News & Insights
Regular readers of our weekly column will know that we put very little stock in the flood of predictions made by investment houses large and small as the New Year gets under way. Who knows where the S&P 500 or the MSCI All World Index will be eleven and a half months from now? Not us, not the heads of Wall Street bulge bracket banks, not the Fed chair or the economics departments of Harvard or MIT. All manner of things are going to happen, in our country and the world at large, between now and December 31. All we can do is to say that there are some things out there that we are paying closer attention to than others. Here are five of those things, reflecting our opinions about what may have a fair chance of mattering in the year ahead. These are, of course, only our opinions.
The US economy is weaker than the numbers suggest
Perhaps the most surprising thing about the economy last year was what didn’t happen: namely, it didn’t implode. The highest tariff rates since the misguided Smoot-Hawley regime of the 1930s didn’t create runaway inflation (yet, anyway), or stop American consumers from their tried and true shopping habits. Growth surged ahead on the back of the artificial intelligence spending spree (more about that below). But “affordability” is not just a political buzzword; it is the issue that households place as number one on their list of concerns. The jobs market, meanwhile, has been weakening at a slow enough pace to keep the headline numbers well away from red-flag levels presaging recession. But that could change quickly, particularly if some of those use cases for AI show up sooner rather than later. The “soft data” survey numbers have been depressed for awhile now; we will not be surprised to see the hard data follow suit.
Fed credibility will be a bigger issue than markets are currently assuming
After the financial crisis of 2008, central banks in general and the Fed in particular became the single most indispensable part of the architecture of the global financial system. Markets await interest rate decisions with bated breath and spend much of the time in between Federal Open Market Committee meetings debating and prognosticating what will happen at the next one. So it is perhaps a little surprising that the possibility of a politically compromised Fed – an outcome with at least a reasonable probability of happening – is not showing up as a top-level concern for the market. Interest rates have been rather quiescent for much of the time in recent months. The history of political tinkering with interest rate decisions is a generally sad history, whether we are talking of the Nixon – Arthur Burns era of the early 1970s here at home or, abroad, the incessant meddling of Turkish president Recep Tayyip Erdogan in more recent memory. We will see if the calculus changes, particularly in the bond market, as Jay Powell’s term approaches its end in May, or sooner than that depending on who gets the final nod from Trump.
AI stocks may or may not take a tumble, but the infrastructure build will continue at full speed
Are AI stocks in a bubble? That was the question of the day on many mornings late last year as CNBC talking heads gathered in their virtual Brady Bunch-esque space to ponder which way markets may be heading. It is an imprecise question, obviously, as defining bubbles is as effervescent as blowing bubbles. There is certainly a distinct possibility that AI-themed stocks could pull back – into correction or bear territory, even – given their consistent outperformance over the past three years. Whatever happens to share prices, though, we expect that the frenetic pace of infrastructure building will continue. AI is the central economic story for the 2020s. We are still in the building phase, and it may be some time yet before the companies investing heavily in AI capabilities are able to clearly demonstrate proof of concept to justify the hundreds of billions of dollars invested (it also may happen sooner, in which case we may have to massively revise our assumptions about the jobs market). We think that investors will be reluctant to completely pull out of their exposure to AI names as long as the possibility remains that these innovations will lead to levels of economic productivity not seen for at least half a century. Any pullback, in other words, would be more likely than not, in our opinion, to be temporary in nature.
China will double down on manufacturing while muddling through its present woes
China’s next five-year plan, which covers the period between now and 2030, will come out in March. It should come as a surprise to nobody that the plan will be doubling down on major investments in manufacturing processes aimed at achieving global economic dominance. China demonstrated in 2025 that, apparently alone among all countries, it was able to not only withstand the threat of massive tariffs from the US, but to push back strongly and force a retreat from the Trump administration. That strength derives from its strategy, many years in the making, of building dominance in the market for rare earths metals that are key ingredients to a wide range of manufacturing processes. Having won the first round, why stop there? But as promising as China’s strategy looks for long-term success, the country continues to be somewhat flippant about the problems plaguing its present-day economy, including an eviscerated property sector, anemic household demand and the ever-present specter of deflation.
Europe will have to figure out its economic and foreign policy in a new and unfriendly world
The car industry is a good place to start when thinking about the many problems facing Europe as 2026 gets going. Time was, when Europe’s car industry was a key component of its longstanding strategy of exporting high-quality products to an eager Chinese market. Now, China manufactures and exports some of the most successful auto brands in the world, notably including electric vehicle maker BYD which surpassed Tesla last year as the globe’s largest EV maker. China is a competitor to Europe in ways that it was not just a few years ago. Meanwhile, the strength of Europe’s political alliance with the US is also a thing of the past, which has additional economic implications beyond merely the headache of higher tariffs. Patience among Europeans from Sweden to Spain is running thin. In France, Emmanuel Macron’s governing coalition is hanging on by a thread, and there is still a possibility that the coalition’s ability to stay together will run out before Macron’s official term ends in 2027. Europe does have some things to be cheery about, notably inflation that has settled back to the European Central Bank’s two percent target. And the ramping up of defense spending should help to keep growth positive this year. But time is not on the side of the rules-based EU as the rule of law fades from view elsewhere in the world.
There are no doubt many other variables at play that we have not covered here. But this is a start. Let’s get to work.