Morgan Stanley's Michael Gapen Predicts US Economy To Return To ‘Modest Growth’ In 2026

• Gapen said that the impact of trade and immigration policies should fade, and that the overall economic climate should improve going forward.
• The economist also thinks there is a better chance for positive surprises for growth.
• He expects President Trump’s tariffs to squeeze the purchasing power of low- and middle-income households, even as high-income consumers continue to fare well.

Morgan Stanley’s Chief U.S. Economist Michael Gapen on Wednesday predicted that the United States economy would return to “modest growth” in 2026.

“Last year, we predicted slow growth and sticky inflation, mainly because of strict trade and immigration policies – and this proved accurate. But this year, the story is changing. We see the U.S. economy finally moving past the high-uncertainty phase,” Gapen said.

The economist predicts the U.S. economy will grow at 1.8% in 2026 and 2% in 2027. He added that the impact of trade and immigration policies should fade, and that the overall economic climate should improve going forward.

Reason For Optimism

Gapen said that while there are some risks to the U.S. economy’s growth prospects, he expects them to shift to the upside in the second half of 2026 and beyond. The economist thinks there is a better chance of positive growth surprises.

Explaining his optimism, Gapen pointed to “robust” spending in AI-related businesses and to upper-income consumers faring well.

Inflation Fight Isn’t Over

As for inflation, Gapen stated that President Donald Trump’s tariffs could result in prices remaining firm in the first half of 2026. He noted that while inflation is expected to cool next year, it likely will not hit the Federal Reserve’s 2% target.

“By the end of 2026, we see headline PCE inflation at 2.5 percent, core inflation at 2.6 percent, and both stay above the 2 percent target through 2027. In other words, the inflation fight isn’t over, but the worst is behind us,” Gapen added.

However, he expects President Trump’s tariffs to squeeze the purchasing power of low- and middle-income households.

Fed Rate Cut Expectations

The Morgan Stanley economist also stated that following the two 25-basis-point rate cuts in September and October, he expects the Fed to cut rates further by 75 bps by mid-2026.

According to data from the CME FedWatch tool, there is an 83.1% probability of a 25-basis-point rate cut in December, up from 30.1% a week ago.

Meanwhile, U.S. equities gained in Wednesday’s opening trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up by 0.41%, the Invesco QQQ Trust ETF (QQQ) rose 0.4%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) gained 0.42%. Retail sentiment around the S&P 500 ETF on Stocktwits was in the ‘bearish’ territory.

The iShares 7-10 Year Treasury Bond ETF (IEF) was down by 0.15% at the time of writing.

Also See: AMD Stock Extends Decline In Pre-Market On Meta’s Reported Interest In Google’s TPUs – Mizuho Warns Of A ‘Modest Challenge’

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