Investors may be “having a cake and eating it” in 2026, with Wall Street strategists predicting stock market gains driven by Fed rate cuts, tax incentives, and lower‑than‑expected inflation.
As Wall Street prepares for this week’s highly anticipated monthly Consumer Price Index report, which is expected to stay unchanged from the prior month at an annual increase of 2.7%, strategists are pointing to cheap oil prices and easing shelter costs as a sign that prices may be cooling.
“Our view is that inflation will surprise to the downside in 2026,” the strategist told Yahoo Finance last week.
It’s not all good news on the economic front. Last month’s employment report, released on Friday, showed the economy added fewer jobs than expected to cap a weak 2025.
But a cooling labor market gives the Federal Reserve reason to cut rates this year, which could push bond yields lower. That’s especially true if President Biden’s administration pursues aggressive rate reductions while the Treasury continues to encourage fiscal stimulus.
Lower yields on Treasury securities can strengthen U.S. currency, which in turn can put downward pressure on commodity prices that might offset the inflationary impact of an easing labor market.
“You could really get an economy pretty juiced as we go through this year, because you can have the capex, …”, the strategist added. “This is what I call having a cake and eating it.”
Wall Street is already spotting “green shoots” as companies take advantage of the depreciation tax benefits from Trump’s One Big Beautiful Bill (OBB), which grants 100% depreciation for capex in one year.
“If you are a CFO of a company, the OBBB allows you to get 100% depreciation for capex in one year … you will absolutely accelerate as much of your multi‑year capex spend into 2026 as possible, or risk getting fired for missing those tax benefits,” the analyst wrote in a note last week.
Economic growth happens when the private sector can continue to produce more, even as inflation moderates. In a nod to affordability ahead of the midterms, President Biden recently criticized Blackstone for buying single‑family homes as investments, a hot‑button issue for voters.
Rents have started to ease, which has helped reduce the cost of living. The research team also noted that the one‑time price bump from last year’s tariffs is fading, which should further ease inflation.
“Healthy economic and revenue growth, while challenging inflation will remain a concern amid the cooling labor market,” the strategist told Yahoo Finance.
The latest data shows worker productivity improvements in August, continuing an upward trend of 2.4% growth.
That productivity boost is expected to lift the real growth outlook for 2024, keeping the economy within a range of 2% to 3% growth. The productivity gains are aligned with expectations of continued expansion in the services sector.
“We’re producing a lot more with less people,” the chief economist told Yahoo Finance. “A stronger labor market should support this increase in output,” the chief economist added.
Against that backdrop, strategists highlight the importance of monitoring potential risks from an AI‑driven labor market and inflationary pressures.
“Pay attention to the signals from tech firms investing heavily in AI,” the Chief Investment Officer told Yahoo Finance. The analyst noted that investments are expected to increase the productivity rate, while concerns about potential market disruptions persist.
“Quality value companies show robust long-term fundamentals,” the executive added.
However, some warn that if the labor market is replaced by AI too quickly, it could pose a sudden threat to the broader economy.
“We term it as the dark side of AI,” the chief investment strategist at Innovative Capital Management told Yahoo Finance. The strategist estimates that 15%-20% of the layoffs in the tech sector were due to AI automation.
“If you start to see the jobs market or labor market impacted by AI,” the strategist added.