Favorite 15 – October 2026

By Vigilant Wealth Management on October 22, 2026

The Investment Policy Committee has finalized the Favorite Fifteen chart pack for October 2026.

The U.S. economy remains strong despite persistent inflation, elevated interest rates, and geopolitical uncertainty. Our base case anticipates a “Goldilocks-like” environment through year-end, supported by resilient consumer spending, substantial investment in artificial intelligence, and strong corporate profits. We expect real GDP growth near 2.5% and nominal growth, which includes inflation, closer to 6%.

Looking ahead, the combination of higher interest rates, slowing job growth, and persistent inflation are likely to weigh on economic activity in 2027. The ongoing conflict with Iran, tariffs, and shifting global supply chains remain important sources of transitory and structural inflationary pressures, limiting the Federal Reserve’s ability to lower interest rates. While the economic outlook remains constructive, we expect growth to moderate in 2027 as tighter financial conditions take effect.

The charts that follow highlight the strength of the current expansion and the risks shaping our outlook.

Global Economic Activity: Global economic activity (Chart #2) accelerated in September, with the composite PMI reaching 54.3, its strongest reading in the period shown. Services led the improvement, rising to 54.5, while manufacturing remained in expansion at 53.0. The Economic Surprise Index (Chart #1) is also positive across developed and emerging markets, at 34.2 and 33.2, respectively, suggesting economic data continue to exceed expectations. Despite the improvement, geopolitical disruptions, tariffs, and higher energy costs remain potential headwinds to global growth.

U.S. Growth: The Weekly Economic Index (Chart #3) has risen to 3.1%, suggesting U.S. economic activity remains strong. The Atlanta Fed GDPNow estimate (Chart #4) projects 3.6% annualized growth in the third quarter, well above the 2.2% growth recorded in the second quarter. The ISM surveys (Chart #5) reinforce this strength, with both manufacturing and services activity expanding and new orders pointing to continued momentum. However, much of the strength in business investment remains concentrated in AI infrastructure, with limited evidence of a broader acceleration in capital spending across the economy.

AI Capital Spending (Bonus Chart): Investment in artificial intelligence infrastructure continues to accelerate at an extraordinary pace. The five major hyperscalers, Alphabet, Amazon, Meta, Microsoft, and Oracle, spent a combined $416 billion on capital expenditures in 2025. Consensus estimates now project spending of approximately $799 billion in 2026, $1.1 trillion in 2027, and $1.2 trillion in 2028. These projections are substantially higher than expectations at the end of 2025. The scale of investment is becoming increasingly important to economic growth and corporate earnings, but it also raises questions about the sustainability of spending and the returns companies will ultimately generate. Notably, projected capital expenditures approach or exceed combined operating cash flow in 2027, indicating that funding requirements may increasingly depend on external financing.

U.S. Consumer: Consumer spending (Chart #6) remains robust, with retail and food service sales increasing 6.3% year over year and sales excluding motor vehicles rising 7.2%. September sales increased 0.7% from August. However, these figures are reported in nominal dollars and reflect both higher prices and actual spending growth. Consumer confidence (Chart #7) tells a different story, with the headline sentiment index falling to 48.1, near its lowest level in the past three years. Sentiment surveys are designed to represent households across the population, while aggregate spending is disproportionately influenced by higher income consumers. This divergence reinforces the K shaped economy, where affluent households continue to drive growth while many lower and middle income households struggle with the cumulative impact of higher prices.

Labor Market: Employment growth (Chart #8) remains positive but has slowed considerably. Total nonfarm employment reached 159.0 million in September, while private employment rose to 135.7 million. However, only 29,000 jobs were added during the month, well below the average pace of approximately 97,000 over the past three years. The continued slowdown in hiring suggests businesses are becoming increasingly cautious about adding employees despite firm economic growth. This may reflect margin pressures, slowing demand among lower income consumers, and growing opportunities to improve productivity through AI. While the number of Americans collecting paychecks remains historically high, weaker job creation could eventually weigh on consumer spending.

Inflation: Inflation (Chart #9) remains a growing concern. Headline CPI increased to 3.7% year over year in September, up from 3.5% in June, while core inflation has remained relatively stable at 2.6%. However, core prices increased 0.3% in September, suggesting underlying inflation pressures have not fully subsided. Higher energy prices related to the conflict in Iran remain an important contributor to headline inflation, while tariffs, supply chain disruptions, and firm consumer demand create additional pricing pressure. In response, the Federal Reserve has raised its policy rate to 4.0%, reinforcing expectations that interest rates will remain elevated until there is clearer evidence of slowing inflation.

Bond Market: The Treasury yield curve (Chart #10) has shifted higher across nearly all maturities, reflecting persistent inflation and expectations for tighter monetary policy. The 2 year Treasury yield has risen to 4.77%, while the 10 year and 30 year yields have increased to 5.14% and 5.48%, respectively. The 10 year Treasury has increased approximately 48 basis points since July, raising borrowing costs for consumers, businesses, and the federal government. Higher long term interest rates are particularly challenging for housing and other capital intensive industries and could begin to slow economic activity in 2027.

Investment grade credit spreads (Chart #11) have widened modestly but remain relatively tight. BBB spreads have increased to approximately 80 basis points, compared with 70 basis points last quarter, while AA spreads have risen to 40 basis points from 35. Credit markets continue to reflect confidence in corporate balance sheets and sustained economic growth, although the modest widening suggests investors are beginning to demand additional compensation for credit risk.

Corporate Profits: Corporate earnings expectations (Chart #13) continue to strengthen. S&P 500 earnings were $270 in 2025, while consensus estimates for 2026 and 2027 have increased to $363 and $419, respectively, implying earnings growth of approximately 34% in 2026 and 15% in 2027. Next twelve months earnings have risen to $408, up from approximately $373 last quarter. Continued spending on AI and data center infrastructure remains an important driver of earnings growth, particularly among the largest technology and communications companies. While absolute profits remain strong, the expected deceleration in earnings growth raises questions about whether current profit margins and growth rates are sustainable as economic activity moderates.

Stock Market: The S&P 500 remains near record highs (Chart #12), supported by strong corporate earnings. However, the forward price to earnings ratio (Chart #14) has declined to 18.9 times earnings, down from 20.2 times last quarter and well below its recent peak above 23 times. Despite this decline, valuations remain above the 20 year average of 16.8 times. The compression in valuations reflects higher interest rates and greater uncertainty around the durability of earnings growth. While rising profits continue to support equity prices, the market remains vulnerable to disappointing earnings guidance, particularly among the large AI related companies that have contributed disproportionately to index returns.