2025 was another year where doomsayers got it very wrong. After the new White House introduced sweeping tariffs in the spring, many pundits and economists predicted a hard landing for the economy: a melt-up in prices, due to tariffs, and a meltdown in the business environment, as companies grappled with increased costs.
The Research Desk argued against this narrative back in our June midyear report. We called this “the economy that wants to hang on,” whose strength was underpinned by a resilient, if disgruntled, consumer. As was the case in June, we paired macroeconomic commentary with CWAN’s proprietary database to provide corporates a sense of where things were heading in the economy and, more importantly, in the investment environment.
Now in December, we’ve done the same, looking across more institutional investors, to gauge the landscape for 2026. Where is the economy heading? Can it still hang on? And what do institutional investors need to know?
The Federal Reserve had a difficult year, balancing tariff price pressures with a cooling labor market. With three cuts to the policy rate in the second half of the year, policymakers have shifted in their posturing and have arrived at, or are approaching, neutral, neither pumping the brakes nor tapping the accelerator. Notably (and as we anticipated), a recession did not unfold amid this balancing act.
We maintain a similar level of restrained optimism for 2026: our base case is an economy that feels uncomfortable but outperforms low expectations. The Fed will continue to shift policy towards neutral, but at a slow, cautious pace, as price pressures persist.
How have investors responded to changes in monetary policy? CWAN’s proprietary database shows that corporates have continued to trim cash holdings and added duration. Median cash holdings peaked around 40% in 2021, and after a brief resurgence in 2023, have dropped significantly, as treasurers shifted from cash to longer-duration debt (6-12 months time to maturity)
At the same time, insurers have maintained a higher-than-normal cash allocation that the Research Desk expects to keep drifting down (slowly).
If short rates are expected to decline further, long rates have less to fall. At the Research Desk, we perceive a structural floor for the 10-year Treasury yield, driven by inflation pressures, term premia, and estimates of the Fed’s long-run neutral. Barring a major shock to the economy and corresponding flight to safety, we do not project downside risks and think that a 4% yield is reasonably priced for the 10-year. (Download our outlook for a more specific decomposition.)
If monetary policy has long served as a headwind, that headwind, amid rate cuts, continues to fade. Meanwhile, consumer spending has remained resilient, despite a weakening labor market (slower wage growth) and tariffs (more inflation). Overall, inflation-adjusted wages stayed positive this year, conferring increased purchasing power to consumers. We foresee this as an ongoing story in 2026.
On the corporate side, strong profitability and an appetite for credit risk have both kept the engine going. That story, with idiosyncratic pockets of weakness, will also continue in the year ahead.
No analysis of market expectations and economic growth would be complete without reviewing the impacts of AI. Investment in IT technology is still accelerating and shows no signs of abating. While many point to productivity gains from AI as a leading cause of a shaky job market, we at the Research Desk are a bit more skeptical. While AI will undoubtedly lead to strong, structural changes in the economy, the immediate impacts on the labor market are likely simpler: AI is expensive, and corporates only have so much budget at their disposal. If firms are investing in AI, they are likely diverting resources away from hiring.
What does this AI boom look like on the investor side? After profit-taking in 2023-24, insurers on CWAN’s platform are doubling down on AI bets. (See coverage in Bloomberg.)
For more detailed analyses on monetary policy, long rates, risk-on sentiment, the shift towards private credit, US economic resilience, and the potential impacts of AI, download our data-driven take on this economy that still wants to hang on.