Economic Letter

By Patrick Pascal

April 2026

U.S. ECONOMY

Economic activity continues to slowly expand. First-quarter GDP growth is estimated at 1.3%, with full 2026 growth expected to approximate 2.2%. The labor market remains generally balanced, as reflected in an unemployment rate of 4.3% in March—down 0.1% from February. Importantly, to date, there has been no meaningful evidence of job displacement attributable to artificial intelligence, and wage growth has trended in line with inflation.

Consumer sentiment, as reported by the University of Michigan, weakened during the quarter, particularly in March as escalating tensions in the Persian Gulf grew substantially. Indicators of both current conditions and future expectations also moved lower, highlighting the impact of geopolitical uncertainty on household confidence. We believe a sustained improvement in sentiment will depend on continued progress toward resolving present tensions.

U.S. government debt is projected to rise meaningfully as a percentage of GDP over the coming decade. Offsetting this trend, household debt, relative to GDP, has declined significantly over the past several decades. Additionally, anticipated productivity gains associated with advances in artificial intelligence may provide a path to reducing this future fiscal risk.

FIXED INCOME

During the quarter, fixed-income markets exhibited atypical behavior, as bonds did not provide their traditional diversification counterbalance to equity market declines. This dynamic was largely driven by rising energy prices and the corresponding inflation concerns.

Looking ahead, a decline in energy costs back towards market-based price levels could place downward pressure on inflation and improve the prospects for fixed-income investments. At the same time, elevated levels of global government borrowing, coupled with substantial capital investment in artificial intelligence—expected to exceed $700 billion this year—have renewed concerns regarding potential “crowding out” effects in fixed income markets.

With a transition underway at the Federal Reserve, we expect monetary policy to remain measured and data dependent. Absent a material change in economic conditions, we expect interest rates to remain within a narrow range near current levels for the remainder of 2026.

EQUITIES

Equity markets entered the quarter with strong momentum, nearing recent highs by late February. However, geopolitical developments in March led to a temporary correction, with major indices declining between 9% and 13%. Following the announcement of a ceasefire, markets recovered a substantial portion of those losses and now appear positioned to retest recent highs.

As always, the central question for investors is whether current valuations are justified by underlying fundamentals. In our view, this environment continues to favor a disciplined approach, emphasizing careful selection across sectors and individual companies.

While near-term uncertainty—particularly geopolitical—remains elevated, the underlying economic backdrop continues to demonstrate resilience. We remain focused on maintaining well-diversified portfolios aligned with long-term objectives, while remaining attentive to risks and opportunities as they evolve.