Tag Archives: economy

2026 Investment Outlook: Navigating the “New Normal” of Policy and Innovation

As we begin 2026, I want to take a moment to reflect on the remarkable—and at times turbulent—market landscape of the past year and share our roadmap for the year ahead.

2025 Retrospective: A Year of Resilience

2025 was a year defined by significant policy shifts and the continued evolution of the Artificial Intelligence “supercycle.” Despite concerns early in the year regarding “Trump 2.0” trade policies and a sweeping tariff regime introduced in April (the “Liberation Day” tariffs), global markets proved surprisingly resilient.

  • Equity Performance: While the U.S. market faced mid-year volatility following the tariff announcements and a temporary government shutdown, the S&P 500 managed to close higher, supported by robust corporate earnings. Notably, 2025 saw a much-anticipated “broadening” of the market, as international stocks—particularly in the U.K., Japan, and parts of Emerging Markets—outperformed U.S. equities for significant stretches.
  • The AI Narrative: The AI trade matured but faced “reality checks.” Events like the “DeepSeek shock” in January and the August MIT study caused sharp, short-term pullbacks in tech giants, forcing investors to pivot from pure hype toward companies demonstrating actual productivity gains and monetization.
  • Fixed Income: The Federal Reserve’s transition into an easing phase provided a tailwind for bonds, though sticky inflation driven by trade costs kept yields from falling as sharply as some had hoped.

The 2026 Outlook: Things to Watch

1. Opportunities: The “OBBBA” Tailwinds and Global Green Shoots

The implementation of the One Big Beautiful Bill Act (OBBBA) is expected to provide significant fiscal stimulus through tax rebates starting early this year, potentially boosting U.S. consumer spending and GDP. Opportunities may include:

  • U.S. Small & Mid-Caps: Lower rates and deregulation should favor domestic-focused companies that lagged during the mega-cap tech boom.
  • The AI Ecosystem “Picks and Shovels”: Beyond chips, I am looking at the energy and infrastructure sectors required to power the AI buildout.
  • Emerging Markets: With a weaker U.S. dollar and local rate cuts, EM equities (especially Korea and Taiwan) offer attractive valuations compared to historically expensive U.S. multiples.

2. Risks: Debt, Inflation, and Concentration

  • U.S. Fiscal Health: With U.S. debt-to-GDP approaching 100%, market sensitivity to government deficit spending is at an all-time high.
  • The “AI Bubble” Peak: Deutsche Bank client surveys recently ranked a tech bubble burst as the #1 risk for 2026. Any earnings misses from “Magnificent 7” peers could trigger broader contagion.
  • Monetary Policy Tension: The Fed chair transition in May could introduce volatility as markets gauge the independence of the central bank under political pressure.

A Word on Venezuela

The arrest of Venezuela’s president is a significant geopolitical event with implications for Latin America. However, history shows that such geopolitical events, even when oil is concerned, tend to be limited to short-term volatility. The situation in Venezuela, with respect to governance and oil production, will likely take years to play out.

Investing involves risk, including possible loss of principal. Past results do not indicate future returns. As Warren Buffett once observed, risk comes from not knowing what you’re doing. Be careful out there.

Mid-2025 Market Update: Navigating Volatility and Looking Ahead

The first half of 2025 proved to be quite a ride, marked by significant market volatility, including a sharp decline of over 10% in early April. A constant stream of unsettling headlines contributed to investor anxiety:

  • Recession predictions intensified, fueled by various economic indicators and expert analyses.
  • The risk of tariff-induced stagflation emerged as a key concern, with rising import costs potentially leading to slower growth and higher inflation.
  • Expectations for interest rate cuts diminished, as the Federal Reserve signaled a more cautious approach to monetary policy, emphasizing data dependency.
  • A notable public dispute between the President and the Federal Reserve added to policy uncertainty, creating headlines about central bank independence.
  • Geopolitical tensions escalated with the war between Iran and Israel, contributing to global instability and impacting energy markets.
  • Aggressive trade policies, including the implementation of 145% Chinese tariffs, significantly disrupted trade flows and global supply chains. These tariffs were a major factor in the 0.5% contraction of US GDP in Q1 2025¹, primarily due to a surge in imports as businesses rushed to stockpile goods before higher levies took effect, and a decrease in government spending. While imports are subtracted in GDP calculations, the rush to import indicates a proactive, albeit costly, maneuver by businesses to manage tariff impacts.

The President’s negotiating style, characterized by threatening “crazy action” to extract concessions from trade partners, has certainly weighed on investor sentiment and consumer confidence. While these metrics initially plunged, they have since shown some signs of recovery as a temporary de-escalation of tariffs between the US and China was announced in May, with US tariffs on Chinese goods reportedly dropping from 145% to 30% for a 90-day period². Markets, despite the rhetoric, appear to be betting that the President will ultimately avoid actions that cause serious damage to the economy.

