The outlook for 2026 is significantly more optimistic than 2025, primarily due to fiscal policy. Deficit-financed tax cuts are expected to add nearly half a percentage point to GDP growth. This stimulus, not AI, is seen as the main force lifting the economy from below-potential to at-potential growth.

It's possible to have strong GDP growth without a corresponding drop in unemployment. Goldman Sachs' forecast squares this by pointing to accelerating productivity growth, meaning the economy can expand its output without necessarily hiring more workers.

The 'One Big Ugly Bill' has already passed and its main effects will be felt in 2026-2027, creating a 1-2 percentage point positive fiscal impulse to GDP in each year. This pre-programmed stimulus, combined with runaway mandatory spending, suggests US growth could hit 3-4%, far above consensus expectations.

The negative economic impact of tariffs was weaker than forecast because key transmission channels failed to materialize. A lack of foreign retaliation, a depreciating dollar that boosted exports, and a surprisingly strong stock market prevented the anticipated tightening of financial conditions.

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 market is focusing on individual positives like earnings growth and Fed easing, but the real story is the reinforcing interplay between deregulation, operating leverage, and accommodative monetary and fiscal policy. This collective impact is being underestimated by investors.