TD Securities expects US growth to be broadly flat through 2026, running slightly below trend, with real GDP seen at 2.0% on a Q4/Q4 basis and unemployment around 4.3% by Q4 2026. Risks centre on the Iran conflict and an associated oil shock, which could push the economy towards stagflation, while AI and higher-income consumer spending are described as supporting demand. The firm assigns a 25% probability to a US recession over the next year.
On prices, TD Securities sees limited scope for rapid disinflation while supply chains remain under strain. Core CPI inflation is forecast to peak near 3.0% year-on-year in Q4 2026, ending that year higher than it began, and the reading is described as similarly elevated in core PCE terms. It expects most oil-price effects to feed into headline inflation, with gradual disinflation returning in 2027, while policy and geopolitical developments are cited as key sources of uncertainty.
Monetary Policy And Market Strategy
We see the Federal Reserve remaining on hold for the rest of the year, pinned between slow growth and persistent inflation. With the latest Core CPI report showing inflation holding firm at 2.9%, the Fed has no room to cut rates. This suggests that trades expecting a stable Fed funds rate, like selling options on near-term interest rate futures, could be effective.
The combination of sideways economic growth and significant geopolitical risk points toward heightened market volatility. We believe owning downside protection is prudent, as the 25% chance of a recession could quickly materialize into a market shock. With the VIX index recently climbing above 20, buying put options on major indices like the S&P 500 offers a clear way to hedge against this uncertainty.
Geopolitical Risks, Energy, And The Labor Market
The conflict in Iran is directly propping up energy prices, which is the main source of the stagflationary risk we face. WTI crude oil has remained stubbornly high, trading this week near $95 a barrel, and we see little reason for this to change in the near term. We should therefore consider maintaining long positions in crude oil futures or call options on energy-sector ETFs.
The labor market is stable but showing signs of topping out, which supports the overall outlook of muted growth. Last week’s jobs report saw the unemployment rate tick up slightly to 4.2%, moving closer to the year-end forecast of 4.3%. This lack of strong momentum reinforces the idea that equity markets are unlikely to break out to the upside in the coming weeks.
