US 3Q26 macro outlook: Oil prices ease, yet inflation pressures remain

• Inflation is likely to remain elevated in the near term as oil supply normalisation lags and higher input costs continue to pass through to consumers, with tariff risks posing an additional upside pressure.

• Recent retail sales data point to resilient US consumer spending, but momentum may soften as the boost from tax refunds fades, savings decline, and inflation continues to outpace wage growth.

• That said, a resilient labour market, stronger higher-income spending, and AI-related investment should continue to support growth and limit recession risk.

• We expect continued earnings growth momentum in the coming quarters, particularly in tech and tech-adjacent sectors, although this strength comes against a backdrop of elevated US equity valuations.

• We recommend investors to underweight US equities, while rotating exposure toward Asian equities and favouring the digital economy sector and high-quality companies. 

The signing of the interim peace deal between the US and Iran has provided a welcome reprieve for global markets, sparking a sharp pullback in crude oil prices from their triple-digit peaks. Yet, while the geopolitical premium on energy has eased, the road to macroeconomic normalisation in the US remains complex.

In this article, we assess the state of the US economy and its implications for investors.

Inflation to remain elevated despite the US-Iran peace deal

The Consumer Price Index (CPI) rose 4.2% year-on-year (YoY) in May, in line with consensus expectations and up from 3.8% in April. The increase was driven largely by energy prices, which surged 23.5% YoY. Core CPI, which excludes the more volatile food and energy components, rose 2.9%, up from 2.8% in April and also in line with market expectations.

Figure 1: Consumer prices are elevated

While the signing of the interim agreement between the US and Iran has helped bring oil prices down from over USD100 per barrel to USD70s today, we believe inflation will stay elevated for longer. It will likely take several months for shipping traffic through the Strait of Hormuz to return to pre-war levels, given the backlog of stranded vessels, concerns over uncleared underwater mines, and lingering caution among shippers that hostilities could resume while the US and Iran negotiate a final agreement.

As a result, oil supply — and by extension, oil prices — are unlikely to normalise quickly, particularly given the damage sustained by energy infrastructure during the war. In addition, the gradual resumption of shipments of fertilisers, petrochemical feedstocks, and other industrial inputs could keep production costs elevated. The Producer Price Index (PPI) accelerated to 6.5% YoY in May from 5.7% in April, driven largely by higher energy costs. Even if this marks the peak in producer inflation as fuel prices moderate, the pass-through from higher input costs to consumer prices typically occurs with a lag, suggesting that consumer inflation may remain elevated for some time.

Related Article: The Iran deal is done, but oil isn't going back to USD 65. Here’s why.

Concurrently, the Trump administration’s tariff policies present a distinct upside risk to inflation. Despite legal challenges to some of the Trump administration's previous tariff measures, the administration continues to explore alternative avenues to impose tariffs.

Earlier this month, the US Trade Representative proposed tariffs of between 10% and 12.5% following a Section 301 investigation into imports allegedly linked to forced labour practices. The proposal covers 60 economies and highlights the administration's continued commitment to using tariffs as a policy tool. While the final tariff regime remains uncertain, any expansion of tariffs could place additional upward pressure on import prices and inflation in the coming quarters.

Strong spending masks growing consumer pressure

Recent retail sales data suggest that US consumers continue to spend despite higher gasoline prices. Retail sales rose 0.9% month-on-month (MoM) in May, exceeding the consensus forecast of 0.6%. After adjusting for inflation, retail sales are estimated to have increased by approximately 0.4% MoM. The retail sales control group, which excludes volatile categories such as autos, gasoline, building materials and food services, also surprised to the upside, rising 0.7% versus expectations of 0.4%.

Part of this resilience was likely supported by seasonal factors, including tax refunds, as well as continued spending by higher-income households, whose wealth has benefited from strong equity market performance. This reflects an increasingly K-shaped economy, where spending patterns diverge across income groups. Walmart Chief Financial Officer John David Rainey recently noted that higher-income consumers are "spending with confidence in many categories", while lower-income consumers remain "more budget-conscious" and continue to face financial pressures.

