Markets are worrying over recession risks despite surging GDP because a “low hiring, low firing” market is taking a toll on consumer sentiment, but Fidelity fund manager Lars Schuster, an institutional portfolio manager with Fidelity’s Strategic Advisers, just sent a reassuring message.

While job losses and layoffs are in the news, and consumers are wrestling with sticky inflation that’s put the Fed back on pause, Schuster doesn’t think the AI bubble will burst in 2026, rejecting comparisons to the Internet boom and bust.

“The tech sector today has positive earnings growth and price-to-earnings ratios that are much lower than what we saw at the peak of the internet boom in the year 2000. There’s a very distinct difference,” said Schuster.

Those differences are good news for the economy, given AI spending has become a key cog in U.S. GDP growth.

“We’re talking about hundreds of billions of dollars that were spent last year,” said Schuster. “That’s more than 1% of GDP… those dollars go to more than just semiconductor chips. They also go to entities and workers that build these data centers, install cooling units, supply energy needs, and so on and so forth.”

The U.S. economy is projected to grow again in 2026, avoiding recession.

Tradingeconomics/U.S. Bureau of Economic Analysis.

Unemployment, inflation are real, but may be overblown risks this year

There’s no denying that we’ve got a firmly entrenched K-shaped economy. Those with high incomes and big 401 (k) balances are doing better than lower-middle-class households, especially as layoffs increase and tariff-driven inflation remains stubborn.

The U.S. unemployment rate has risen to 4.4% from 4% one year ago, and over 1.2 million people lost their jobs in 2025, the 7th worst year for layoffs since 1989, according to Challenger, Gray & Christmas data. Meanwhile, Consumer Price Inflation has ticked up to 2.7% from 2.3% last April, before most tariffs took effect.

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The dynamic has taken a toll on consumer confidence, which tumbled last month amid a spike in geopolitical drama and uncertainty.

“The Conference Board consumer confidence index declined sharply in January—well below expectations—to its lowest level since March 2014,” wrote Goldman Sachs in a research note shared with me this week. “The decline reflected a significant deterioration in both the expectations and present situation components.”

In short, nervousness is creeping into Americans’ psyche, causing recessionary worries.

Still, Schuster sees the weakness as siloed and ultimately manageable given the economy’s size and breadth.

“With a roughly $30 trillion economy, the US is very large and very economically diverse. When you take the whole picture, on balance, the US economy still has a lot of potential to grow,” said Schuster.

He sees pockets of strength and weakness, but overall, consumer spending has proven resilient.

Retail Monitor data shows that 2025 holiday sales grew 4.1% year over year, according to the National Retail Federation, or NRF. In December, core spending, excluding restaurants, auto dealers, and gas stations) grew 3.58% year over year.

Goldman Sachs currently expects GDP growth to average 2.6% in 2026, below the 4.3% in the third quarter and the 3.8% in the second quarter of 2025. While slowing, that outlook is hardly recessionary.

AI spending won’t be the only driver, says Schuster. Consumer spending has hung tough even as sentiment has soured, and that could continue this year, supported in part by lower Federal taxes and bigger tax refunds this spring due to the One Big Beautiful Bill Act (OBBBA).

“Consumers typically spend the money they receive in refunds, and this could help blunt the effects of firm inflation,” said Schuster.

What Fidelity’s outlook means for stocks

The big question is whether the economy’s ongoing strength is enough to sustain stocks’ impressive rally. The S&P 500 has recorded three consecutive years of double-digit returns, including a 17.8% gain in 2025, including dividends.

The rally in the first nine months of last year was driven by big-cap technology stocks, particularly those with exposure to artificial intelligence, such as Nvidia and Palantir. Since September, we’ve seen stocks tilt more defensive, favoring sectors that perform best during the late stages of the business cycle, including energy and healthcare.

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Whether those defensive trends continue or technology simply experiences a pause that refreshes will likely depend on how the current earnings season plays out.

This week, fourth-quarter earnings releases picked up the pace, including high-profile Magnificent Seven stocks Meta Platforms, Apple, and Microsoft.

What those companies say about business trends, including revenue and profit growth, and especially, capital expenditure plans to support AI projects, will be key. On balance, though, Wall Street is generally bullish on stocks, expecting another year of solid gains driven by earnings growth.

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“Rising corporate profits generally reflect positive economic growth,” says Schuster.

The key takeaway: While Schuster is aware of the risks, he doesn’t think it’s time to press the sell button on stocks yet.

“Trying to determine when a boom becomes a bubble and when that bubble might burst is tricky business,” says Schuster. “We don’t want to get too ahead of ourselves by getting too conservative too quickly, because then we run the risk of leaving meaningful returns on the table.”

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