The recession warnings that followed investors into 2026 have not turned into a full-blown downturn yet, but they also haven’t disappeared.
The U.S. economy continues to expand as of early June, supported by a resilient labor market, steady consumer spending and a wave of artificial intelligence-related capital spending. At the same time, inflation remains above the Federal Reserve’s 2% target at 3.8%. The Federal Reserve held interest rates steady at its April policy meeting, keeping the federal funds target at 3.5% to 3.75%. Now, a newly sworn-in Fed Chair Kevin Warsh inherits an economy that’s not flashing obvious recession warning lights, but also isn’t giving investors an all-clear signal.
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Economic cycles are natural, but investors can navigate the turbulence by understanding the specific risks ahead.
“Midterm election years tend to be the most volatile of the presidential cycle, with the largest intra-year drawdowns averaging the highest of all four years,” says David McInnis, a wealth advisor and managing partner at Aristia Wealth Management.
Here’s an analysis of the likelihood of a recession in 2026 and how to position portfolios accordingly:
— 2026 recession risk factors.
— Will there be a recession in 2026?
— What to invest in during a recession.
2026 Recession Risk Factors
While the Fed is projecting growth, four key threats could derail the economy in 2026: policy and geopolitical shocks, the Fed’s inflation
dilemma, consumer exhaustion and a potential AI bubble. While these “aren’t necessarily recession triggers on their own, they could compound into something more serious if they collide,” McInnis says.
Policy and Geopolitical Shocks
The biggest wildcard for 2026 may be the collision of government policy and geopolitical risk.
On the policy side, tariffs continue to create uncertainty for businesses, consumers and, by extension, investors. The Supreme Court’s rejection of many Trump administration tariff actions in 2025 opened the door for importers to seek refunds, but this has sparked a refund fight as the administration contests the scope of those repayments. Meanwhile, a 10% global tariff remains in effect.
At the same time, war in the Middle East has become a more direct threat to an already precarious inflation outlook. The Fed pointed to developments in the Middle East as a key risk to the economic outlook in its April meeting. The committee highlighted the resultant “sharp” increases in energy prices and “notable” repricing in several asset classes and Treasury yields. A prolonged conflict could cause global inflation and an economic slowdown in the U.S. and abroad, according to the central bank.
The Fed’s Inflation Dilemma
Inflation remains a key risk for the 2026 economic outlook because it limits how much help investors can expect from the Fed if growth slows. The risk now is that inflation remains too high as some parts of the economy, like the labor market, show signs of cooling. In a normal slowdown, the central bank might cut interest rates to support the economy. But if inflation remains elevated, cutting too quickly could make inflation even worse. Some Fed officials have even signaled they’re prepared to raise rates if inflation doesn’t abate.
This matters for investors because it means the Fed may not be able to come to the rescue as quickly as markets would like. Even if economic activity continues expanding at a solid pace, stubborn inflation could keep volatility elevated, making diversification and defensive positioning more important.
Consumer Exhaustion
The U.S. consumer has been the indomitable engine of the post-pandemic economy, but that engine is showing signs of slowing down. Consumer spending as measured by the personal consumption expenditures (PCE) rose only 0.1% in April, while the savings rate fell to 2.6% compared to 3.6% in March 2026.
“Cracks beneath the surface, such as rising delinquencies and slowing job growth, could compound the effects on an already stressed consumer,” McInnis says.
High interest rates throughout 2024 and 2025 have also taken a toll on household balance sheets. High debt levels could mean many consumers have less room to absorb another shock from increased fuel prices, rising interest costs or a softer job market.
David Schneider, a certified financial planner and president of Schneider Wealth Strategies, echoes this concern, noting that the economy in 2026 faces a threat from “a consumer breaking point where households, exhausted by high inflation and record debt, finally hit a financial wall.”
The Potential AI Bubble
The massive run-up in technology valuations, driven by the artificial intelligence boom
of the mid-2020s, presents a unique structural risk. If the astronomical capital expenditures by major tech firms do not yield profitable returns soon, the market could face a severe correction.
