2026: Back to Basics
By: Eric Lohmeier, CFA
After years of extreme volatility marked by the pandemic recovery, inflation and rate spikes, conflict-driven supply shocks, and AI mania, 2026 has opened with something in short supply: relative calm. Broadly stable economic indicators point to the economy at large, and especially in the Midwest, beginning to level off. Key regional indicators reflect this trend: Iowa’s unemployment rate remains steady at around 3%, and national inflation has cooled to 2.7% year-over-year (December 2025, BLS). Meanwhile, the Federal Reserve has signaled a likely hold on interest rates until late Q2. These signals suggest a more grounded environment for both operators and investors. For two sectors in particular that have been struggling over the last 24-26 months, ag and transportation, a stable economic environment could position them well for a rebound in the near future.
Normally, even muted growth would encourage some stability and certainly some measured risk taking, but persistent political uncertainty appears to be the major roadblock keeping business sentiment from catching up with the data.
Green Shoots
While not yet in growth mode, the ag sector has clearly stabilized, which is a major shift after three tough years. Month-to-month sentiment is improving from down-and-out to cautious optimism (December Ag Economist), driven by steadier commodity pricing, easing fertilizer costs, $12 billion in Federal public assistance/trade disruption payments, and slowly improving export demand. After a prolonged period of trade uncertainty and cost pressure, producers are cautiously re-entering planning mode, which bodes well for manufacturing, transportation, and service sectors that support the ag economy. Planning for the future means replacement parts, calling in long-postponed service orders, and a lot of deferred maintenance. Deferred investments are poised to turn into spending, and transportation and logistics businesses that were hit hard by COVID whiplash and rural softness are showing early signs of growth. As those industries go, so goes much of the state’s “real economy.”
Our projection is that we’re actually going to see slight growth in ag, driven by near-term commodity upside, which will in turn spur marginal growth in manufacturing. This same trend has already been observed in the transportation and logistics sector.
Plowing ahead
Normally, even muted growth would encourage some stability and certainly some measured risk taking, but persistent political uncertainty appears to be the major roadblock keeping business sentiment from catching up with the data. It’s difficult for large producers to make long-term capital expansion decisions in an environment where trade or tariff environments could happen overnight in a tweet. In addition to a turbulent Federal policy environment, Iowa’s 2026 elections for gubernatorial, senate, and local office elections have the potential to muddy waters further. Uncertainty around the next quarter of trade policy, labor, public health, and infrastructure have and will likely continue to undermine business owners’ and investors’ ability and willingness to assume risks.
Closer to home issues like water quality and cancer rates that have long simmered in the background are now at the forefront of public scrutiny. Iowa ranks second in the U.S. for cancer incidence according to the National Cancer Institute, and nitrate contamination in public water systems has triggered comparisons to Flint, Michigan. These issues might not reflect in financial statements like tax decreases or R&D credits, but they shape the mood of voters and investors alike. Coupled with a $1 billion plus projected state deficit and a wildcard on the revenue side (negative implications) with uncapped private school/education vouchers, we forecast a much murkier outlook compared to years of tax cuts and de-regulation. With these factors in mind, this might be a year where decisive, growth-oriented policy takes a back seat to public health and safety or education, driven by increasing voter engagement on these issues – which would make the outcomes of local and state elections, and hence policy, a lot more unpredictable than recent cycles.
Y2k Revisited
The parallels between AI and the dot-com era are getting harder to ignore. 2026 will likely be the year where we likely see a mean reversion in the ‘Magnificent Seven’ and a second look at everything else. AI will undoubtedly increase efficiencies, but it’s likely to take a decade or more to fully realize its potential, and that repricing is redirecting capital.
As AI valuations come back down to Earth (following a 96% rally from mid-2023 to late 2025, the Nasdaq AI Index was down 4.1% in the first month of 2026) attention is shifting to underinvested sectors like industrials, infrastructure, and regional manufacturing. Many of these industries are core to the Midwest economy. The AI comedown may also mitigate the “wealth effect” for investors that have been riding the public equity surge since 2023, over which period AI-related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth and 90% of capital spending growth (ChatGPT launched in November 2022, JPM). Aside from those lucky few, consumer spending slowed to 2.5% annualized in Q1 (BEA), and household savings rates have climbed for three consecutive quarters.
Hold on tight: This roller coaster will be a harrowing ride, but in the end, we don’t get innovation without some volatility (and heartbreak for many) along the way. AI will undoubtedly increase efficiencies in many lives and industries; it is quite likely that it will just take a decade or more to more fully realize its ultimate potential as Wall Street (and Robin Hooders everywhere) bet on “next week.”
Closing Thoughts
If recent years have been driven by disruption, hype, and uneven recovery, then 2026 is beginning with a kind of cautious pragmatism. For the first time in several quarters, we’re seeing consistent signs that the underlying economy is stabilizing. The ag sector is no longer in retreat. Transportation and logistics are picking up steam. And capital, once chasing tech at any price, is slowly rediscovering value in the physical world—industrials, infrastructure, and the businesses that keep them moving.
But while the economic data points to moderation, the mood remains hesitant. Public sentiment is shaped as much by what’s happening in communities as it is by Fed policy or earnings season. And in a high-stakes election year, the business community would do well to stay nimble and engaged.
Last but certainly not least…
Happy Semi quincentennial, America
Ten years ago, I enjoyed a reception and tour of the U.S. Department of State, aka “Foggy Bottom”, courtesy of the efforts of the Des Moines Partnership. It was an indelible moment for me, marking a vigorous appreciation of our shared American history and highlighted by an ornate display of the original Treaty of Paris, which marked the official end of the Revolutionary War on September 3, 1783. Bearing witness to the actual signatures of Benjamin Franklin, John Adams and John Jay – America’s most famous inventor and statesman, the eventual 2nd President of the United States and our country’s first Chief Justice of the Supreme Court, respectively was awe inspiring. In light of the celebration of our country’s 250 years as a democracy and nation, we wanted take the opportunity in this year’s inaugural correspondence to recognize our Nation’s 250th and appreciate the signature struggles in our country’s harrowing road to Independence from a Tyrant, one “… unfit to be the ruler of a free people.”1 A cause to celebrate the US Constitution and its three separate but equal branches of government and so much else.
We are thankful for our 250 years of collective endeavors for a more perfect union, coupled with the necessary vigilance and citizen participation in our democracy. Many years of struggle and countless lives were lost in the original fight for the independence of our new nation from a monarchy, but the temptations, fallibilities and corruptibility of human nature are forever among us, so we march on… “A republic, if you can keep it.” (Benjamin Franklin’s words upon finalizing of the US Constitution)
- In reference to George III, King of Great Britain, and as quoted from the Declaration of Independence ↩︎
Image created using generative AI