Tax refunds smaller than expected

What happened: Tax refunds for the 2026 season are shaping up to be smaller than expected, with the average refund dropping from $3,700 to $3,571, a 10.9% increase year-over-year, according to the IRS. This shift comes despite predictions of a "fresh wave" of tax refunds by JPMorgan's chief global strategist, David Kelly. Nearly half of U.S. tax filers claimed new deductions offered in the Republican tax cut law, driving the increase in refunds. However, the IRS is phasing out paper checks, which could delay refunds for those without direct deposit information.

Market impact: The reduction in tax refunds may impact consumer spending, affecting sectors like retail and consumer discretionary. The shift could also influence financial services companies that offer tax preparation services, such as H&R Block and Intuit. The change in refund delivery method may impact banks and financial institutions that facilitate direct deposits.

What to watch next: Investors should monitor the IRS's final tax refund data for the 2026 season, due in late April, to confirm the trend. Additionally, watch for any changes in consumer spending data, such as the U.S. Census Bureau's retail sales report, due in mid-May. Lastly, keep an eye on the IRS's progress in phasing out paper checks and any potential delays in refunds.