Guest commentary: Economic market update — AI, Iran, inflation and K-shaped consumption
By Eric Kelley
2026 has already been a year replete with spicy news items, including the future of artificial intelligence (AI) and the initiation of military strikes against Iran. Additionally, the Supreme Court struck down the initial tariff regime.
AI SHAKES MARKET
Mid-month, a smaller research firm, Citrini, issued a thought piece on the possible economic and market impacts of AI. The authors didn’t intend the article to be a forecast of what is likely to happen, but instead a worst-case scenario analysis of what could happen as AI is implemented.
Citrini’s illustration covered rising unemployment, falling consumption, credit and mortgage market stress and deeper deficit issues – potentially causing a severe downturn in the equity markets. The article triggered counter responses from many research firms, but uncertainty shook the markets anyway.
The markets were already rotating away from the massive tech growth story of the last several years and toward more value-based sectors, and the Citrini article added momentum to that trend.
It’s important to highlight the authors closed with: “We are certain some of these scenarios will not materialize.”
We are fairly sure iterations of some scenarios will occur at some point, and that AI will disrupt many industries and job categories.
Over the longer term, equity markets should benefit from higher profits and likely lower employee headcount because of AI deployment. If this occurs, our nation will have to develop strategies for managing a climbing unemployment rate, which could entail higher corporate tax rates to help fund government support programs. It’s possible AI will create as many jobs as it eliminates, a thesis endorsed by some, although current concerns tilt more toward job destruction than creation.
NEW MILITARY STRIKES AGAINST IRAN
As February closed, the U.S. (and Israel) initiated military strikes against Iran. Oil supplies via the Strait of Hormuz have been almost completely disrupted, and prices have risen significantly.
It’s important to remember the U.S. is far less reliant on oil than in the past. The amount of oil needed to produce one unit of gross domestic product in the U.S. has fallen by roughly 70% since 1980. Natural gas and renewables are now a significant portion of our energy usage.
The U.S. is a net exporter of crude oil, and shale production can be increased quickly. It’s reasonable to assume that if oil prices rise meaningfully, production will increase, which should stabilize or reduce prices.
U.S. capital markets are still processing the situation and U.S. equities are under selling pressure due to uncertainty. We’re reminded of the long-term trends; regional geopolitical skirmishes are typically not substantial enough to impact the global outlook, and, therefore, don’t typically have meaningful, long-term impacts on the financial markets.
A large-scale military conflict with Iran could be meaningful enough to bring turbulence to the global financial markets in the short-term, but should resolve over time. For February, the equity markets absorbed the turbulent headlines quite well, with the S&P dropping very modestly, taking year-to-date returns to +.70%.
On a more positive note, February’s performance was defined by a broad sector rotation rather than purely a risk-off environment. This was demonstrated by another month of outperformance by the equal-weight S&P 500, which has outperformed since October 2025 – a sign of healthy broadening.
ECONOMIC CHALLENGES FOR THE FOMC
The economy appears to be on stable footing, despite a negative surprise in the GDP report for the fourth quarter of 2025 (due to accounting anomalies). It’s broadly expected we’ll see a rebound to above-average growth for the first quarter of 2026.
There are still issues with what appears to be very strong consumption concentrated in the wealthiest households (signaling the K-shaped consumption). Additionally, there are still issues in the labor market with job creation below normal levels. Savings rates for the average household are near the bottom of a normal/healthy range.
Economists are grappling with an apparent disconnect between labor market conditions and economic growth. Perhaps, due to AI, we have entered an age where consumption and economic growth remain healthy, with the business sector generating higher profits without creating meaningful job growth.
Inflation remains elevated and could be exacerbated by the Iran conflict. In February, the Supreme Court struck down the initial tariff package, but it’s presumed that a replacement plan with a similar average tariff rate will be implemented. The Fed must remain “data dependent” and reactive to what they learn over the coming months.
When the new Fed chair takes the helm in May, they will need to consider numerous crosscurrents before specifying a clear path forward. The markets are expecting 1-2 more cuts to the overnight rate by year-end, but the story around inflation becomes more challenging by the day.
OUTLOOK AND SUMMARY
The U.S. economy appears to be on reasonable footing, while the labor market continues to face challenges. Economic growth continues to be driven primarily by the wealthiest households and AI-related corporations. The markets have shown incredible resilience in the face of ongoing uncertainties, but the fresh military conflict with Iran will bring a need for vigilance.
Oil is likely headed toward even higher prices, and uncertainty will increase. Inflation is still too high, and the Iranian conflict could send it higher, yet the FOMC believes it will taper off on its own in 2026. Monetary and fiscal stimulus should help broaden economic growth to a wider group of households as the year transpires. We have become a bit more optimistic about more stable, sustainable economic growth as we move through 2026.
Eric Kelley serves as the executive vice president, chief investment officer for UMB Bank. In his role, he leads the bank’s economic forecasting team and sits on its asset liability committee as a voting member, helping to direct the company’s $68 billion balance sheet.
