Key takeaways
- U.S. GDP growth of 1.5–2.0% expected for 2026, assuming resilient consumer spending, robust AI capex and contained Middle East tensions.
- The core PCE inflation outlook has risen to 3.4% at year end, up from 2.9%, driven by a supply shock in oil and gas, fertilizer and helium tied to the Strait of Hormuz.
- Artificial intelligence is expected to continue to shape and drive large parts of the markets & economy.
U.S. economic data is generally pointing in the right direction with business surveys signaling expansion, solid corporate earnings growth and a pick-up in hiring activity in recent months.
Why the inflation outlook has risen
An exception to these positive trends is inflation, which has risen from somewhat elevated levels already. Our outlook for core PCE at year end is now 3.4%, up from 2.9% at the beginning of the year. This is being driven by the global supply shock for several key commodities: oil and gas, fertilizer, and helium as a result of the Middle East conflict and Strait of Hormuz closure for more than 15 weeks.
Geopolitical risks remain in focus
There is cautious optimism that geopolitical risks are easing after the U.S. and Iran reached a 14-point memorandum of understanding (MOU) mid-June. The memorandum provides for:
- An immediate end to military operations on all fronts
- Near-term sanction-free Iranian oil exports
- A 60-day commitment to facilitate safe commercial passage through the Strait of Hormuz
The agreement serves as a bridge to further talks, with the nuclear framework and broader strategic issues to be resolved in upcoming negotiations. While reopening of the strait reduces downside risk to the growth outlook, it is important to consider it could take weeks or months for global commodity flows to return to normal.
What inflation could mean for Fed policy and rates
With both headline and core inflation now further away from the Federal Reserve’s 2% target and other aspects of the economy performing in line to better than expected, we think the FOMC is likely to hold the Fed funds target range at 3.50-3.75% for the rest of 2026. With this backdrop, we expect modestly higher U.S. Treasury yields, with 2-year and 10-year yields around 4.2% and 4.7% at year end.
Forecast (Year-end 2026) | Rate |
|---|---|
Fed funds target range | 3.50–3.75% |
2-year Treasury yield | ~4.2% |
10-year Treasury yield | ~4.7% |
Source: J.P. Morgan estimates. As of July 2, 2026.
How consumer spending is trending through 2026
Despite headwinds from higher gasoline prices over the past few months, consumer spending trends have remained at resilient levels. Stimulus benefits from the One Big Beautiful Bill Act (OBBBA) including higher tax refunds and lower tax withholdings have outpaced incremental outlays for higher gasoline prices through June.
In addition, improved labor market conditions, with the unemployment rate holding steady at 4.3%, have also benefited households. Our Chase card spending data indicates overall spending growth is tracking slightly over 5% year to date relative to the same period in 2025. The mix of spending shows households are prioritizing essentials, with non-discretionary categories, including gasoline, outpacing discretionary spending growth. Lower-income has lagged middle and higher-income spending growth slightly more than normal since March, while spending growth across all income cohorts remains noticeably above the prior 12-month average
The effects of interest rates on the housing market
The higher interest rate environment continues to weigh on housing sector activity. Homebuilder sentiment and existing home sales remain subdued given ongoing affordability challenges. A recent rise in pending home sales and contract signings suggests the lock-in effect may be slightly easing with an increased willingness of buyers and sellers to accept above-6% mortgage rates as a new normal. Meanwhile, available single-family housing supply remains somewhat limited, keeping home values supported and near all-time highs. Our outlook for stable-to-slightly-higher interest rates this year likely means that housing sector trends could remain in a holding pattern.
Trade and tariff developments to watch
Recent developments in trade and tariff policies include new Section 301 tariff proposals of at least 10% on imports from major trading partners, based on unfair trade practices—specifically forced labor. Since the Supreme Court struck down the IEEPA tariffs earlier this year it has been expected that the administration would take steps to reconstruct the 9-10% tariff regime in place at the end of 2025.
With regards to this year’s renewal process for the USMCA, both Mexico and Canada recently pledged support for a 16-year extension, while the U.S. administration is looking to make substantive changes. Specifically, the administration has called for tighter rules of origin and content requirements, as well as higher minimum tariff rates to be codified into the deal. We expect the USMCA negotiation process could drag well into next year, with terms of the existing agreement continuing in place until a new one is completed.
The economic implications of AI
Artificial intelligence remains a central theme across markets and the economy, given the substantial amount of AI-related capex expected by the major hyperscalers and the game-changing aspects of the technology. Collectively, the top five hyperscalers are guiding to roughly $730 billion of capex this year, up nearly 80% from 2025, and 2027 capex is already projected at over $900 billion. While the build out of AI has significant implications for U.S. economic activity, the net effect to GDP growth is relatively modest given the associated surge in AI-related imports which serve as an offset to the capital investment.
How J.P. Morgan can help
Our Commercial Banking team helps clients navigate policy uncertainty and evolving economic conditions through scenario-based planning and flexible financial solutions. We combine macro insights with industry expertise to support strategic decision-making across market cycles. Contact a banker to discuss how we can support your business objectives.
JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/commercial-banking/legal-disclaimer for disclosures and disclaimers related to this content.
