Economic Trends for 2026 and Beyond

In Part IV of our series, we focus on Economic Trends facing small and midsize businesses (SMBs) in 2026 and beyond.

Margaret Thatcher once said, “Standing in the middle of the road is very dangerous; you get knocked down by the traffic from both sides.”

Small and midsize businesses are under pressure to maintain volume and pricing as tariffs and other inputs bite into margins. After spiking to 40-year highs, inflation has cooled but continues to run above the Federal Reserve’s target. Labor is scarce and expensive, with wages and benefits climbing fast. All this at a time when the cost of capital remains high, and growth plans are muted.

The U.S. is on course for a sustained stagflationary period.

But opportunities exist — from productivity boosts via AI to growth in key industries like tech, health care, and clean energy. In this writing, we consider the economic outlook for 2026, noting a central theme: Vistage members must navigate higher costs and tighter margins. They should focus less on revenue growth and more on protecting profitability.

Despite headwinds, one of the biggest surprises of 2025 has been the resilience of the U.S. economy. Through the third quarter, the S&P 500 gained 9.8%, while the Nasdaq jumped 17.5%, powered by AI stocks. Markets usually recoil from uncertainty, yet even amid tariff turmoil, GDP expanded at a solid 3.8% clip in Q3, replicating its strong showing in Q2. The economy continues to defy gravity.

More in this series

Part I: Social and Workforce Trends for 2026 and Beyond 

Part II: Technology Trends for 2026 and Beyond

Part III: Special Report: AI Trends for 2026 and Beyond 

Tariff Effective Rate

Source: Bipartisan Policy Center

The press would have you believe tariffs will turn markets upside down, but their impact has been slow to develop. The “effective rate” of tariffs (dollars collected as a % of import volume) remained below 10% until it spiked to 18% in August. This is a predictor of things to come; odds are the U.S. economy will revert to a more tepid growth rate next year.

Tariffs’ true impact on the U.S. economy won’t surface until 2026.

During President Donald Trump’s first term, it took over a year for tariffs to take hold. This is, of course, the nature of incentives and disincentives — countries naturally move production to items that are not subject to penalty. Conversely, buyers shift to local sources for supply. Most surprising is that as the effective rate of tariffs has risen, inflation has continued to stabilize.

Impact of Tariffs on Inflation

Source: The Federal Reserve Bank

Naturally occurring inflation in our economy brings a false sense of security, and customers have been more accepting of price increases.

It’s important for companies to actively track units sold as a true measure of growth.

The U.S. federal debt now exceeds $34 trillion, and higher interest costs compound the problem. The government’s annual interest payments are approaching $1 trillion, surpassing defense spending and crowding out funds for discretionary programs like infrastructure and education. As debt service consumes a larger share of the budget, fiscal flexibility shrinks — leaving policymakers fewer tools to stimulate growth during downturns. The long-term impacts of the debt cycle are sobering, but borrowing costs should improve.

Futures markets are pricing 75 basis points (0.75%) in Fed rate cuts in 2025 and 2026.

U.S. Growth vs. Global Growth

According to the Conference Board, U.S. GDP is expected to grow a meager 1.3% in 2026. At that rate, the U.S. would grow more slowly than Europe (which has been mired in a slump, partially because many countries there are not participating in the AI revolution). Mexico may be the winner of the trade war, given the shift toward nearshoring.

India’s economy remains one of the world’s fastest-growing, driven by robust domestic consumption, infrastructure spending, and a booming tech and services sector. However, recent frictions with the U.S. over trade policy, semiconductor access, and its neutral stance toward Russia have tempered diplomatic momentum and raised concerns about the stability of future investment and defense cooperation.

Source: The Conference Board

China’s economy is sputtering as global tensions and U.S. tariffs squeeze exports and weaken manufacturing competitiveness. Meanwhile, weak domestic consumption — held back by high household savings, soft wage growth, and shaky job prospects — has left factories grappling with excess capacity and falling prices, tipping parts of the economy toward deflation. Its property boom has morphed into a debt-ridden drag, undermining both consumer confidence and local government finances. Given a rapidly aging population, a shrinking workforce, and the diminishing returns of state-led investment, China’s annual growth projections are only slightly higher than those of more mature economies such as the U.S. (which grows at a slower rate due to the law of large numbers).

Implications: export opportunities exist for niche U.S. SMBs. Supply chains can benefit from nearshoring and selective offshoring, and currency moves may influence import costs and pricing power.

Members are advised to test small export channels (distributors, marketplaces) and diversify sourcing to balance cost, quality, and risk.

A Story of Two Economies

Even as equity markets reach new highs, many American consumers and small businesses feel detached from Wall Street’s success. It’s as if the U.S. now runs on two parallel economies: one powered by the AI revolution, and another struggling to keep pace. For perspective, hyperscalers are expected to pour more than $400 billion into data centers in 2025 — nearly rivaling the $529 billion spent nationwide on roads, bridges, and infrastructure combined. Some view AI as a bubble, in part because of its “circularity.” Nvidia, OpenAI, Oracle, AMD, and Microsoft (among others) are signing alliances and making investments in each other, driving up their stock prices without evidence of delivering value back to the economy.

In 2020, large tech stocks made up roughly 18% of the S&P 500; today, the “Magnificent Seven” account for 34%. Stock market spikes only widened the chasm of wealth inequality.

