Charts and Smarts^®

Looks Like Rain: Wages are the second source of structural inflation not only because wages are used directly in the calculation of many services prices but also because cooling nominal wage growth acts as a natural governing mechanism against rising prices. Labor demand remains weak as slack continues to build, shifting leverage further from employees to employers and placing further downward pressure on wage growth.

Estimated Prophet: Commodities, namely energy, are the final conduit for structural inflation pressures. And despite gains in industrial and precious metals, oil markets remain oversupplied, keeping energy prices in check. With all three sources of structural inflation pressures stable to moving lower, core prices are likely to follow suit through 2026.

Jack Straw: With labor markets continuing to linearly cool and inflation risks skewed to the downside, tension in the Fed’s dual mandate is likely to fade in 2026 keeping the Fed’s easing bias intact. Markets increasingly look overly sanguine on the growth outlook and overly hawkish on the policy backdrop as the modal outcome priced into rates markets sits at just one cut for 2026. Two cuts remain a reasonable base case, but the risk for more cuts is greater than the risk of fewer.

Sugar Magnolia: While we may not be as bullish on the prospects for a fiscal boost emanating from the One Big, Beautiful Bill Act, real growth looks likely to print close to trend levels in the low 2% range. Add in inflation cooling from the high 2s toward the Fed’s 2% target, and we’re looking at nominal growth in the 4%–5% range for 2026. Healthy nominal growth tends to support strong earnings growth as well as meaningful multiple expansion. Pair that with recession risks being held at bay by the Fed’s continued easing bias, and 2026 is shaping up to be another risk-on year.