The U.S. economy is entering 2026 with rare momentum: growth is accelerating, inflation remains contained and labor market stress is easing.
• SPDR S&P 500 stock is trading near recent highs. What’s next for SPY stock?
That rare sweet spot, often described as a "Goldilocks" setup, is historically supportive of risk assets, from large-cap stocks tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY) to smaller and mid-sized companies represented by iShares Russell 2000 ETF (NYSE:IWM), handing President Donald Trump a symbolic win one year into his second term.
U.S. Economic Growth Is Running Hot — And Broad-Based
According to the final third-quarter reading from the Bureau of Economic Analysis, U.S. gross domestic product expanded at a 4.4% annualized rate, up from a prior estimate of 4.3% and well above the economy's long-term trend.
That marked an acceleration from 3.8% growth in the second quarter, already a strong showing by historical standards.
Importantly, the momentum doesn’t seem to stop here.
The Atlanta Fed's GDPNow model estimates the economy expanded at a 5.4% annualized pace in the fourth quarter — a level rarely seen outside of post-recession or post-pandemic rebounds.
Strong Growth — Without An Inflation Spike
Even more striking is what hasn't happened: inflation has not surged alongside growth.
The Personal Consumption Expenditures (PCE) price index rose 2.8% year over year in November, in line with economists’ expectations. On a monthly basis, prices increased 0.2%, matching October's pace and expectations.
Core PCE — which strips out food and energy and is the Federal Reserve's preferred inflation gauge — also came in at 2.8% as expected, reinforcing the view that price pressures remain contained.
The implication: productivity gains may be doing much of the heavy lifting, allowing the economy to grow faster without overheating.
Consumer fundamentals continue to improve. Personal spending rose 0.5% month over month in November, matching October's gain, while personal income increased 0.3%, marking the sixth consecutive monthly increase.
“Rising wealth has been playing in supporting consumer spending, particularly from older, wealthier households,” commented in an emailed note Michael Pearce, chief U.S. economist at Oxford Economics.
“Real consumer spending is on track to rise by close to 3% annualized in Q4, only slightly below the 3.5% pace in Q3 and well above our baseline forecast for a 2.1% gain,” he added.
On the labor market front, fears of widespread layoffs have eased as jobless claims have come in lower than expected in recent weeks.
"A wave of layoff announcements in the fall never translated into a significant increase in initial jobless claims… Continued claims are also trending lower, suggesting employers aren't pulling back further," said Nancy Vanden Houten, economist at Oxford Economics.
"Notifications by employers of pending layoffs were down sharply as of December after a jump in October," she added.
What It Means For Your Money
Strong growth alone does not guarantee higher stock prices, but the macro backdrop is supportive for risk assets, according to some Wall Street experts.
"The U.S. economy is producing at a very high level and the 4.4% real growth rate is much higher than normal and is likely to moderate over the course of the year," Chris Zaccarelli, chief investment officer at Northlight Asset Management, said
He indicated the market could still benefit if growth stays elevated. "If we can stay above 3% for the entire year, it could lead to double-digit returns in the stock market," Zaccarelli added.
While it's often said that the stock market is not the economy, corporate profits ultimately drive stock prices.
That outlook is reinforced by strong profit expectations. According to veteran Wall Street investor Ed Yardeni, president of Yardeni Research, consensus estimates for S&P 500 forward revenue growth stand at 7%, well above the 20-year average of 5.2%.
Forward earnings growth expectations are holding at 15.2%, just shy of a 54-month high and comfortably above the 20-year average of 11.4%.
Taken together, sustained productivity gains, resilient growth and solid earnings expectations suggest that the fundamental backdrop for the stock market remains constructive.
Photo: Shutterstock
