Gabriela Santos and David Kelly frame the 2026 mid-year outlook around a fairly steady U.S. growth backdrop, but with higher inflation and sharper divergences than expected. The biggest shocks were stronger-than-expected AI capex and a war in Iran that pushed energy prices up, lifted inflation, and kept the Fed on hold.
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This episode is an interview-style mid-year outlook discussion from J.P. Morgan Asset Management. Gabriela Santos, chief market strategist for the Americas, introduces the theme as a chance to revisit what the firm got right and wrong at the halfway point of the year, then brings in David Kelly, Chief Global Strategist, to update the U.S. and global macro outlook. Kelly’s core view is that the economy still looks like a “2-0-3-4” version of the old “2-0-2-4” setup: roughly 2% growth, no recession, and unemployment around 4%, but inflation is proving stickier and may end the year closer to 3% rather than 2%. …
Near term, the actionable setup is to favor short-duration fixed income and stay with AI-linked leaders while the market continues to price energy shocks and a higher-for-longer inflation backdrop. The immediate risk is a renewed spike in inflation or rates if Middle East tensions do not ease.
Over the next few months, the base case is modest growth with gradually easing inflation if oil and energy prices normalize, which could allow some rotation beyond the most crowded AI winners. If fiscal or political gridlock deepens, growth should soften further and the market may shift toward defense, quality, and shorter duration.
Structurally, the transcript argues for a world of persistent divergence: AI as a long-lived capital cycle, U.S. fiscal fragility, and a likely weakening dollar if global central banks diverge. The durable implication is that portfolios may need to diversify across themes and regions rather than assume broad beta will do the job.
AI-related capital expenditure is driving explosive earnings growth of 50% in tech and 350% in memory, with the magnitude even bigger than expected.
Earnings expectations have been revised up 15 percentage points since start of year instead of coming down, and emerging market earnings expectations moved higher by 35 percentage points, all tied to AI CapEx.
US GDP will average about 2% growth for the full year.
Based on offsetting forces — consumer slightly weaker, investment spending stronger — but the war in the Middle East has added uncertainty.
The Federal Reserve will do nothing on rates for the rest of the year — no cuts and no hikes.
Inflation running at 3% makes it hard to justify easing, but rates are not too high to justify a hike. Fiscal gridlock could bring inflation and growth down in 2027-28, enabling cuts later.
What surprised you most compared with your year-ahead outlook?
He says the economy still looks like a roughly 2% growth, no-recession year, but inflation is running hotter than expected. The biggest drivers were weaker-than-expected tax refunds, a stronger-than-expected AI investment surge, and the war in Iran pushing up energy prices and inflation.
How do growth, jobs, and inflation look overall, and where are the big divergences?
He says the average economy looks okay, but there is a sharp K-shaped split. Stocks, corporate profits, and AI-linked investment are strong while consumer sentiment is very weak, and political polarization adds another layer of risk and volatility.
Could the midterm election change the economic outlook?
Yes. He argues a divided government would likely mean more gridlock and less chance of further fiscal stimulus, while single-party control could mean stronger growth but also more inflation. He thinks House control may shift to Democrats, while Republicans are more likely to keep the Senate.
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