At the same time, retail sales primarily capture spending on goods and provide only a partial view of overall consumer activity. Services account for roughly two-thirds of US consumption and are better reflected in Personal Consumption Expenditures (PCE) data. Real PCE rose just 0.1% MoM in April, suggesting a more moderate pace of spending growth. Investors should therefore look to the upcoming May PCE release on 25 June for a more comprehensive and up-to-date assessment of consumer health.

Looking ahead, we see several headwinds building for consumer spending: the fading boost from tax refunds, a savings rate that has fallen to a four-year low of 2.6% in April, and inflation outpacing wage growth — real average hourly earnings fell 0.7% YoY, while real disposable personal income fell 1.1%. The pace at which Americans have been drawing down savings to sustain spending is not sustainable.

Higher interest rates also remain a constraint. With a near-term Federal Reserve rate cut highly improbable and a meaningful risk of further rate hikes this year, financing large-ticket items or securing mortgages will remain prohibitively expensive.

Figure 2: Consumption growth has been outpacing income growth

Nevertheless, our base case remains one of continued economic expansion, with recession risks still relatively low. Consumer spending is unlikely to contract meaningfully given the resilience of the labour market. Nonfarm payrolls have increased for three consecutive months, while the unemployment rate has remained steady at 4.3% over the same period and layoffs continue to be subdued. Initial jobless claims fell to 226,000 in the week ended 13 June, from 230,000 previously, and were broadly in line with both expectations and the five-year average. This suggests that labour market conditions remain healthy despite periodic announcements of workforce reductions by large companies such as Meta Platforms, Amazon, and Walmart.

In short, while lower-income households are likely to remain under pressure, continued spending by higher-income consumers, coupled with strong investment in artificial intelligence infrastructure, should continue to support economic growth and help keep the US economy out of recession.

Figure 3: The labour market is resilient

Favour structural growth and quality, and diversify beyond the US

On the whole, the US economy has remained remarkably resilient despite the disruption caused by the US-Iran conflict, and we continue to expect positive economic growth in 2026. As highlighted in our recent analysis of 1Q S&P 500 earnings, we also expect sustained earnings momentum over the coming quarters, particularly in tech and tech-adjacent sectors that continue to benefit from the structural tailwinds of AI adoption and AI infrastructure buildout.

That said, strong earnings growth in US equities comes with high valuations attached, and we see better opportunities in Asian markets such as Taiwan and South Korea, which offer comparable earnings growth at considerably cheaper valuations. The MSCI Asia ex Japan Index currently trades at around 12.5x forward 12-month earnings — a nearly 40% discount to the US market's 20.5x.

With this in mind, our recommendations for investors are to:

• Stay invested in the US market but underweight it, reallocating exposure toward Asian equities (e.g. Taiwan, South Korea) that may be overlooked in US-dominant portfolios.
• Overweight the digital economy sector, while limiting exposure to consumer discretionary stocks given ongoing pressure on the US consumer.
• Favour high-quality companies with strong balance sheets, resilient earnings, and high returns on equity — characteristics that should help them weather near-term macro volatility.

Table 1: Projections for the S&P 500 Index

S&P 500 Index	2025	2026E	2027E	2028E
Earnings Per Share (EPS)	269.2	340.4	391.0	437.5
Earnings Growth YoY	12.5%	26.4%	14.9%	11.9%
PE Ratio (X)	25.4	22.0	19.2	17.1
Target Price (based on a fair PE of 20X)				8,750
Upside Potential				16.7%
Source: Bloomberg Finance L.P., iFAST estimates. Data as of 18 June 2026

Figure 4: Share prices are driven by earnings growth in the long run

Table 2: Recommended products

Sector/Style	Recommended Products
Digital Economy	•       Fidelity Global Technology A-ACC-USD •       Eastspring Investments Unit Trusts – Global Technology SGD •       Invesco NASDAQ Internet ETF (NASDAQ: PNQI)
Quality	•      JPMorgan U.S. Quality Factor ETF (NYSE: JQUA)

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.