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Brent Kenwell joins US here US Investment and Options analysts for E.
Trou Brett.
You look back on twenty twenty five, heck of a performance across the equity markets here.
What are the key drivers.
For you for twenty twenty six? What are you looking at? What are your expectations are for twenty twenty six?
Yeah, thanks for having me to start.
Off the hour.
You know, when we look at equity markets for twenty twenty six, at this point almost actually feels a little bit more of a concern that so many people are constructive on equities as we look to the next twelve months, But we are amongst those who are also constructive on equities.
We expect US markets to do another have another solid year, driven by really multiple catalysts, three of which include a continued AI trade, expanding and accelerating earnings growth in the S and P five hundred and a fed that is not looking to be hawkish or derail equities from a monetary perspective.
So when we look at kind of those I.
Think bigger drivers of the market, we still see that there's room for expansion there and we expect those to be positive drivers for next year.
So given all of that, why does invent investor sentiment remain subdued? What do you think could be contributing to this cautious approach and how do you anticipate this sentiment to evolve throughout the year.
Yeah, that's such a good question, and I think it really speaks to sort of the division we're seeing in so many ways between Wall Street and Main Street. You know, when we look at you know, and we include ourselves in this observation too, but when we look at like the streets, the firms on Wall Street, they remained pretty optimistic for next year. But when we look at sentiment, like various sentiment measures or surveys or gauges, they remain
fairly subdued. Really, and they they that happened in you know, late Q one, early Q two of last year when we had you know, the tariff sell off and about twenty percent correction the sp we never really saw that sentiment come back to life. There's always been this I would almost argue a healthy amount of skepticism in the market rally, But nevertheless, we haven't seen that confidence really
come back. And that's consumer confidence, that's investor sentiment. So you know, I don't know if that will maybe actually.
End up being a positive as we pushed through the year. I'm hoping it acts as a positive.
But yeah, you're to your point, we haven't really seen sentiment make the types of rebound that we've seen in you know, whether it's GDP or the S and P hasn't really followed followed those measures higher. So twenty twenty six will be interesting in that respect, Brett.
We have not really seen to any meaningful degree of broadening out in participation in this market. It has remained fairly concentrated in a handful of technology names, and a lot of folks will call that out as a potential headwind.
For this market or concern. How do you guys think about that?
Yeah, you know, I think, well, I think there was a couple of ways of looking at first. To your point, I do think we see some broadening in twenty twenty six, not only our SMP earnings expected to accelerate next year, but all eleven sectors in the SMP are expected.
To post earnings growth.
We haven't seen that in five years, you know, twenty twenty one being the last time we had. It was pretty low bar to a hurdle at that time, coming out of you know, the first year out of COVID. So we're expected to see fairly broad earnings growth next year. That should act as a positive catalyst. But we're also seeing, you know, we might finally see small caps come to life.
You know, I have to put might in there because you know, last year I expected the Russell to do and it did do better last year, but certainly you know, didn't lead need the charge higher necessarily. But you know, we do think that small caps could finally have their moment in twenty twenty six. Maybe they start to show they have the very strong expectations for revenue, cash flow and earnings growth next year. So we're hoping to see
that takeoff. But you know, even within tech, I think there's this concern that we're approaching this AI bubble.
We're in the depths of the bubble.
And I mean, I think it's reasonable to question are we in a bubble or even speculate that we are. But it's it's too hard for us at this point to say that we're in a late stage bubble, and I think we need point to certain observations within the space, whether that's analytical, like looking at directly at Nvidia stock trades, about twenty five twenty six times forward earnings is expected to grow fifty percent on the top and bottom line.
That's very difficult for us to look at that and say that's a bubble like valuation, you know, less analytical. You look at something like Meta and Oracle. Investors are punishing these names because of the con urns over cash flows and their balance sheets.
So these are not.
Behaviors that we see in late stage bubbles. Is they're not valuations we see in late stage bubbles. So from those perspectives, we still think that there's room to go in that trade.
What about downside risks. You've highlighted the labor market as one of those. How crucial do you think the stabilization of that is to the continuation of really this record bill market We've seen double digit gains in the past three years.