Looking further ahead

The Road Ahead: The “Big Beautiful Bill” and the Bond Market

As we move into the second half of 2025, markets and interest rates will likely be heavily influenced by the proposed Big Beautiful Bill (H.R.1 – One Big Beautiful Bill Act) – the budget reconciliation bill currently making its way through the 119th United States Congress. The House of Representatives passed its version on May 22, 2025³. The Senate just passed their version today. Now both houses of Congress with go back and forth to reconcile differences.

As it stands, this bill, in its various forms, is projected to increase the national debt significantly. The Congressional Budget Office (CBO) has estimated that the House-passed version of H.R.1 would increase deficits by $2.8 trillion over the 2025-2034 period (including interest costs related to the additional debt) ⁵. Key provisions that could impact spending and the deficit include the extension of major provisions of the 2017 Tax Cuts and Jobs Act, increased defense spending, and proposed changes to programs like the Supplemental Nutrition Assistance Program (SNAP) and Medicaid⁶.

While the President continues to “jawbone” the Fed to lower interest rates, it’s crucial to remember that the Federal Reserve primarily controls short-term rates. The bond market, on the other hand, holds significant sway over longer-term rates. If the bond market starts to “sniff out” inflation due to increased government spending and a widening deficit, we could see longer-term rates – which are critical for driving economic development – begin to climb.

The question of when our ability to finance this increasing deficit will become an imminent problem is one that many have debated for years. However, the current trajectory suggests it bears close watching. I will be watching the bond market for clues as we navigate the remainder of the year.

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This information is for general purposes only and should not be considered investment advice. Investing involves risk, including possible loss of principle.

Footnotes:

¹ U.S. Bureau of Economic Analysis (BEA). Gross Domestic Product, 1st Quarter 2025 (Third Estimate). Released June 26, 2025. https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-third-estimate-gdp-industry-and-corporate-profits

² Raymond James. “How does the US-China trade truce impact our market and economic views?” May 14, 2025. https://www.raymondjames.com/bvfs/resources/2025/05/14/how-does-the-us-china-trade-truce-impact-our-market-and-economic-views (Note: The KBOI article also confirms the truce, but Raymond James gives more detail on the tariff reduction percentage)

³ Congress.gov. H.R.1 – 119th Congress (2025-2026): One Big Beautiful Bill Act. https://www.congress.gov/bill/119th-congress/house-bill/1

⁴ Wikipedia. One Big Beautiful Bill Act. (Provides information on the Senate goal for passage). https://en.wikipedia.org/wiki/One_Big_Beautiful_Bill_Act (Also corroborated by news reports like AP and Club for Growth).

⁵ Congressional Budget Office (CBO). H.R. 1, One Big Beautiful Bill Act (Dynamic Estimate). Released June 18, 2025. https://www.cbo.gov/publication/61486

⁶ Committee for a Responsible Federal Budget. “Breaking Down the One Big Beautiful Bill.” June 4, 2025. https://www.crfb.org/blogs/breaking-down-one-big-beautiful-bill (Provides a detailed breakdown of provisions and their fiscal impact). Also, Wikipedia page on the Act (Source 4) lists key provisions.

Peak Uncertainty

I do not know how to write an apolitical market update when the main issue driving markets is politics. We can only hope that Trump’s tariffs ultimately lead to reciprocal elimination of tariffs on both sides. Otherwise, we are playing chicken with our economy and the outcome might not be pretty.

The administration speaks of bringing manufacturing back to the U.S. Autoworkers and unions believe the vision. It will not happen. If auto manufacturing returns to the U.S., it will be automated. If you haven’t been inside a modern car manufacturing plant lately, here’s a link to a 4-year-old video of the Porsche Taycan plant to illustrate. https://youtu.be/XnWYgKWHUwc

Tariffs are the issue, and until the administration clarifies its plans and objectives, there will be uncertainty (and we know markets do not like uncertainty). Is this about fentanyl or jobs? Other countries’ tariffs are not fair to the U.S., and we need to push back, but the lack of clear policy and blanket tariffs are maddening.

Other than that, earnings and jobs are holding up and inflation is down. If Liberation Day goes down as planned at 4 PM today, that will change. But the good news is, Trump can reverse course as economic conditions deteriorate. Businesses cannot re-engineer supply chains overnight. Hopefully, today’s announcement will indicate lower tariff increases and a willingness to negotiate. The longer it goes, the deeper the permanent damage.

Longer term, the question is not if, but when things get better.

Understanding Current Market Valuations and Risks

After three quarters of 2024, the S&P 500 is up 20.81%, and +34.38% over the past 12 months (Morningstar). Portfolios that include US small and mid-cap stocks, and international, have underperformed the large-cap US market. Price multiples over twenty times earnings are historically high.

