GDP growth to rebound in 2027-2029; markets to see more volatility in 2026

U.S. gross domestic product is expected to rebound from 2027 through 2029, with inflation expected to begin falling after 2026.

Those were among the predictions in Morningstar’s second-quarter outlook.

Preston Caldwell, Morningstar senior U.S. economist, explained that several headwinds are impacting near-term GDP growth, including tariffs, oil prices, low population growth and interest rates.

Morningstar predicts the 2026 annual inflation rate will be 3.1%, but inflation will begin to fall next year as oil price shocks unwind and the impact of tariffs plays out.

U.S. population growth is expected to dip between 2025 and 2030 as the federal crackdown on immigration will result in 2.6 million fewer immigrants entering the U.S. over that time period than entered it in 2025.

Caldwell said lower immigration will have a downward impact on GDP growth because immigration simultaneously boosts both the supply and the demand sides of the economy. Population growth also props up the housing market.

The U.S. also will experience slowing consumption and business development through 2027, Caldwell said. Consumption will slow due to a decrease in population growth. Artificial intelligence fueled a technology investment boom in 2025 but nontechnical investment was down 2.7% in 2025.

The U.S. workforce saw a productivity boom that began before mass AI adoption, but Caldwell predicted a job growth rate of only 0.15% for 2026. He expected the unemployment rate to reach a peak of 4.5% in 2027.

Energy prices are in the news after the U.S. attacks on Iraq last month, but Caldwell predicted energy price shocks will be lower than they were in 2022. Oil prices are expected to rise 27% in 2026 -  a lower rate of increase than the 39% price hikes in 2022.

Tariffs were one headwind impacting GDP, but tariffs are expected to decline slowly in the coming years. Caldwell said that after the Supreme Court ruled that the International Emergency Economic Powers Act does not authorize the President to impose tariffs, the stated tariff rate dropped by four percentage points to 10.5%

Interest rate cuts are paused but not done. Caldwell predicted the Federal Reserve will pause interest rate cuts in 2026 due to the increase in oil prices. Morningstar predicts another 1.25 percentage point in rate cuts during 2027 and 2028.

Let the barbell strategy work

The end of first-quarter 2026 was marked by the Iran war and its impact on oil supplies, leading to market volatility. Dave Sekara, Morningstar chief U.S. market strategist, said that the two-week ceasefire agreed to this week means it’s the perfect time for investors “to do nothing and let the barbell strategy work for you.”

Sekara had recommended investors create a barbell-shaped portfolio, a strategy that deliberately concentrates investments at two extremes of risk, with little or nothing in the middle. He predicted AI and tech stocks will show the most growth while energy stocks will continue to sell off.

But after the two-week truce is up, what’s next? Sekara predicted production and shipping disruptions, increased inflation, and consumer retrenchment in the short term.

A sustainable stock market rally requires opening the Strait of Hormuz, he said. He predicted slowing growth and rising inflation going into 2Q.

And more volatility could be on the horizon through the end of the year. Sekara listed several factors fueling that volatility, including:

• High oil prices leading to stagflation.
• AI stocks requiring even greater growth to support their high valuations.
• A new Fed chair taking the reins.
• The midterm elections.
• Resumption of trade and tariff negotiations.
• Weakening fundamentals in credit markets.
• A weaker Chinese economy than expected.

 

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