2026 may bring higher volatility, slower GDP growth, experts say

The coming year will bring increased market volatility and a slowing in U.S. gross domestic product as the economy contends with a slackening labor market and the impact of tariffs.

That was the word from two Morningstar economists, who presented their 2026 market outlook.

Market volatility in 2026 will be higher over the course of the full year than it was in 2025, said Dave Sekara, Morningstar Research Services chief U.S. market strategist. Last year also saw market volatility, he said, but the difference is that most of that volatility occurred in the beginning of the year.

“It’s not just volatility to the downside. We think there will be a lot of volatility to the upside as well,” he said.

Among the factors that Sekara said will drive volatility in 2026 are:

• Artificial intelligence stocks requiring even greater growth to support high valuations.
• A new chair to take the reins at the Federal Reserve.
• Resumption of trade and tariff negotiations.
• A slowing rate of economic growth.
• Higher-than-expected inflation.
• The impending midterm elections.
• Weakening fundamentals in private credit markets.
• A weaker-than-expected Chinese economy.
• Watching Japanese government bonds and the Japanese yen.

Economy outperformed 2025 predictions

The U.S. economy outperformed predictions made in early 2025 but tariffs, interest rates and unemployment continue to impact GDP for 2026, said Preston Caldwell, Morningstar Investment Management chief U.S. economist.

In January 2025, Morningstar predicted GDP growth of 2% for the year and “it looks like that’s where we ended up,” Caldwell said. But the economy performed better than Morningstar predicted in April, immediately after the Trump administration’s announcement of tariffs on major trading partners. At that time, Morningstar predicted GDP growth of only 1.2% in 2025 and 0.8% in 2026.

Paring back of tariffs was one factor contributing to the improved GDP and increased use of artificial intelligence was another, Caldwell said.

GDP growth to accelerate in late 2027

Morningstar expects GDP growth to begin accelerating in the second half of 2027, driven by further Fed monetary policy loosening. Inflation will peak this year and then eventually move downward to the Fed’s 2% target as the impact of tariffs fully fades.

The Fed still must push interest rates lower to support economic growth, Caldwell said. He said current rates are still too high to support continued robust economic growth.

Tariffs have had little impact on consumer prices but that could change, he said.

“As it stands, we’ve seen little pass-through in consumer prices,” he said. “Prices of core goods are up 1%-1.5% since the start of the tariffs, and import prices inclusive of tariffs are up around 10%.

“The data is clear that foreigners are not paying the tariffs, but neither are U.S. consumers. That leaves the U.S. business sector as the only one logically paying for these and that’s what the data shows.”

Caldwell said it’s unlikely that businesses will continue to eat the cost of tariffs indefinitely.

“I would say one factor is that businesses have been running down their pretariff inventories, which has allowed them to delay recognition of tariff costs and accounting terms,” he said. “I think increasingly in the latter half of last year, businesses have been expecting the Supreme Court to bail them out by striking down the International Emergency Economic Powers Act tariffs. But even if those tariffs are struck down, and if the administration comes back with new tariffs that replace the old ones, then at some point, businesses will recognize their pricing must recalibrate based on higher costs.”

Households are cautious

Morningstar reported personal consumption was down from 2.9% in 2024 to 2.4% in third-quarter 2025. The personal savings rate was 4.8% in 3Q 2025, compared with 7.3% in 2024. But household wealth was up by 55% of GDP since 2019.

Caldwell predicted consumption and investment will slow in 2026 as households “move in a more cautious direction.”

The labor market has continued to slow in terms of job growth, Caldwell said, with nonfarm employment growth flat year over year and the unemployment rate up to 4.3%.

“We know that both labor supply and labor demand are contracting,” he said. “We believe the fall in labor demand is exceeding the fall in labor supply.”

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