Yeah, the jobs, you know, sort of like the mantra we've adopted for you know, sort of, the macro environment is messy but manageable. We're seeing so many moving parts, and whether that's you know, whether that's to do with economic policy, or whether it's what's going on at the FED. There's a lot of moving parts at the FED right now, one of which of course being a new FED share coming in twenty twenty six. But even when we just broadly look at macro, there's a lot of moving parts.
You have the labor market is cooling but not collapsing. Inflation is taking higher but not you know, you know, going out at at a pace that is not controlled or well anchored, to put it in FED speak. But then you have this consumer that's strained but resilient. And same with GDP, it continues to come in above expectations. So overall, when we look at the space, I think the foundation is constructive for equities to continue hire, for
the economy to continue along in twenty twenty six. But to your point, the labor market is the biggest concern. The consumer in the US is responsible for a little more than two thirds of GDP. The consumer does not have very much spending ability if they lose their jobs.
So if we.
See that, you know, the cooling and the labor market kind of accelerate or really get to a concerning level interior to a concerning level in twenty twenty six, that's going to have a really negative impact on equity markets. Some investors, you know, might be out there kind of rooting for continued cooling in the labor market to push the FED along to be a bit more accommodative, but you know, we don't think that that's the right approach.
Labor market is a very healthy thing, and we believe a very healthy thing for equities.
Ratt thanks so much for journeys. Really appreciate it.
Brent Kenwell joining us a US investment and options analyst for e Toro.
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The Russell Price Joints is here, chief economist at a merit prize financial here. Russell I love to get your thoughts about kind of how you view this economic backdrop for twenty twenty six here. What do you think investors should be focusing on here?
Well, I think we have a pretty good year ahead of us from an economic perspective. We come into the year with consumers and pretty financial shape and aggregate. We also should see some pluses and minuses in the first half of the year for investors to watch out for. On the plus side, we should get a little bit more consumer income from the no tax on tips, the no tax on overtime, plus the six thousand dollars senior
tax credit or deduction excuse me. And also against that you'll have some consumers that are negatively affected by the ACA subsidy elimination, and also the student loan payments repayments been forced for stringently. So but other than that, the economy is going into the twenty twenty six with pretty
good momentum. We should also continue to see pretty good business investment spending related to AI and other growth initiatives, so we expect the pace to be a little bit better this year than it was last year, and last year was a pretty decent year.
So those are the pros you've also highlighted labor market. That's a key risk. What improvements are needed to avoid a slowdown? Maybe in consumer spending.
Yeah, we've certainly seen a big decline in overall consumer centiment that hasn't really translated yet into lower consumer spending. But if we were to continue to see a further deceleration or degradation and the job market, those weaker sentiment levels likely would translate into reduce spending. So what we need to see is for hiring to regain a little bit more traction. Recent data suggests that that might be happening, but it's still very early and it's not by any
means conclusive. So we just need to see businesses alleviate some of their concerns or lose some of their concerns. Is related to how much the terroriffs mighty negatively impact the economy, what that might do to company profit margins, and from a small business perspective, where much of the job hiring has fallen off, we need to see small businesses to become more accustomed to dealing with all of the added paperwork involved with tariffs and the additional expense as well.
So, Russell, what do you think the fetter reserve should do in twenty twenty six. Right now, the market is kind of discounting maybe two quarter point rate cuts during the year.
What do you think they should do.
Well. I think we could see a little bit more than that, probably around three primarily because inflation has been not been nearly as strong as people have predicted a few months ago when the terriffs were first announced. So
the inflation situation has been a lot better. Of course, that is a big caveat that the data is incomplete and a little bit suspicious related to the most recent Labor Department report because of the government shutdown that we had in October in the first half of November, but we do expect inflation to peak maybe at three point two percent in the first quarter. That might actually be
a little bit too high. We could see the number be a little bit weaker than that, offsetting some of the ongoing tier if upside pressures were seeing in inflation, is a steady deceleration in shelter costs, and shelters are thirty five percent of the total costs of the consumer price index, so that's a pretty strong downward pressure. So with that backdrop and still some relatively weak hiring activity.
