On this episode Remy Blaire speaks with Paul Gruenwald, Global Chief Economist at S&P Global Ratings, from the New York Stock Exchange to break down the 2026 market outlook. As bond yields return alongside heightened volatility, markets are adjusting to a new era shaped by geopolitical fragmentation and persistently elevated terminal rates, shifting the focus from timing rate moves to identifying where the new neutral level lies. Gruenwald explains that despite earlier concerns about tariffs, the economy entered the year in solid shape, supported by labor market resilience and a surge in investment tied to data centers and AI. He points to potential upside driven by productivity gains from artificial intelligence, echoing historic skepticism like that of Robert Solow, while noting early signs that AI may already be boosting growth. Still, risks remain, including narrow growth concentration, possible labor market weakness, or financial volatility. On policy, he expects the Federal Reserve to hold rates steady in early 2026 before cutting later in the year, while the European Central Bank is likely finished tightening, the Bank of Canada may have one move left, and the Reserve Bank of Australia has recently raised rates. Overall, he notes that relatively strong U.S. growth and higher rates could continue supporting the dollar, as markets balance lingering risks against the transformative potential of AI-driven productivity.
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Welcome to FinTech TV.
I'm Remy Blaire.
Yields are back, but so is the volatility.
After decades of lower for longer, bond markets are recalibrating to a regime defined by geopolitical fragmentation as well as sticky terminal rates.
Now the question for this year, 2026, is no longer about the timing, but where the new neutral actually sits.
Well, joining us to navigate this next era is Paul Grunwald, who's the global chief economist at S&P Global Ratings.
Paul, great to have you here.
Thank you so much for joining.
Well, you and Baguard are having an event here at the New York Stock Exchange.
So first and foremost, given all the volatility that we've seen so far in 2026, what is the outlook moving forward and what are you paying attention to?
Yeah, well, we spent the second half of last year upgrading our forecasts, right?
We were all worried about the impact of the tariffs.
They were not as bad as we thought.
The labor market held together, and now we've got this investment boom for the data centers and AI.
So we started the year in pretty good shape.
The question is, We have a recovery that's pretty narrow.
We've got one sector investing, one sector hiring, and the consumption's kind of skewed toward the high end.
Is that all going to hang together, maybe with some tailwinds from easy financial conditions and low oil prices.
But right now, we don't normally say this, but we've got a little bit of upside risk to our forecast, I think, for 2026.
Yeah, so tell me about this upside and where you see this coming from.
Yeah, well, I think the big, the big prize is productivity around AI, and, you know, we economists have a, have a sort of a data point from the 1980s.
1 of our Nobel laureates, Robert Salo, famously said that he could see computers everywhere in the economy except in the productivity data.
So people are kind of applying that same framework to AI.
But it looks like the last couple of quarters in the US we're starting to see this unexpected and not fully identified source of growth.
But um you know, if that's AI productivity coming through, that is happening faster and a little bit larger than a lot of people thought.
So it's not.
Time yet to sort of declare victory on this, but this is a potential windfall for earnings, for government tax revenue, for household income, so we'll have to see.
If that's the real deal, and then how, how big is it and how is it going to play out this year?
Yes, and speaking of which, of course we are paying attention to economic data when it comes to the labor market as inflation as well as policy coming out from the nation's capital.
Now when it comes to policy, there's still a lot of uncertainty in terms of implications for the US as well as for around the world.
So how are you factoring this in?
Yeah, well, one of the surprises last year was the resilience.
So, you know, the labor market is held together.
We're still, I would say, close to full employment in the US, 4.4-ish.
Hiring has dropped, but firing has also dropped, so the churn is lower.
But yeah, we're looking at geopolitics.
We have a long list of risks that could knock our forecast to the downside, but markets have been resilient.
Trade looks like it's being rewired.
In response to the tariffs, some of the the capital flows are getting rewired in response to the tariffs.
So the downside hasn't been as bad as we thought.
I mean, there could be more to come, but now we've got the balance with the AI story.
So, you know, it doesn't look like a, given everything we've gone through since the beginning of last year, it doesn't look like a terrible year this year, to be honest.
Yeah, and you did touch on risks.
So tell us what you Watching when it comes to risks and why it matters.
Yeah, well, I think the foundation of growth right now, as I mentioned, is pretty narrow.
So if anything happens to a combination of labor demand, the AI story, or these benign financial conditions we have, that's probably going to lead to a down leg of growth and could lead us to lower our growth forecasts.
So that could be a surprise around. earnings, it could be a bad print for the labor market, let's say, or it could be something around, just volatility in the market, you know, jump in yields or something like that.
But as I said, those risks have been around for a while and they still seem to be holding together.
Yes.
And finally, when it comes to the outlook moving forward, of course we're paying attention to policy, in particular monetary policy, but At a time at a time when we're watching what the other global central banks are doing outside of the Federal Reserve and what this means for rate differentials as well as the currency markets, what are the implications here and what is your outlook for the Fed?
Well, the Fed, we think the neutral rate for the Fed is 3%, maybe a bit more, so they're about 50 basis points above neutral.
But you know, if you look at the economy and where we are on unemployment and growth, etc.
It's not obvious the Fed is far, far away from where it should be.
So we have the Fed on hold the first half of this year and two more cuts, uh, later in this year.
The Rest of the world looks like they're pretty much done.
ECB we think is done.
They're at 2, maybe 1 more from the Bank of Canada.
The Reserve Bank of Australia actually raised its rates, uh, this week, but I think this cutting cycle that we started in the middle of 2024 is largely done.
So in terms of flows, you know, with the US, you've, you've got relatively high rates and a growth, good growth story that's probably gonna support the, uh, the currency.
Well, Paul, great talking to you as we kick off 2026.
Thank you so much for sharing your insights.