Economic Outlook

January 15, 2026

Investment Outlook
and Portfolio Strategy
Q3 2026

Economic Outlook

The global economy remained resilient in 2025. President Trump walked back his most aggressive tariff policies, with less punitive levies mitigating the impact on growth. Meanwhile, massive investment in Artificial Intelligence (AI) provided a tailwind, with consumers thriving on the wealth accumulation stemming from the unrelenting stock market rally – while businesses were active in ramping up spending on the AI buildout.

The outlook remains cloudy heading into 2026. While trade-related headwinds have subsided, one theme remains clear: We are embarking on a period of stagnating growth and elevated inflation. On the trade front, the lagged (not averted) impacts of tariffs are expected to have undesirable implications for both growth (lower) and inflation (higher). Indeed, the levies have yet to fully pass through to prices (in the United States) and exports (globally). The Federal Reserve faces a delicate balancing act in assessing these conflicting forces. While the labor market has cooled, inflation remains stubbornly elevated and is missing its target by a wider margin than the employment objective. Meanwhile, exuberance around AI leaves the economy vulnerable to disappointment should earnings falter alongside a stock market correction – and particularly should financial market conditions tighten as we expect.

Scenario Overview & Investment Strategy

Stagflation (50%)

While tariffs have come in at a lesser magnitude, the hit to both growth (lower) and inflation (higher) may prompt a cautious approach from the Federal Reserve – with elevated interest rates resulting in a prolonged period of stagnation.

Productivity Boom (15%)

AI-driven productivity gains in the United States bolster growth without overheating the economy, allowing the Federal Reserve to accelerate rate cuts.

Soft Landing (25%)

Despite macroeconomic and policy-related headwinds, the consensus appears comfortable in the view that growth will cool just enough to allow for Federal Reserve easing – but without tipping the economy into an outright recession.

Recession (10%)

Should AI-driven productivity disappoint while the labor market is cooling, this would have negative implications for growth on the back of a sharp deceleration (contraction) in consumer spending and business investment.

The environment of stagflationary headwinds, uncertain trade/ policy dynamics, and the diminished prospect of aggressive monetary policy easing argues for a defensive (underweight) stance on equities. We maintain an underweight allocation to bonds given that central banks are likely to be held hostage by still-elevated inflation. That leaves cash as one of the few places to hide given increased potential for market turbulence. Finally, this tumultuous backdrop underscores the case for private markets strategies, which can prove instrumental in enhancing the overall risk-reward proposition in the strategic asset allocation. Namely, non-traditional sources of income such as private credit and real assets provide a relatively stable return profile, lower volatility, and diversification benefits (uncorrelated to public markets) – while private equity has demonstrated an ability to outperform public equities, even in market downturns, with less volatility.

Economic
Scenarios

Main Scenario – Stagflation

50%

In this high probability scenario, sweeping tariffs across a wide-ranging group of trading partners threaten to hobble global growth and push up prices for consumers and businesses. While the magnitude of levies are less than initially thought, the effective tariff rate in the United States remains at its highest level in nearly a century. In this environment, households rein-in spending given the prospect for higher prices and concerns about their financial situations – while lingering business angst manifests itself into weaker investment and hiring plans. On the policy front – specifically in the United States – fiscal uncertainty could reassert itself through higher term premia and tighter financial conditions – while trade and immigration policy may exert more binding effects on labor supply and investment decisions. Pricing pressures linger on – while the lagged (not averted) impact of new levies add to the inflationary impulse. That keeps inflation firmly above target and prompts the Federal Reserve to remain restrictive for longer than markets currently expect.

Scenario 2 – Soft Landing

25%

The consensus view for the coming 12-18 months remains one of a “soft landing” – a so-called “goldilocks” scenario of healthy, trend-like growth, moderating pricing pressures towards the 2% target, and multiple rate cuts from central banks. Investors appear comfortable in the view that growth will cool just enough to prompt Federal Reserve easing but without tipping the world’s largest economy into an outright recession.

Scenario 3– Productivity Boom

15%

In this optimistic scenario, massive investment in Artificial Intelligence (AI) boosts productivity (and accordingly growth) without the associated upside pressures on inflation – an environment of “disinflationary growth” that allows the Federal Reserve to resume its easing campaign. Indeed, a productivity shock is unanimously dovish for the Federal Reserve. While inflation declines and reinforces the case for easier monetary policy, a reduction in labor supply keeps the unemployment rate relatively contained. Moreover, productivity gains spread more broadly around the world, with buoyant tech investment and higher stock prices buttressing global growth.

Scenario 4 – Recession

10%

While the likelihood of a recession has receded alongside tariffs that have been scaled down markedly from the levels proposed on Liberation Day, material headwinds prevail that could put downside pressure on the economy. On the trade front, while negotiations and trade deals brought some relative stability in 2025 – there’s little clarity on the direction on policy – with the pending Supreme Court ruling on the new tariffs, the 2026 US-Mexico-Canada (USMCA) review, and unresolved US-China deliberations potentially weighing on activity. In a worst-case trade war scenario, should the US raise import tariffs beyond trade agreement levels, USMCA renegotiations fail, or advanced economies hit back with retaliatory measures – a full-blown trade war would ensue and permeate across the globe – with sweeping tariffs pushing the economy into a recession. Meanwhile, an unraveling in the AI trade that drives a sharp drop in stock markets may lead to a sharp deceleration (potentially contraction) in household spending and capital spending – and by extension GDP growth.

Discussions regarding potential future events and their impact on the markets are based solely on historical information and Fiera Capital’s estimates and/or opinions, and are provided for illustrative purposes only. General Market projections are hypothetical estimates of long-term returns of economic asset classes based on statistical models and do not represent the returns of an actual investment. Actual results could vary substantially. Models have limitations and may not be relied upon to make predictions of future performance of any account. Past performance is not a guarantee of future results. Inherent in any investment is the potential for loss.