In this quarter’s Counsel Views, RBC PH&N Investment Counsel’s Chief Investment Strategist Tasneem Azim-Khan once again delivers a two-part report that provides important insights into both the U.S.’s and Canada’s economies, markets and related key developments:
- Part I – It’s gonna be OK – focuses on the world’s largest economy, providing important updates and analysis of the U.S. by looking closely at where it stands today, but also where it is headed, tackling key issues that will impact global markets and in the months to come.
- Part II – A ‘Double-Double’ half full – turns the lens on Canada, diving into the seminal developments that are shaping – and will continue to shape – the economy and investment markets for the year ahead and beyond.
View the Part I executive summary below, or click here for the full article.
Part I: It's gonna be OK
Overview: U.S. economic growth remains resilient at just over 2% growth for 2026, but faces headwinds from K-shaped recovery dynamics, tariff uncertainties, and elevated equity valuations, particularly in AI-related sectors.
Summary
U.S. economic growth for 2026 is forecast at just over 2%, and this is more or less in line with their forecast for real GDP growth in 2025. But it represents a deceleration from nearly 3% growth in 2024, while maintaining the dynamic of American exceptionalism. Economic tailwinds supporting this growth include AI capital spending driving productivity gains, fiscal stimulus through the One Big Beautiful Bill Act, deregulation initiatives, favorable wealth effects, and benefits from previous and anticipated rate cuts.
However, stagflation risks persist as growth decelerates while inflationary pressures remain elevated and labor markets soften. The November Consumer Price Index showed unexpected downward trends, though this data remains questionable given the 43-day federal government shutdown - the longest in U.S. history. Labor market concerns intensify heading into 2026, with tightening immigration policies, corporate restructurings, record Baby Boomer retirements, AI-driven job losses, and tariff uncertainty amplifying employment risks. The era of "no-hire-no-fire" corporate policies has shifted to "no-hire-start-to-fire" in late 2025, with Challenger, Gray and Christmas reporting layoffs topping 1 million through early November – 50% higher than the previous year and the highest since 2020's pandemic-driven losses. Unemployment crept to 4.6% in November, corroborating the softening labor market narrative despite the rate itself not being problematic.
The economic recovery has developed pronounced K-shaped characteristics, with higher-income households thriving while lower- and middle-income households face deteriorating conditions. Lower-to-middle income cohorts suffer disproportionate exposure to higher inflation, tariffs on goods versus services, and elevated interest rates due to their borrowing patterns and reduced savings capacity. Recent tax cut extensions have favored higher-income households at lower-income expense. Conversely, older, wealthier households experience substantial wealth effects from liquid asset appreciation and income growth stemming from multiple pandemic-era stimulus injections. RBC Economics notes the top 10% accumulated roughly $30 trillion in liquid, income-generating assets since 2020 - six times more than other groups - enabling reduced wage reliance for maintaining living standards.
This wealth divergence creates dangerous economic concentration, with the top 10% of earners now accounting for nearly half of U.S. consumer spending - a record share dating to the late 1980s. Given that approximately 70% of U.S. GDP derives from consumption, the sustainability of wealthy household spending becomes critical for 2026. Much wealth effect gains stem from AI-related stock market appreciation, making potential corrections in lofty AI valuations a significant risk to consumption patterns. Recent consumption data already shows cracks, with September 2025 consumer spending increasing only moderately following solid prior gains, suggesting third-quarter momentum loss. November consumer confidence plummeted to its second-lowest level since April, approaching historic lows due to increased layoffs, continued tariff uncertainty, and widespread affordability issues particularly affecting middle- and lower-income households.
Tariff developments have proven "better than feared" compared to early 2025 expectations when countries braced for impact. Tariffs have been largely watered down even among contentious negotiations with China, Canada, and Mexico. While declining, the average effective U.S. tariff rate remains elevated at approximately 16%. Affordability concerns exacerbated by Trump's tariff policies appear to be reaching a fever pitch, evidenced by high-profile Democratic victories attributed to campaigns addressing American affordability issues. Trump recently rolled back tariffs on several food products and proposed $2000 tariff rebate cheques for American taxpayers (excluding high-income earners). This fiscal stimulus injection to pay for these rebates would cost the U.S. Treasury Department USD$300 billion according to the Tax Foundation, roughly equivalent to incremental annual tariff revenue from new levies and already accounted for as tax cut offsets under the One Big Beautiful Bill Act.
The Supreme Court is expected to rule on Trump's tariff agenda legality under the 1977 International Emergency Economic Powers Act. If ruled against, the government may theoretically provide tariff refunds, though Trump cabinet members have characterized such verdicts as near-fiscal calamity, eroding confidence in good-faith refund delivery. Questions remain whether refunds would apply partially or fully, and to lawsuit-pursuing companies only or all impacted companies.
Federal Reserve (Fed) policy remains uncertain given inflation stickiness opposing labor market weakness signs. Modest stagflationary pressures will likely force the Fed to maintain data-dependent stances on meeting-by-meeting bases. The December 9, 2025, rate cut of 0.25% marked the third consecutive 2025 cut and sixth overall since mid-2024, totaling 1.75% reduction to a 3.50%-3.75% range. Mixed recent economic data includes stronger-than-expected Q3 GDP at 4.3% - a full percentage point above consensus - while November unemployment ticked to 4.6% primarily from re-entrants and temporary layoffs rather than permanent layoffs. November inflation readings showed headline CPI slowing to 2.7% year-over-year, well below expectations but containing data quirks requiring cautious interpretation.
The rate-setting Federal Open Market Committee divide between hawks and doves reflects different perspectives on lagged tariff impacts, immigration tightening effects on labor supply, and Baby Boomer retirement impacts. Hawks cite potential upward wage pressure risks, while doves point to AI boom transitions from builders to adopters suggesting broad-based productivity gains and corporate cost-savings. The May installation of a new Fed chair may complicate narratives further, with frontrunners Kevin Hassett and Kevin Warsh being Trump loyalists sympathetic to faster, more forceful rate cuts. Potential waning Fed independence under Trump-allied leadership may be checked by bond market revolts against concerns of upward inflation inflection later in 2026.
S&P 500 Index equity valuations reached concerning levels, with the Index up mid-to-high teens through November 2025 - respectable but decelerating from 2024's 20% increase and underperforming other major markets. The Magnificent 7 (Mag 7) stocks have grown from 15% to over one-third of index weight over the past decade. The S&P 500 Index trades more than one standard deviation above long-term averages, though stripping out Mag 7 yields more palatable 16.7X multiples modestly below historical averages. Earnings expectations call for just over 14% growth in 2026 following 13% in 2025, with Mag 7 expected to power growth at approximately 23% - representing meaningful slowdown from 2024's 35-40% breakneck pace.
Highlights
- U.S. layoffs topped 1 million through early November 2025, 50% higher than previous year
- 43-day federal government shutdown was longest in U.S. history
- Top 10% of earners account for nearly half of U.S. consumer spending - record since late-1980s
- Average effective U.S. tariff rate remains elevated at approximately 16%
- $2,000 proposed tariff rebate cheques would cost the U.S. Treasury USD$300 billion
- Fed implemented six rate cuts totaling 1.75% since mid-2024
- Magnificent 7 stocks comprise over one-third of S&P 500 index weight
- AI-related consensus capital expenditures exceeded $400 billion in 2025
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