What We Are Watching

What We Are Watching

Now, I do constantly stress that no one can predict the markets, especially with the millions of unpredictable variables that impact said markets.  That said, we would be pretty bad at our jobs if we weren’t keeping a close pulse on the data, trends, and economic news so we can properly position our portfolios for success. 

Big disclaimer, I went to my investment team and asked them what they are going into focusing on this year.  Thanks in advance, Tyler!  Here are their 3 big themes for the year.

Potential Economic Reacceleration

• Fiscal and monetary policy are expected to be supportive of economic growth in 2026.  Median GDP projections are between 1.7% to 2.3%.  The median rate in the Federal Reserve’s projections reflects one 25bps rate cut in 2026 to finish the year at 3.25% – 3.50%.
  • As the Fed cuts rates and short-term rates fall, nominal GDP should feel a boost (or at least remain elevated) as lending increases.  Between lower interest expense and higher tariff revenues, the debt concerns could be moving in the right direction, which could keep the long end from rising sharply.
  • The consumer is expected to receive an estimated 44% jump in federal tax refunds for fiscal year 2026 due to the One Big Beautiful Bill tax benefits.  Consumers drive the US economy, and any meaningful tax cuts can help improve consumer health and spending, continuing to drive economic growth.

Profit Growth Continues to Trend Higher

• As of the end of December, the next twelve-month earnings growth stands at 14.2%, the highest level since January 2025.  Analysts are expecting a 6.5% boost to corporate earnings per share from tax benefits on the consumer.  With so much discussion around a potential market slowdown or even a recession, it’s hard to reconcile those concerns with an economy that’s moving from roughly double-digit growth to no growth at all.
  • If there’s one area of fundamental risk, it’s the continued concentration within the index – it can drive markets higher or lower.  The top 10 companies now account for about one-third of total net income, meaning a miss from any major large-cap contributors could materially affect the overall earnings outlook.  For now, growth expectations remain robust for 2026.

Artificial Intelligence Spending

• We expect AI-related spending to naturally moderate after such outsized investment levels. A key question is whether companies that issue debt to fund this spending will continue to receive the same valuation multiples they enjoyed earlier in the cycle.  Consensus 2026 AI-related spending for the hyperscalers (AMZN, GOOGL, META, MSFT, and ORCL) has risen from $467B to $533B.  So far, AI-related spending has been mainly funded with free cash flow, and now these companies are starting to take on debt.
  • Cash flows and balance sheet capacity are unlikely to constrain large public AI hyperscaler capex spending in 2026.  While the vast majority of hyperscaler spending has so far been funded out of cash flows, many of these companies have the capacity for substantial debt funding as well.
  • Goldman Sachs estimates that hyperscalers can add around $700B of financing before their net debt load is > 1x 2026 EBITDA.

Bonus

Now the investment brain trust here doesn’t allow me to infiltrate their team, smart, but I will tell you what I am paying especially close attention to myself.  POTUS!  We went from a POTUS who was on the back page to one who literally consumes every little space of media attention.  It is quite remarkable when I read the WSJ every day to see that the first 25 articles all lead with Trump.  It truly is head-spinning and should lead to an interesting mid-term election coming up.  That said, I am not focusing on the main headline anymore, but rather the subtext or plot.  I think the MO is out on Trump, and he is a shock-and-awe type of guy.  Do I believe we are going to invade Greenland?  No.  Do I believe it is a big threat to some other postering or agenda?  Absolutely.  Also, what are the other reverberations and consequences down the line, good, bad, or ugly?  Those are the types of things I personally am trying to sift through and keep an even keel on.  It isn’t easy with the plethora of information, but what is the grand plan for each of these events and the repercussions to follow?

Well, folks, if the first month of the year is any indication, get your popcorn ready and enjoy the ride. 

As always, stay wealthy, healthy, and happy.