Current valuations are based on optimistic assumptions. The risks seem skewed to the downside for the S&P 500 index, but the risk is concentrated in the 10 largest stocks. Although a large decline is not inevitable and might not last long, it is something to be prepared for.

On the positive side, not one of the four primary recession indicators, including residential investment as a % of GDP, light vehicle sales, business fixed investment as a % of GDP, and total business inventory/sales ratio, is warning of recession.

The Fed recently cut interest rates for the first time this cycle because inflation is declining. That is good for stock valuations as long as economic growth remains strong. The labor market will be a key indicator to show whether inflation is declining due to a weakening economy or if underlying economic growth remains strong. Market valuation hangs in the balance.

The election circus, port strike, and geopolitical chaos are ever-present risks, but there should eventually be an upside to them.

Investing involves risk, including possible loss of principle. Past performance does not guarantee future performance.

Stock Market 2024: Potential Shifts and Opportunities Amid AI-Centric Market Cap

At halftime of 2024, the S&P 500 is up 14.48% YTD (source: Morningstar), driven by expectations of interest rate cuts and AI enthusiasm. A 29% annual gain for the market is not unheard of, so the second half might see a continuation. However, key risks remain, including valuation, breadth, and inflation. Perhaps a reversal occurs, taking back the 1st half’s gains. If so, valuation issues would likely resolve and improve 2025 performance. Bottom line, stock market returns are lumpy. Longer term, the return is consistently close to 10% (Source: Dimensional Matrix Book – Historical Returns Data).

Gains have been driven disproportionately by a few large tech companies associated with AI, so a diversified portfolio including international, small and midcap stocks, and even the 493 stocks in the S&P 500 that are not Nvidia, Alphabet, Meta, Microsoft, Apple, Amazon or Tesla, your performance is less than the S&P 500. These 7 stocks comprise more than 30% of the market cap weighted index. Hopefully the market will broaden as businesses adopting AI see upside potential.

How High Is Too High?


The S&P 500 logged a stellar first quarter of 2024, rising just over 10% in 3 months. Moreover, it has gained more than 28% since the October low, just five months ago. It is likely that something will happen to trigger a sell-off from these levels. Trying to time a correction is not a good strategy. Sometimes momentum begets momentum. We could see another 10% rise before a reversal. The price of market returns is volatility. It might help to view part of the recent gains as “cushion” to offset a correction.

We’ve Come a Long Way

I am attempting to lean into rising risk by delaying new cash deployments and allocating new funds to value oriented positions. On the positive side, the Morningstar Market Valuation indicator suggests that the market is only 4% overvalued. That does not suggest a change in strategy, but I see significant parts of the S&P 500 trading at valuations that stretch my imagination.


Valuation and concentration risks are becoming elevated, but a correction is not inevitable in the near term. The key factor, as usual, is earnings and cash flow growth that provide fundamental support for market valuations. Another moderate risk factor would be fewer or delayed rate cuts. More impactful, but less likely factors include an inflation rebound or an earnings slowdown.

The overall outlook remains positive based on the four supporting themes including:

  1. Stable growth
  2. Falling inflation
  3. Impending Fed rate cuts
  4. AI enthusiasm

I will be watching these developments.

Past performance does not indicate future performance. Investing involves risk, including loss of investing principal.

And So the 4th Quarter Begins

The stock market fear gage, the VIX, is flashing extreme pessimism. If you follow the news flow, it is easy to see why. It’s a constant barrage of negativity. It’s important to note that crises and the stock market have coexisted for decades. Crises come and go, while the stock market has always been volatile, yet sustains a positive trend.

Near-term indications suggest that the market is challenged by the Fed interest rate policy but appears reasonably valued all things considered.

My favorite bottom-up indicator, the Morningstar Market Valuation chart, puts the US market at 91% of fair value on 9/30/23, suggesting slight undervaluation. On a deeper level, growth is slowing, but it is very debatable how much it will slow. For now, it appears that the answer is “not too much.”

Part of the reason the market pulled back from its recent high at the beginning of August is that the Fed signaled that it is likely to keep rates higher for longer. Higher yields translate into lower stock price multiples. Ultimately this will reverse when the Fed sees the threat of persistent inflation above target diminishing.

In the absence of an upside catalyst, I expect the market to remain rangebound (S&P 500 between 4,220–4,560) until either the positive scenario occurs with the economy’s slowing stops, the Fed becomes dovish, and disinflation proves successful. On the downside, if either of these factors deteriorates, the market could break to the downside.

This morning’s job report (Tuesday, October 3, 2023) sent interest rates higher. Accordingly, stocks dropped. The knee jerk reaction to a data point illustrates the market’s myopia in seeing the trees instead of peering through the forest. Every data point is extrapolated far into the future when we’re pretty sure that won’t be the case. That suggests the long-term outlook just went up by the amount of today’s decline.

