy action that otherwise seems unlikely given the political landscape.

With major US policy variables like tariffs and fiscal stimulus now more defined, investors should shift focus from predicting policy direction to analyzing how businesses and consumers react to these established policies, as this will drive market outcomes.

The US economy is seeing a rare combination of high government deficits, massive AI-driven corporate investment, and bank deregulation. If the Federal Reserve also cuts rates based on labor market fears, this confluence of fiscal, corporate, and monetary stimulus could ignite unprecedented corporate risk-taking if growth holds up.