“There is a fear that the massive investment in AI could lead to an asset bubble,” McInnis says. “If this bubble bursts or if AI productivity gains fail to materialize quickly, it could cause a derisking and reassessment of AI valuations.”
A collapse in these valuations wouldn’t just hurt stock portfolios; it could trigger a “reverse wealth effect,” according to Schneider. In this scenario, “a bursting AI bubble could evaporate the paper wealth that is currently propping up high-end consumption.” While Schneider admits “it is impossible to know whether these risks will materialize,” the impact on market sentiment would be immediate.
Will There Be a Recession in 2026?
As of early June, a 2026 recession doesn’t appear to be a given, but the economy is sending mixed signals. On one hand, economic activity is expanding: GDP grew 1.6% in the first quarter, and the Federal Reserve Bank of Atlanta’s GDPNow model points to stronger second-quarter growth.
On the other hand, inflation remains elevated, job growth slowed between March and April and consumers may be feeling the strain of higher prices and borrowing costs.
“The economy is literally moving at two speeds, with businesses and affluent households stimulating growth, fueled by AI spending and record asset prices, while the average person is increasingly anxious and financially exhausted,” Schneider says.
He adds that the outcome will depend on if “top-heavy spending can continue to overcome broader economic vulnerabilities.”
The data suggests a slowdown is a real risk, but a full-blown recession is not necessarily on the horizon for the U.S. The Philadelphia Fed’s second-quarter Survey of Professional Forecasters showed the near-term outlook weakening, with forecasters expecting 2.2% real GDP growth in 2026. Meanwhile, the New York Fed’s yield-curve model put the probability of a U.S. recession by April 2027 at 17.6%. For investors, the takeaway is less about predicting a recession and more about preparing for a wider range of outcomes.
What to Invest In During a Recession
Predicting the direction of the economy is nearly impossible since there are always conflicting signals, Schneider says. “Smart investors accept the limits of prediction rather than betting on a single, uncertain outcome.” As such, the best strategy is one of preparedness, not prediction.
“You should adjust your cash reserves to be sure you have adequate liquidity to weather an economic storm, but you shouldn’t drastically alter your long-term investment strategy based on economic forecasts,” he says. Cash may not be the most exciting play, but it reduces market risk and provides financial flexibility if a recession creates potential buying opportunities in 2026.
You might use this opportunity to rebalance your portfolio, trimming high growth areas to buy more attractive valuations, McInnis says. He recommends focusing on income-generating investments like government-backed securities and investment-grade corporate debt, alongside global investments, commodities and alternatives. That said, given the current inflation backdrop, you may want to pay particular attention to bond quality and duration. Higher for longer rates can make long-term bonds more volatile.
“I encourage investors to remain invested but focus on diversifying equities and adding some HALO companies,” McInnis says. HALO, or hard assets, low obsolescence, companies have physical assets or products that can’t be replaced by AI. Those include infrastructure and energy stocks.
Some stocks and market sectors are also more defensive than others and tend to outperform the rest of the market during recessions. Utility stocks, healthcare stocks and consumer staples stocks are considered defensive investments because their earnings tend to be insulated from economic cycles and swings in consumer confidence.
Certain individual stocks have also outperformed during each of the past two U.S. recessions. Walmart Inc. (ticker: WMT), Netflix Inc. (NFLX) and T-Mobile US Inc. (TMUS) are just three examples of stocks that beat the S&P 500 in both 2008 and 2020. But past performance is not a guarantee of future results. Similarly, defensive does not mean risk-free, so avoid relying on any one sector or stock to protect your portfolio.
That said, investors with longer-term financial goals have another alternative as well — simply ignore a recession and stay the course.
Since 1948, the S&P 500 has declined an average of 2.4% during the six months prior to a U.S. recession. However, it has gained an average of 3.5% during those recessions and has averaged a 20% gain in the 12 months following the end of a recession.
“The stock market usually drops months before a recession starts and begins its recovery well before a recession ends,” Schneider says. “The worst move is often sitting on the sidelines, as the biggest market gains typically occur while the economic news is still terrible.”
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Recession 2026: What to Watch and How to Prepare originally appeared on usnews.com
Update 06/01/26: This story was published at an earlier date and has been updated with new information.