A Chat GPT forest

I’ll also comment about Congressional dysfunction after this past weekend’s drama. A Government that can’t govern is not helpful given the fiscal state of this country. It can only create uncertainty in the Treasury market. Stocks will not go up with interest rates increasing from this level. Let’s hope Congress gets its act together sooner than later.

Last quarter I noted that the market “appears to be approaching fair value” after being up 15.91% in the first half of the year. The 3rd quarter pullback was not surprising.

The bottom line is that the S&P 500 went up 13.03% YTD through the 3rd quarter according to Morningstar. The 4th quarter should be interesting.

Investing involves risk, including loss of principal. Past performance is not indicative of future returns.

Recession Ahead?

Despite a banking crisis, rising interest rates, the indictment of a former president, et al., the S&P 500 finished the 1Q23 with a 7.03% gain. However, within the U.S. Market, growth stocks were up 14.79% and value was up only .18%, according to Morningstar. Despite this quarter’s gains, the Morningstar Market Valuation estimate puts the market at 92% of fair value.

The Fed kept interest rates too low for too long. There’s plenty of blame for both sides of the aisle in Congress too. While inefficiencies need to be purged from the system, politicians try to address the suffering at the individual level of those directly impacted when marginally profitable businesses are forced to close.

The banking problems that surfaced in March 2023 are one of the unintended consequences of Fed policy. Low interest rates incentivized banks to stretch for yield by buying long duration bonds that exposed their asset portfolios to excessive interest rate risk. When Silicon Valley Bank faltered, the whole banking system became suspect, and we saw a contagion effect with depositors pulling funds from similar banks. The Government intervened by extending FDIC insurance.

It is unreasonable to expect that 10+ years of easy money will not create some financial moral hazard. Now that we’re getting off the sauce, we’ll see who has been swimming naked. I expect continued volatility until the second half of the year. Getting past the peak interest rate question, lower inflation, the regional bank solvency question will likely result in better equity markets by the end of the year.

Patience

In my market outlook a year ago on January 3, 2022, I said, “I think a 20% correction would be reasonable… A 20% correction is not fun, but it is to be expected.” I’m not trying to say I told you so, but we need to maintain perspective after a very ugly year. Bonds went down too.

What now? Coming into 2022, the stock market looked about 7% overvalued. Now, it appears to be about 16% undervalued relative to Morningstar’s fair market value index. Since the end of 2010, only about 5% of the time does the market appear cheaper by this measure.

The broad landscape for investors is much healthier than it was a year ago. Valuations have come down. Interest rates are rewarding creditors for taking risk. Things are getting back to normal, and that’s good.

It might take another few quarters to see results, but the 2022 headwinds should turn into tailwinds later in 2023. The issues include slower economic growth, tightening monetary policy, hot inflation, and rising long-term interest rates. According to most projections, these issues should begin to resolve by the middle of this year.

Geopolitical risks around China, Russia, North Korea, and perhaps Iran, remain a threat to western civilization.

Heightened uncertainty makes the stock market go down and that creates an opportunity for long-term investors.

Investing involves risk, including loss of principal. Past performance is not indicative of future performance.

Closer to the Bottom than the Top

In January I said we should expect a 20% correction. I believe the Fed’s hawkish response to inflation has driven markets to over-shoot to the downside. I think the interest rate shock will slow the economy sufficiently to break the rapid rise in inflation and the Fed will pivot to a more dovish stance. We need positive real interest rates with low inflation, so stock prices can normalize. How long this take to play out is probably measured in quarters, not years.

Everyday millions of people vote on the value of companies by buying and selling. Many are influenced by the latest interview on CNBC. The only thing I know with certainty is that none of the pundits know what will happen. If watching the gut-wrenching volatility affects your happiness, you should probably spend your time watching something else. A quarterly review will tell you what you need to know.

Interest rates influence the value of stocks. Stocks are worth less with higher real interest rates than low rates. The artificially low rates we had until recently are the main reason stocks were overvalued in January.

There is a probable way out for stocks. Watch the following: Inflation will eventually recede, the Fed signals a pause, a Russia/Ukraine ceasefire occurs (which will happen at some point, even if it’s a Korean War-type solution where the war never actually ends and there’s a demilitarized zone). Then, China realizes that an economic collapse is worse than COVID and the U.K. accepts the reality that one can’t solve a problem partially caused by too much money via throwing more money at it (this already happened over the weekend – I wrote this on Friday afternoon and guess what, the markets are up about 3% mid-Monday afternoon). These things can happen, and they can happen fast. When they do, stocks should stage a massive, legitimate, well-rounded rebound.

Like Ian, I believe this storm shall pass.

Inveting involve risk, including loss of principal. Past results do not guarantee future results. The opinions expressed here are my own.