Capital Group: Economic outlook – less uncertainty, solid growth
16 DEC, 2025
By Jared Franz, Economist, Capital Group
If 2025 was the year in which uncertainty caused by tariffs disrupted the outlook for the global economy, 2026 could be the year when things begin to fall back into place.
Investors should expect greater stability in the coming year, as global trade disputes ease, government stimulus measures take effect, interest rates decline and the boom in artificial intelligence spending continues to drive economic growth.
The economy has faced several challenges, including rising tariffs, relatively high interest rates and the recent US government shutdown, among other difficult events. We believe the economic environment will improve significantly in 2026.
In fact, consensus estimates for global economic growth are positive across the board, despite expectations of persistent trade disputes, geopolitical conflicts and elevated inflation. Globally, according to the International Monetary Fund (IMF), real GDP growth is expected to reach 3.1% year on year in 2026.
The US economy could grow by around 2.0%, supported by artificial intelligence–related spending and government stimulus measures, even as the labour market weakens and higher tariffs weigh on commercial activity. According to IMF projections, emerging markets, led by China, are expected to record the highest growth rates, at 4.0% in 2026, while the European economy is projected to grow by around 1.1%, supported by increased spending on national defence and infrastructure.
Capital Group economists, who are part of Capital Strategy Research, are slightly less optimistic about the global economic outlook, but still expect solid growth in the United States, Europe, Japan and most emerging markets. This is mainly due to greater clarity around tariffs and US trade policy compared with earlier in the year.
Clearer visibility on tariffs should allow companies to make investment decisions, such as reshoring supply chains.
US trade policy has influenced financial markets this year, but 2026 could be less volatile, given the recent trade agreements announced between the United States, Europe and Japan, among other countries. This represents a major shift from April, when President Trump imposed the highest tariffs in the past 100 years on all US trading partners in what he called “Liberation Day”. Equities initially fell sharply, then reversed course and posted a strong rally lasting several months.
The reasons for this performance remain debated. However, part of the explanation lies in the gradual decline in policy uncertainty, as world leaders reached trade agreements, Trump rolled back some threats and investors concluded that tariffs might not be as burdensome as previously expected. In fact, the effective US tariff rate has been around 11% in recent months, well below earlier expectations.
US recession fears, which were widespread in April, have eased, and markets have reflected this shift. Positive investor sentiment could continue to support equities, as the US economy avoids recession and grows at a moderate pace.
It would likely take something akin to “Liberation Day: Part 2” to seriously derail the US economy. Policy uncertainty has faded and markets have moved on. While trade tensions may flare up again with the introduction of new tariffs, there is hope that this will occur with less disruption to markets.
Generally favourable macroeconomic conditions are providing a positive backdrop for corporate earnings in 2026. Consensus earnings estimates for the new year appear more encouraging, as the Federal Reserve seeks to cut interest rates, government spending boosts industrial activity and many companies plan to resume major capital expenditure (CapEx) now that tariff levels are becoming clearer. The artificial intelligence boom is a key driver of capital spending, stimulating strong demand for computer chips, data centres and related investments.
Companies based in emerging markets are expected to deliver the strongest earnings growth, at 17.2%, while the United States is projected to exceed 14% and Europe slightly above 11%, according to FactSet earnings estimates as of 30 November 2025.
Looking ahead, there are favourable factors that should drive earnings growth and support market gains beyond the technology sector, but ultimately what will matter most is corporate earnings growth.
Investors Should Expect Sporadic Market Pullbacks
While there are many encouraging signs for the year ahead, clear risks are also emerging, and investors should prepare for inevitable market pullbacks.
To begin with, equities are expensive. Most global equity markets delivered strong returns from 2023 to 2025. Although corporate earnings have generally been solid, price-to-earnings ratios for the United States, developed markets outside the US and emerging markets were all above their 10-year averages at the end of September 2025.
Persistent inflation and rising public debt in the United States, Europe and other parts of the world are also causes for concern. Aggressive stimulus measures to support economic growth will only add to debt levels, which the IMF projects will exceed 140% of GDP by 2030.
It is worth remembering that equity market declines are recurring events. The S&P 500 has experienced market corrections – defined as declines of 10% or more – about once every 16 months. Based on market data from 1954 to 2025, the index has experienced bear markets – declines of 20% or more – approximately once every six years.
The optimism currently embedded in markets leaves little room for disappointment. Unexpected surprises almost always occur each year, even when the outlook is positive.
