US: Sideways Growth Amid Stagflation Risks – TD Securities

TD Securities' latest outlook indicates that the US economy will face a complex scenario of sideways growth and stagflation risks in 2026. The firm's strategists expect US output growth to remain range-bound, with their tracked GDP indicator showing a quarterly annualized pace of 2.5%, while the year-over-year rate for the fourth quarter is slightly below trend at 2.0% to 2.1%. This dynamic primarily reflects the lingering impact of oil price shocks.

**Stagflation Risks and Policy Dilemma**

The report specifically highlights that geopolitical factors, such as the Iran conflict, are posing significant stagflation risks. This combination of weak growth and persistent inflation could severely constrain the Federal Reserve's policy flexibility. TD Securities strategists explicitly state that, against this backdrop, they expect the Fed to be forced to remain on hold throughout 2026, with little room for policy adjustments. This assessment underscores the classic dilemma central banks face when responding to supply-side shocks.

**Market Implications Ahead**

Sideways growth coupled with a stagnant policy rate implies that valuation expansion for risk assets may be limited, while bond markets will likely continue to search for a pricing anchor between sticky inflation and economic slowdown. Investors should be wary that further escalation of geopolitical risks could heighten market volatility and test traditional equity-bond hedging strategies.