US Outlook 4Q26: Growth remains strong but selectivity matters

• The US economy remains resilient, with strong corporate earnings continuing to support the outlook.

• Inflation is likely to remain elevated for longer amid higher energy, food and semiconductor prices, while a resilient labour market keeps the risk of further rate hikes tilted to the upside.

• We remain cautious on consumer discretionary stocks as elevated inflation and borrowing costs weigh on purchasing power and encourage more selective consumer spending.

• We are also cautious on unprofitable high-growth companies, as elevated bond yields and funding costs can put pressure on valuations.

• We favour the digital economy sector, particularly internet and semiconductor companies, and have upgraded our semiconductor sector rating to 3.5 stars Attractive on stronger AI-driven earnings prospects and more attractive valuations. 

• Overall, we recommend investors underweight US equities at the index level given elevated valuations relative to Asia, while favouring high-quality companies with strong balance sheets, resilient earnings and high returns on equity for broad US exposure.

The US economy continues to demonstrate resilience despite elevated inflation and interest rates. Real GDP expanded by 1.5% in the second quarter of 2026, supported by strong consumer spending, which grew 3.4%, and a 13.6% increase in equipment spending across industrial, transportation and information-processing equipment. Growth momentum is expected to strengthen in the third quarter, with the Federal Reserve Bank of Atlanta’s GDPNow model currently pointing to real GDP growth of 5.0%.

Corporate earnings have also remained exceptionally strong. S&P 500 earnings grew 52.3% year-on-year in the second quarter, with 10 of the index’s 11 sectors posting positive earnings growth and beating consensus estimates. For the full year, earnings are expected to grow by more than 30%, accelerating from 12.5% in 2025. Growth is being led by technology and technology-related companies benefiting from the AI boom, particularly semiconductors, while higher oil prices are supporting profitability in the energy sector.

Figure 1: Energy and tech sectors lead projected S&P 500 earnings growth

Sticky inflation and a resilient labour market keep rate risks elevated

However, higher energy and semiconductor prices are likely to keep inflation elevated for longer. The latest Consumer Price Index (CPI) data showed headline inflation holding at 3.4% year-on-year (YoY) in August, while core CPI eased to 2.4% from 2.5% in July, both in line with market expectations. Energy remained a major contributor, with fuel oil prices rising 52.0% YoY and gasoline prices increasing 27.4%. On a monthly basis, however, headline CPI rose 0.4%, the fastest increase in three months, while core CPI accelerated to 0.3% from 0.2% in July.

This latest inflation data reinforced concerns that price pressures remain persistent, with the Federal Reserve subsequently raising its benchmark interest rate by 25 basis points to 3.75%-4.00% on 16 September.

Figure 2: US inflation remains sticky above the Fed’s 2% target

Energy prices are likely to remain a key source of inflationary pressure. Iran has proposed reopening the Strait of Hormuz in exchange for conditions including the lifting of oil sanctions and the release of frozen assets, but Trump has rejected the proposal and reportedly expects bombing of Iran to resume after the November midterm election. Meanwhile, disruptions to the Bab el-Mandeb Strait and Saudi Arabia’s East-West pipeline have constrained alternative routes for transporting crude oil, although Saudi Arabia has since restarted the pipeline at reduced capacity.

Even if the Strait of Hormuz reopens, fuel prices may remain elevated because refining capacity, rather than crude supply alone, is an important bottleneck. Middle Eastern refining capacity has been disrupted by the conflict, while Ukrainian drone strikes have also reduced Russian refinery capacity. US refiners, meanwhile, are already operating at high utilisation rates, limiting spare capacity to compensate for disruptions elsewhere. This has put particular pressure on refined fuel prices, including gasoline and diesel. As of 28 September, the national average price of regular gasoline stood at USD 4.48 a gallon, while diesel had reached around USD 6.45 a gallon, both significantly above year-ago levels. Diesel prices are particularly important for the broader economy given their use in freight, agriculture and construction. Higher diesel and other fuel costs can raise transportation and production costs across the economy, potentially feeding through to food and other goods prices.

Beyond energy, other sources of inflationary pressure are also emerging. Rising memory chip prices amid a global shortage are contributing to higher electronics prices, while food prices are also moving higher. The UN Food and Agriculture Organization’s Food Price Index rose 1.9% month-on-month (MoM) in August, reaching its highest level since November 2022. Further tariff escalation could add to inflationary pressures.

These inflationary pressures are also evident in business surveys. The September S&P Global Composite PMI rose to 58.4, its highest level in more than five years, as activity accelerated across manufacturing and services. However, the survey also showed severe supply-chain bottlenecks, with work backlogs rising and supplier delivery times lengthening. The input-price index jumped to 66.4 from 59.9 in August, its highest level since October 2022. Selling price inflation also picked up, suggesting that some of these higher costs are being passed on to customers.

At the same time, the labour market remains resilient. Nonfarm payrolls increased by 162,000 in August, well above consensus expectations of 55,000, while the unemployment rate remained at 4.1%. Initial jobless claims also remained low at 197,000, indicating limited layoffs and continued labour market stability. With economic activity remaining strong, supply-side pressures intensifying and labour market conditions holding up, inflation risks remain tilted to the upside, keeping the risk of further rate hikes elevated.

Figure 3: The US labour market remains resilient

Favour the digital economy and quality amid selective positioning

Despite resilient economic activity and strong corporate earnings, we remain selective in our positioning within US equities.