Rising Labor Costs and Worker Shortages

For decades, economists and governments have shaped policy around labor demand, assuming strong job demand drives higher prices. But this cycle is different. It’s defined not only by weaker demand, but by a shrinking supply of workers. The artificial stimulus of the past few years distorted the natural balance between job growth and inflation, leaving the job market out of sync and disrupting the natural correlation of job growth and inflation:

Employment and Inflation

Source: Federal Reserve Bank

While the market has softened, workers remain scarce and more expensive. Unemployment stayed historically low in 2024-2025, and participation constraints continue in select cohorts. Total compensation (wages + benefits) rose sharply over the past five years, with benefits — especially health care — comprising a growing share of employer costs.

Health care costs are expected to rise 9% in 2026.

SMBs report difficulty filling skilled roles, particularly in trades, logistics, and health care-adjacent services. To compete, firms are increasing wages, enhancing benefits, and offering more flexibility (see our Social and Workforce Trends post for more on hybrid work). HSAs are gaining steam with assets up 19% in 2024.

Sector Growth Outlook for 2026

Growth is uneven across sectors. According to forecasts, technology and professional services, health care and social assistance, and clean-energy supply chains lead mid-decade growth. Infrastructure outlays also support construction, engineering, and selected manufacturing niches.

Source: CBO, OECD

Note: Growth forecasts are not adjusted for inflation, which is why sector growth exceeds “real” GDP growth.

U.S. manufacturing output has grown modestly in 2025, supported by reshoring, infrastructure spending, and continued demand from sectors like aerospace, defense, and AI data centers. However, manufacturers are facing significant pricing pressure. Input costs have stabilized or declined from pandemic peaks, while tariffs and global supply chain shifts have raised uncertainty. At the same time, weak downstream demand, excess durable goods inventory, and slower capital spending have made it difficult to pass on price increases. The result: production volumes remain decent, but profit margins are tightening.

Manufacturing Output

Consider offerings with faster-growing customer verticals, pursue certifications or capabilities to enter resilient supply chains (medtech, energy, aerospace), and emphasize speed, customization, and quality where scale players struggle.

M&A Trends

Middle-market M&A showed early-year softness but signs of recovery heading into late 2025. U.S. private equity deal volume rose 6% year-over-year in Q2 2025, with total value up 11%, as trade clarity and Fed rate-cut expectations improved sentiment. Average valuations held near 7.2× EBITDA, but deals ranging between $100 million and 250 million now command 10× multiples, reflecting demand for scale and resilient margins. Health care, business services, and retail gained strength while manufacturing multiples reset to 6.5×. A record $530 billion in undeployed PE “dry powder” and easing credit conditions may accelerate competition for quality assets. For SMB sellers, buyer interest is tilting toward defensible, mid-sized platforms.

Private Equity Deal Flow and Valuations

Source: Pitch Book

There is likely a window for members to exit at the highest valuations in the 2027-2030 timeframe. They should seek out markets where they can achieve and maintain market leadership.

Tariffs Squeeze Margins and Supply Chains

The Administration’s new “reciprocal tariff” regime marks the most sweeping U.S. trade shift in decades. A baseline 10% tariff now applies to nearly all imports, with rates as high as 50% for select nations. These new duties stack on top of older tariffs on steel, aluminum, and automobiles, pushing the effective rate paid by importers to roughly 17% — the highest since the 1930s. The result is higher costs throughout supply chains, renewed inflationary pressure, and operational uncertainty for small and midsize businesses.

For SMBs, the challenge is structural: limited sourcing options and smaller purchasing power mean tariffs land harder. Many small manufacturers and distributors are seeing double-digit increases in input costs, while also facing rising expenses for utilities, rent, and insurance. Passing those costs to customers is difficult in competitive markets, especially when large rivals can absorb or offset import costs through volume and hedging.

Still, SMBs can take several steps to cushion the impact. Review supply chains at a granular level — understand the tariff codes tied to each imported component, and where alternate sourcing is viable. Explore reshoring or “nearshoring” options in Mexico or Canada, which may offer cost stability and reduced exposure to trade volatility. Negotiate longer-term contracts with suppliers to lock in pricing or share risk.

While dynamic pricing may not apply to every industry, more adaptable pricing strategies should be adopted by SMBs.

Where to Go from Here

The U.S. economy is settling into a period of mild stagflation — marked by low growth, persistent price pressures, and squeezed profit margins. For small and midsize businesses, this means adapting to an environment where revenue growth is harder to come by, costs remain stubbornly high, and efficiency becomes the main lever of success.

The focus for the year ahead should be on smart growth — tightening operations, protecting margins, and seeking selective opportunities where pricing power and productivity gains can still drive ROI.

10 Practical Takeaways for Vistage Members

• Diversify suppliers to reduce tariff exposure and maintain modest buffers for at-risk components.
• Adopt a rolling pricing strategy: smaller, more frequent adjustments tied to unit economics and customer value.
• Treat employee retention as a core financial strategy: invest in training, career paths, and manager effectiveness.
• Automate targeted workflows (customer service, scheduling, reconciliation) to lift output per employee. Read more in our AI Special Report.
• Audit benefits annually; consider creative plan designs (HRA/level-funded) to tame healthcare inflation.
• Lock in financing where appropriate. Pay down high-rate debt and keep multiple banking relationships active.
• Rebuild cash cushions (e.g., 2-3 months of operating expenses) and accelerate receivables where possible.
• Use strong market sentiment strategically: pursue partnerships, selective M&A, or minority investment on favorable terms.
• Realign go-to-market toward high-growth sectors (health care, tech, energy) and infrastructure-linked demand.
• Run scenario plans (inflation up/down, demand shock, supply disruption) with pre-decided levers for speed.

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