Economic uncertainty surrounding US trade policy is much lower than it was a year ago, steadying the broader outlook for 2026. The reduced market anxiety can be seen in historically low volatility metrics for equity, bond and currency markets, as well as in historically tight corporate credit spreads.

The effective across-the-board tariff rate is now about 17%, but based on tax collections, the actual average import tax paid is only about 10%. According to a new year-ahead report from CoBank’s Knowledge Exchange, that rate is expected to drop even further as the reduced tariffs on China and imported food products take effect and more bilateral agreements are finalized.

With tariffs fading from the forefront of economic concern somewhat, AI has become the focal point of financial market prognostication. Direct investments in AI and related infrastructure, combined with the wealth effects from the surging stock market, have conservatively added 1% to US GDP this year. However, the unprecedented levels of investment are driving fears of an AI-driven stock market bubble. The concern is that the AI boom has lifted the entire stock market to unsustainable heights, and a significant market correction would lead to a sharp pullback in consumer spending, potentially even causing a recession.

“That’s one possibility but it’s not the most likely scenario,” said Rob Fox, vice president of CoBank’s Knowledge Exchange. “Corporate earnings remain extremely strong and aggregate corporate debt levels are historically low. Most of the stock market gains in the second half of 2025 were attributable to continually improving earnings expectations, not irrational exuberance.”  

Over the next three to five years, Fox said AI will likely play out similarly to the oil and gas shale boom between 2010 and 2015 – overproduction of a commoditized product, lower than expected earnings and disappointing industry profit margins. “However, just as the overall economy benefited from lower oil and gas prices, we will see productivity gains from AI across the entire economy. As long as the majority of AI capital expenditures are from existing cash flow rather than debt, structural risk to the economy should be limited.”

The CoBank 2026 outlook report examines several key factors likely to shape agriculture and market sectors that serve rural communities throughout the US.

US economy: Markets adjust to a new normal

Several indicators suggest the economy will continue to remain steady in 2026. With the year-on-year tariff inflationary effect fading by end of the first quarter, core inflation is likely to resume its downward trend in the second half of the year. That will provide sufficient cover for the Federal Reserve to continue cutting interest rates in 2026. Moreover, the Congressional Budget Office estimates the accelerated depreciation provisions in the One Big Beautiful Bill Act will boost GDP growth by almost a full percentage point next year. The labor market has cooled from the post-COVID cycle and is now more in line with historic norms. But near 4% wage growth and sub 5% unemployment are well within the margin of safety for a growing economy in 2026.

Tariffs, farm policy and the shifting Washington landscape

The environment in Washington is beginning to change, if ever so slightly. The one-sided nature of the November election results likely served to refocus many elected officials on their own political fortunes. While there is potential for Congressional agreement on the remaining appropriation bills by January 2026, bipartisan cooperation will become less likely as the 2026 mid-term elections approach. Farm Bill programs have been extended through September 2026, but pressure is growing for Congress to take further action before the election. Questions surrounding the president’s authority on tariffs, a key issue impacting several market sectors and businesses, will also dominate policy discussions in the coming year.

Consumers clamor for protein

Despite rising price points for meat and poultry, animal protein demand should remain strong in 2026. The combination of higher revenues and falling feed prices is boosting producer optimism for the year ahead, but not to the degree that expansion is expected to proliferate. Livestock supply conditions have grown notably tighter in the last two years and are likely to remain so over the next 12 to 18 months. As a result, feeding efficiencies and heavier carcasses will remain a focal point in 2026. While optimism in the sector is strong, several headwinds including new and recurring livestock diseases and trade disruptions could constrain growth in the coming year.

Dairy: Protein will drive milk checks for the foreseeable future

Milk protein is poised for an extended bull-market run as demand for protein-based dairy products continues to climb. While demand for full-fat dairy products also remains strong, butterfat has moved to an oversupply situation. Dairy processors are awash in butterfat with some putting caps on butterfat payments. That means protein will be the leading driver in milk checks in the coming years. Shifting consumer dietary trends suggest protein markets will remain strong for many years to come. And according to data from Circana and Dairy Management Inc., four of the top 10 protein products for absolute unit sales growth in the past 52 weeks were dairy products, including cheese, cottage cheese and yogurt.

Restaurant recession, retail reformulations challenge manufacturers

Restaurants are showing further signs of weakness as higher prices are taking a toll on consumer dining-out behavior. Even restaurants like Chipotle Mexican Grill and Shake Shack that had fared relatively well have now begun to underperform. Meanwhile, retail grocery brands face increasing input costs and a quasi-regulatory demand to reduce or remove artificial ingredients like food coloring. Most concerning for those brands is the lack of data indicating consumers actually want or will pay for these reformulated products. Regulatory encouragement to reduce artificial ingredients comes with considerable costs and represents a growing challenge for food companies.

Power and energy: 2026 a pivotal year for grid governance

U.S. electricity consumption is increasing at its fastest pace since World War II. Earlier this year, the federal government declared a national energy emergency citing the unprecedented surge in electricity demand driven in large part by data centers. The Department of Energy is now using its emergency authority to direct FERC to quickly standardize large load interconnections. If adopted, some of the proposed reforms would mark a major shift in how large, energy-intensive customers like data centers connect to the grid. While the reforms could expedite grid access for major customers, they may compromise local utility investment and state regulatory authority. That means unified planning and coordination at the federal, state and local levels will be even more critical going forward.

Digital infrastructure: Navigating AI’s expansion into rural America

The rise of AI is fueling a historic surge in data-center spending, and hyperscalers will increasingly depend on rural America to achieve their ambitious buildout plans. Rural areas offer what hyperscalers like Microsoft and Amazon desperately need: land for sprawling campuses and the ability to colocate data centers with major power infrastructure.

Given the business and geopolitical stakes, data center operators are moving fast and writing big checks to reduce friction in rural communities. While these communities face tradeoffs, rejecting data center projects could mean missing out on generational economic benefits.

Source: CoBank