We remain cautious on consumer discretionary stocks amid elevated inflation and interest rates. US retail sales rose 1.2% MoM in August, following a revised 0.5% decline in July. However, we do not expect this pace of growth to be sustained. The August increase was partly supported by back-to-school spending and higher gasoline prices, with receipts at service stations rising 3.1%. More broadly, consumers are becoming increasingly selective and seeking lower-priced goods as persistent inflation weighs on purchasing power. The retail sales data should also be interpreted with some caution, as the measure is not adjusted for changes in prices and primarily captures spending on goods.

Consumer confidence has also softened. The University of Michigan’s consumer sentiment index fell from 51.7 in August to 48.1 in September, its lowest level in four months, while views of both current and year-ahead personal finances weakened. At the same time, real average hourly earnings fell 0.3% year-on-year in August, marking the fifth consecutive month of contraction. These factors, together with fading support from tax refunds, point to moderating consumption, particularly for larger purchases that require financing.

Recent commentary from retailers also points to a more cautious consumer environment. Walmart has noted that households are becoming more deliberate in managing their budgets as higher fuel prices prompt consumers to make trade-offs, while Home Depot and Lowe’s have continued to see weaker demand for larger home improvement projects that typically require financing. We therefore expect consumer spending to become more selective as elevated inflation and borrowing costs continue to weigh on household purchasing power.

We also remain cautious on unprofitable, high-growth companies. Elevated bond yields, driven by persistent inflation concerns and growing scrutiny of US debt sustainability, can weigh on the valuations of companies whose expected profits lie further in the future. Higher funding costs can add to the pressure, making companies that depend heavily on external financing particularly vulnerable.

In contrast, we continue to favour the digital economy, which remains a key beneficiary of AI adoption. Within the sector, we see opportunities in both internet companies and semiconductors. Big Tech companies are seeing increasingly tangible AI monetisation as demand for AI computing accelerates, even as the heavy capital expenditure required to build AI infrastructure has weighed on valuations and created more attractive entry points.

One source of growing compute demand is AI agents. Unlike conventional chatbots, AI agents can autonomously perform multi-step tasks on users’ behalf, from searching for information and making recommendations to completing purchases and bookings. The greater complexity of these tasks should increase overall compute demand as AI agents become more widely adopted. At the same time, their ability to act on users’ behalf could open up a new source of consumer AI revenue beyond subscriptions and advertising, allowing platforms to capture a small fee from transactions completed through their agents. There are already promising early signs of broad consumer adoption, with Meta’s new personal AI agent, Muse, climbing to the top spot in the US on both Apple’s App Store and Google Play Store. Meta CEO Mark Zuckerberg has also said the company expects to eventually earn transaction fees from purchases and bookings made through the agent.

We also remain positive on cybersecurity, where rising AI adoption, increasingly sophisticated cyber threats, the growth of agentic AI, IT/OT convergence and tighter regulatory requirements are supporting continued security spending.

Related article: Cybersecurity earnings are strong. The bigger opportunity may still lie ahead

We have turned positive on US semiconductors, upgrading the sector rating from 2.5 stars Neutral to 3.5 stars Attractive. The sector has pulled back amid concerns over the sustainability of heavy AI capital spending. However, recent guidance from semiconductor companies has extended the AI growth runway and supported earnings upgrades. The combination of the pullback in share prices and stronger earnings prospects has made valuations more attractive, supporting our upgrade of the sector.

We expect AI investment to remain strong as broader adoption requires continued spending on computing infrastructure and capacity. Hyperscalers are estimated to spend approximately USD800 billion in 2026, supporting demand for GPUs, custom silicon, foundry services, memory and semiconductor equipment. Given that the gap between US and Chinese AI models is narrowing significantly, while national leaders and governments remain firmly committed to the AI model race, we believe the likelihood of a genuine slowdown in AI development in the near term is low. More importantly, even if the pace of frontier model development moderates, growing AI adoption and the shift towards inference and more complex agentic workloads should continue to drive demand for computing power and the hardware required to support it.

While we see attractive opportunities within the US digital economy sector, we remain more cautious on US equities at the broader index level given elevated relative valuations. Applying a fair P/E multiple of 20x to our 2028 earnings estimates, we derive a target price of 9,280 for the S&P 500, implying approximately 19.8% upside from its 25 September 2026 closing level of 7,743.11. That said, the S&P 500 currently trades at a 91.5% premium to the MSCI Asia ex-Japan Index, well above its 10-year average premium of 48.2%. We therefore maintain our 2.0 stars Not Attractive rating for the US market and  continue to favour Asian markets such as Taiwan and South Korea, which offer comparable growth prospects at more compelling valuations.

For investors seeking broad US market exposure, we favour high-quality companies with strong balance sheets, resilient earnings and high returns on equity.

Table 1: Projections for the S&P 500 Index

S&P 500 Index	2025	2026E	2027E	2028E
Earnings Per Share (EPS)	268.7	368.0	420.2	464.0
Earnings Growth YoY	12.5%	37.0%	14.2%	10.4%
PE Ratio (X)	25.5	21.0	18.4	16.7
Target Price (based on a fair PE of 20X)				9,280
Upside Potential				19.8%
Source: Bloomberg Finance L.P., iFAST estimates. Data as of 25 September 2026

Figure 4: Share prices are driven by earnings growth in the long run

Table 2: Recommended products

Sector/Style	Recommended Products
Digital Economy	•       Fidelity Global Technology A-ACC-USD •       Eastspring Investments Unit Trusts - Global Technology SGD •       Invesco NASDAQ Internet ETF (NASDAQ: PNQI) •       Global X Cybersecurity ETF (NASDAQ: BUG) •       VanEck Semiconductor ETF (NASDAQ: SMH)
Quality	•       JPMorgan U.S. Quality Factor ETF (NYSE: JQUA)

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.