Poli-Economic Update

At the start of 2025, I shared a balanced view of the economy. We had real positives—strong spending, a solid job market, and early momentum from AI—but there were also risks building in the background. Now, I will walk you through some of the red flags that I think are turning into warning signs this spring and through summer.

For a while, things held together. The stock market stayed strong, AI helped push valuations higher, and consumers kept spending.

But now, as we move through 2026, the tone is starting to shift. Some of those risks are beginning to show up, and more importantly, they’re starting to combine in ways that could create more pressure on the system.

Stock Markets and Mixed Signals

Right now, stock markets are still acting relatively optimistic.

There’s a general belief that even if policies get aggressive, they’ll likely be scaled back before causing major damage. That assumption has worked so far, but it’s not something markets can rely on forever.

At the same time, not everything is sending the same message. While stock markets have held up, areas like gold and parts of the credit market are showing more caution. That tells us there may be more going on under the surface than stock prices alone suggest.

The Economy Beneath the Surface

On the surface, the economy still looks relatively stable. Underneath, there are signs of slowing.

Job growth has weakened and, depending on how you measure it, has been close to flat over the past year. That’s something we pay attention to this late in an economic cycle.

We’re also seeing more people working in contract or gig-type jobs instead of more stable positions. That can work well when the economy is strong, but it tends to create more risk if things slow down.

At the same time, some companies are starting to reduce staff, in part because of efficiency gains from AI. If that trend continues, it can start to build momentum.

Trade Policy, Inflation, and Interest Rates

Trade policy is starting to have a more noticeable effect on everyday costs.

Tariffs act a lot like a hidden tax. They raise costs for businesses, which often get passed on to consumers. We had made good progress in bringing inflation down, but recently that progress has slowed, and some prices are starting to move higher again.

This puts the Federal Reserve in a tough spot. Interest rates are already high enough to slow the economy, but inflation hasn’t fully settled down, so the Fed has limited room to adjust.

There’s also been more public pressure around interest rate decisions. Keeping the Fed independent is important because it helps maintain confidence that inflation will stay under control over time.

AI Growth and What It Requires

AI has been one of the biggest drivers of the market and the economy recently.

But behind the scenes, it requires a lot to support it—huge data centers, large amounts of energy, water, and significant financing.

Much of this growth is being funded through newer types of lending and investment structures. These systems tend to work well when everything is growing, but they can become more sensitive if conditions change.

Private Credit and Rising Debt

One area that doesn’t get talked about as much is something called private credit.

In simple terms, this is when large investment firms lend money directly to companies or projects instead of going through traditional banks. It has grown quickly in recent years.

That growth has created opportunities, but it also means there’s more lending happening outside the usual safeguards. Some analysts are starting to worry that parts of this market could become unstable if the economy weakens.

At the same time, many households are taking on more debt—credit cards, car loans, and higher housing costs. When both consumers and the financial system are taking on more debt at the same time, it can make things more sensitive to change.

We’ve seen in the past, especially in 2008, how problems in credit markets can spread more quickly than expected.

A More Uneven Economy

Another trend we’re watching is how uneven the economy has become.

A smaller group of higher-income households is now responsible for a large share of overall spending. At the same time, many others are dealing with higher costs and tighter budgets.

We’re also seeing wealth become more concentrated over time. When that gap grows too wide, it can create economic and political pressure that eventually feeds back into markets.

Geopolitics, Energy, and the Dollar

Global tensions continue to play a role in the economic outlook.

Recent conflict in the Middle East has affected energy markets and, in the short term, has supported the U.S. dollar because global energy is still largely priced in dollars.

That can be helpful in the near term, but over time, ongoing tensions can lead countries to look for alternatives and reduce reliance on any one system.

The U.S. has benefited greatly from the dollar being the world’s primary currency, and while that position remains strong, it’s something we continue to watch over the long term.

Debt and Confidence

When we talk about U.S. debt, it’s important to understand what it really means.

The national debt is the total amount the government has borrowed, and it’s also something that investors around the world hold as a safe asset.

That’s why it hasn’t been a major issue on its own. The system works as long as there is confidence in the U.S. economy and financial system.

Where it can become more important is if that confidence starts to weaken over time. Changes in growth, global demand, or trust in the system can affect borrowing costs and financial stability.

Strategic Positioning

From a portfolio standpoint, this is not a time to make emotional decisions, but it is a time to stay disciplined.

We’ve been gradually increasing cash positions. That gives us flexibility and helps cushion against market swings.

We’re also rebalancing where needed, especially after a strong run in stocks. In some cases, that means slightly reducing stock exposure and increasing fixed income to add stability.

Gold and other precious metals can also play a role as a hedge during periods of uncertainty or inflation.

The goal is not to predict exactly what happens next, but to stay prepared for a range of outcomes.

Final Thoughts

This is not a time to panic, but it is a time to stay aware.

There are more moving pieces than usual, and they’re starting to line up in ways that could increase risk. In my experience, the best results come from making small, thoughtful adjustments early rather than reacting later.

We’ll continue to monitor things closely and make adjustments as needed.

Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk. Precious metal investing involves greater fluctuation and potential for losses.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.