Business

LPL Financial sees an economy showing signs of strain

By Damilola Esebame TheStreet

Updated May 5, 2026 5:48 AM

The U.S. economy grew at a 2.0% annualized rate in the first quarter of 2026, rebounding from a 0.5% pace in the fourth quarter of 2025, according to the U.S. Bureau of Economic Analysis. The number missed the 2.3% consensus forecast from economists polled by LSEG, as Fox Business reported.

Beneath the headline, the composition of growth shifted in a way that matters for portfolios and household budgets alike. Business investment contributed 1.48 percentage points to first-quarter growth, more than the 1.08 percentage points from consumer spending, the part of the economy that historically accounts for roughly two-thirds of output, based on the BEA contributions tables.

LPL Financial, which reported $2.3 trillion in total client assets in its Q1 2026 earnings, has signaled a cautious view through both its 2026 outlook published in December and post-GDP commentary from its chief economist.

AI-driven investment overtakes consumer spending as the GDP growth engine

The Bureau of Economic Analysis released its advance estimate on April 30, showing that real GDP grew at a 2% annualized rate, BEA reported. That figure missed the 2.3% consensus forecast from economists polled by LSEG, though it marked a clear acceleration from Q4's 0.5% pace.

Business investment contributed 1.39 percentage points to Q1 growth, exceeding the 1.08 percentage points from consumer spending, according to BEA's Table 2 of contributions to GDP growth. Most of that investment surge flowed into computers tied to the artificial intelligence buildout, as well as software and intellectual property products.

LPL Financial warns that consumer spending is losing its momentum

Real consumer spending rose 0.1% in both January and February on a month-over-month basis, according to the BEA's January and February personal income and outlays releases. Real personal consumption expenditures grew 0.2% in March, the BEA reported on April 30.

Inflation accelerated sharply over the quarter. The personal consumption expenditures price index rose at a 4.5% annualized rate in the first quarter, up from 2.9% in the fourth quarter of 2025, according to the BEA.

Headline PCE inflation was 3.5% year over year in March, the highest annual rate in nearly three years, with the index rising 0.7% from February alone, the largest monthly jump since June 2022.

Real disposable personal income peaked at roughly $18.2 trillion (seasonally adjusted annual rate) in January 2026 and fell back to about $18.1 trillion by March, according to FRED data sourced from the BEA. In other words, households' inflation-adjusted purchasing power declined over the quarter.

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The government shutdown rebound and defense inflated the Q1 growth

A meaningful share of Q1 growth came from federal employee compensation snapping back after the late-2025 government shutdown depressed Q4 spending levels, according to the BEA. Iran-related defense spending added another layer of support, InvestingLive reported.

Net exports subtracted 1.3 percentage points from first-quarter GDP as goods imports outpaced export growth, also according to the BEA's advance estimate. Corporate profits, for which the most recent figures available are for the fourth quarter of 2025, rose $246.9 billion in Q4, accelerating from $175.6 billion in Q3, according to the BEA's third estimate of Q4 2025 GDP, released April 9, 2026.

From an industry perspective, the BEA reported that the Q4 increase in real GDP reflected a 2.3% rise in private services-producing industries, partly offset by a 1.8% decline in private goods-producing industries.

Oxford Economics and EY-Parthenon see AI and fiscal policy sustaining growth

"The core of the economy remained solid in Q1, driven by the AI buildout and the tax cuts beginning to feed through," said Michael Pearce, chief U.S. economist at Oxford Economics, in a note to investors covered by Fox Business.

"Those factors will continue to drive growth over the rest of the year, but the jump in energy prices will take some of the shine off what would otherwise have been a strong year for the economy."

Gregory Daco, chief economist at EY-Parthenon, told Fox Business that while AI investment promises to reinforce "organic productivity growth" in the coming years, the near-term impact of capex, infrastructure buildout, and energy demand is likely to add to inflationary pressures.

"Fiscal stimulus is more than outweighing the drag from higher energy prices for now, but that balance will begin to shift in the months ahead, especially with gas prices still climbing," Oxford Economics Chief U.S. Economist Michael Pearce also explained to Fox Business.

Jeffrey Roach, chief economist at LPL Financial, told Yahoo Finance in an email that "tech equipment continues to boost growth," adding that "the economy has more to go here if the late 90s is any guide."

He said the oil shock created by the war in Iran should dissipate by the middle of 2026, allowing the economy to return to above trend growth, buoyed by AI capex, tax rebates, rising corporate profits, and loose financial conditions.

LPL Financial projects 2% GDP growth for 2026

LPL's outlook projects a modest slowdown in early 2026 before a rebound later in the year, according to LPL Research. The firm sets a fair-value target range of 7,300 to 7,400 for the S&P 500 and projects 10-year Treasury yields of 3.75% to 4.25%, LPL announced when releasing the outlook in December 2025.

"In 2026, volatility will continue," Marc Zabicki, LPL's chief investment officer, said in the outlook's release. "Given the current investment climate, where policy changes and market momentum have a significant influence over fundamentals and valuations, it is important for investors to exercise patience and avoid making impulsive decisions based on short-term market sentiment."

MoreEconomy:

On April 29, 2026, the Federal Reserve held its benchmark rate steady at 3.5% to 3.75% for the third consecutive meeting, but the vote was 8-4, the most dissents at a single FOMC meeting since October 1992, CNBC reported. Markets are now pricing in no changes through the rest of this year and well into 2027.

Reuters' April 17-21 poll of 103 economists, published April 22, pushed the timing of an expected rate cut to late 2026, with 56 of 103 expecting rates to remain at 3.50% to 3.75% through September and the median forecaster expecting a single rate reduction by year's end.

How these economic indicators relate to U.S. GDP

Momentum is increasingly concentrated in business investment, particularly in AI-related infrastructure, while consumer activity, long the backbone of expansion, shows signs of strain under persistent inflation and rising credit stress.

Temporary factors, including a government-spending reversal and Iran-related defense outlays, played an outsized role in lifting the topline figure, potentially overstating the economy's true trajectory. The uneven distribution of wealth continues to shape spending patterns, reinforcing a divide between households driving growth and those struggling to keep pace.

How the rest of 2026 unfolds will depend on whether AI-led investment can keep doing the heavy lifting, whether the energy shock from the Iran conflict eases as Roach and others expect, and how soon Fed chair nominee Kevin Warsh, if confirmed, can build a working majority for the next move on rates.

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This story was originally published May 5, 2026 at 5:33 AM.