by Editorial Team, AdvisorAnalyst
The noise around the US economy in mid-2026 is loud and contradictory. War in the Middle East, energy price anxiety, AI-driven job apocalypse fears, stagflation whispers, and a Fed transition that has investors on edge. Yet when Jeff Schulze, Head of Economic and Market Strategy at ClearBridge Investments, takes the stand on Franklin Templeton's Talking Markets podcast, his message is disciplined and consistent: the data does not support the fear.
Schulze's framework is the ClearBridge Recession Risk Dashboard — a 12-indicator model that has guided his economic calls throughout the current cycle. As of May 2026, ten of those twelve indicators are green. One is yellow. One is red. The aggregate signal maps to recession odds of 20% over the next 12 months, which Schulze has modestly widened to 30% to account for Middle East uncertainty. But the broader message is unmistakable. "This is a healthy economy with a firm foundation," he says.
GDP: Look Through the Headline
First quarter GDP printed at roughly 2% annualized — a number that looked soft on the surface, but masked considerably stronger underlying dynamics. Schulze is quick to disaggregate the components. "A 1.3 drag you saw from stronger imports. My takeaway is that that's showing firm domestic demand." Consumption held. Capital expenditure strengthened. And Schulze's preferred signal — final sales to private domestic purchasers, a core GDP concept that strips out inventories, net trade, and government spending — came in at a healthy 2.5%.
Looking into the second quarter, the Atlanta Fed's GDPNow model is tracking growth of 4%, with roughly half of that driven by consumer spending and another percentage point from business investment. The picture, Schulze argues, is not one of an economy on the verge of stagnation.
Labor: Canary in the Coal Mine Is Singing
Perhaps Schulze's most striking data point involved Initial Jobless Claims. "A couple of weeks ago, we saw the lowest reading of that data set since 1969. And back in 1969, the labor force was only 70 million people, compared to 160 million people today." The implication: on a labor force-adjusted basis, the American jobs market may be operating at unprecedented historical strength.
Payroll breadth has also improved materially. Stripping out healthcare — a sector that has distorted headline employment figures — private payrolls have shifted from negative 271,000 for all of 2025 to positive 153,000 so far in 2026. "You're seeing broader labor breadth and you're seeing stronger private payroll creation," Schulze notes, "which is a really good dynamic."
AI: Jevons Paradox, Not Apocalypse
The AI job disruption narrative is one Schulze contests with both data and economic theory. Youth unemployment among 16-to-24 year olds has dropped from above 10% to 8.5%. In software development — "ground zero of AI disruption," as Schulze calls it — job openings have grown by double digits over the past year and wage growth has accelerated.
His framework is William Jevons' 19th-century observation about steam engine efficiency: that lower cost per unit of work leads to higher total consumption, not lower. "Usually when you have a new technology, yes, that efficiency makes those resources or services cheaper. It doesn't lead to less employment or less demand. It actually does the reverse of that, counterintuitively." He draws the analogy to cars with better fuel efficiency driving more total miles, and LED lights enabling broader adoption rather than less energy use. Applied to knowledge work: lower cost per legal, accounting, or consulting task expands the market for those services. Schulze points to new business formation running at all-time highs as evidence that AI is democratizing competitive capability, not eliminating jobs.
Stagflation: Missing the 'Stag'
Asked directly whether stagflation is coming, Schulze's answer is precise: "We're really missing the stag portion of stagflation." Yes, inflation may tick higher given energy disruptions. But stagflation requires both elevated inflation and economic stagnation — sluggish or negative GDP growth, rising unemployment. With the economy tracking 4% in Q2 and payrolls accelerating, the stagnation component is simply not present in the data.
Earnings: The Strongest Season in Four Years
Q1 2026 earnings came in at 28% growth. Revenues delivered double-digit growth across every sector, each beating expectations set at the start of the quarter. "The revenue surprise was double almost what you typically see," Schulze observes. The median S&P 500 stock surprise was 6%, with median year-over-year delivery of 12% — "both of those are the best that you've seen in over four years." Crucially, this was not a Magnificent Seven story: breadth was genuine and widespread. Guidance was broadly positive, and Schulze's forward earnings expectation for 2026 now stands at 22% — well above the mid-single-digit growth typical in midterm election years.
Valuations and Rates: Manageable, Not Alarming
The S&P 500's P/E ratio has returned above 20, which draws predictable investor anxiety. Schulze contextualizes it historically: the market first crossed the 20x threshold in April 2020 and has traded above it roughly two-thirds of the time in the six years since. Over that same period, the S&P 500 has returned approximately 150%, almost entirely driven by earnings. "I think we're in a higher valuation regime. That's nothing to be scared of."
On rates, the 10-year Treasury hovering near 4.7% has created equity headwinds, but Schulze sees a path lower. Historically, following major peaks in Brent crude, 10-year yields have declined consistently on a 3-, 6-, and 12-month horizon. "I think once we get visibility in the Middle East, the 10-year Treasury will drop, likely down into the low 4% range, which again should be a tailwind for US equities."
The Wall of Worry Is the Bull Market's Foundation
Schulze's closing argument is a market psychology observation with deep historical grounding. Near all-time highs, with abundant skepticism in the air, investors instinctively ask whether the rally is overextended. The data says otherwise: since 1989, buying the S&P 500 at an all-time high has produced better forward one-, three-, and five-year returns than buying below one. "An object in motion tends to stay in motion," Schulze says. "Given the backdrop that we have from an earnings perspective, we think that dips are meant to be bought. And we think the market will continue to melt higher as we move through this year."
3 Key Takeaways for Advisors and Investors
1 The recession risk is real but not dominant — and the data proves it. With 10 of 12 ClearBridge dashboard indicators in green and Initial Jobless Claims at their most favorable level relative to labor force size since 1969, the probability of a near-term recession sits at 20–30%. Advisors should frame client anxiety around geopolitical risk accurately: it is a tail risk, not the base case. The underlying economy — consumer spending, capex, private payrolls — is demonstrably firm.
2 AI is a productivity amplifier, not a job destroyer — and the opportunity is in what it enables. The Jevons Paradox framework offers advisors a powerful conceptual tool for countering client fear about AI displacement. Lower cost per task expands demand for services, creates new businesses, and broadens access — as current software employment and youth unemployment data both support. The investable implication is that AI-driven efficiency gains are more likely to extend the cycle than truncate it.
3 Strong earnings breadth in a high-valuation environment is historically constructive, not a warning signal. With 22% earnings growth expected for 2026, the earnings engine is running well above historical midterm-year norms. Valuations above 20x P/E have been the persistent state of this market for six years, and returns have been driven overwhelmingly by fundamental earnings delivery. Advisors should help clients distinguish between expensive-and-deteriorating and expensive-and-accelerating — the current environment reflects the latter.
This article is based on the May 19, 2026 episode of Talking Markets with Franklin Templeton, featuring Jeff Schulze, Head of Economic and Market Strategy, ClearBridge Investments. The views expressed are those of the speakers and are not intended as individual investment advice.