We expect by the second quarter the Federal Reserve should resume their pace of quarter point cuts, So.
You expect three rate cuts in twenty twenty six. How do you see those impacting inflation and economic growth?
Well, I think the impact on inflation should be relatively benign, as I should mention that over the last two and a half years, if you strip out just shelter costs, which are again our thirty five percent of the index CPI, inflation has been at or below two percent for those two and a half years. So it's really the cooperation of that shelter component that matters much. And those are very long term trends based on the way they measure it and based on the way rental rates are changed
over time in the marketplace. So we should see further deceleration CPI even without the cuts. The cuts they should stabilize economic growth that above trend growth, but still not enough to really give corporations a lot of pricing power, Nor are we likely to see supply and demand imbalances that would continue to push inflation higher.
Russell.
In terms of the labor market, we've got it just a headline print four point six percent and that's by all measures pretty darn good close to full employments you're probably going to get. But still people are concerned about underlying trends in the labor market.
How do you view the labor market?
Yeah, I think the concerns about the underlying labor market are certainly justifiable. We've seen weakness in places that were typically not all that used to seeing weakness. Not only are we seeing weakness, and some of the lower segments of the marketplace where AI may be AI implementations may be having an influence. Certainly, we've seen most of the job decline and hiring, I should say in the small business sector in our view that that is primarily the
reflection of the terror related challenges. But also we've seen certainly a considerably weaker environment for recent college graduates, so that also may be influenced by artificial intelligence. People's concerns about the labor market, at least over the near term,
I think are legitimate. But now that the terror situation is becoming the standard, becoming business as usual to some degree, we think that the hiring should recover modest modestly and we should see the unemployment rate this year decline a little bit from that four point six percent rate that we've seen most recently. So with that a little bit of decline in the total number of available workers, which should put a little bit downward pressure on the rate as well.
Great and with slightly lower mortgage read what's your outlook for housing in twenty twenty six, especially regarding existing home sales? I asked, because I'm a renter and I always tell everyone here asking as a.
Renter, sure, well, existing home sales we have seen we have been seeing over the last several quarters some improvements and the bailability of housing available for sale. That reversed a little bit late in the second half of twenty twenty five, but that's fairly normal as well as far as a seasonality basis. So as we go into twenty four and twenty five, twenty twenty four to twenty twenty
five were very weak years for existing home sales. Twenty twenty four was as weak as it's been since nineteen ninety five. We expect to see a little bit better performance, maybe about five to eight percent improvement and transactions, but we should finally actually see some weakness and housing prices around flat all.
Right, Russell, thanks so much for joining us.
Really appreciate getting your thoughts here as we start off twenty twenty six. Russell Price, chief economist at Americ Price Financial.
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Adam Turnquist Joints is here cheap technical strategies for LPL Financial. Adam, thanks for joining us here. I'd love to get your thoughts from a technical perspective. Where do you see real opportunities here in the beginning of twenty twenty six.
Hey, good morning and happy new year. Thanks for having me on.
So as we look ahead to twenty twenty six, we're pretty constructive on the market when you look at things technically right now, the SMP just kind of stuck in this consolidation range it's really been in since October, and no surprise, we're consolidating here after this big recovery rally off.
Those liberation Day lows.
But when you have an uptrend in a bowl market, the most likely scenario as you break out to the upside of that consolidation range for the S and P five hundred, we're watching kind of the sixty nine hundred area, so not far from current.
Levels for a breakout.
If we see that, the measured technical move would be around seventy two in terms of a price target. So we think the bull market will continue. And I think most importantly what we've seen over the last couple months is a shift from more defensive leadership with healthcare utilities outperforming in November, to more cyclical leadership. That to us suggests more of a durable, sustainable bull market here.
And you also emphasize the versification. What alternative assets or sectors are you bullish on? Especially this year.
Our favorite sector, and it has been for almost two years now, has been communication services. Is the best performing sector last year, and I think in the previous year. It's got very good fundamental story. When you look at Earning's growth double digits, margins double digits, and I think even revenues are expected to grow double digits next year,
so a solid backdrop. You get some hyperscalers in there with meta and alphabet, but then you also get some telecom names some more defensive areas, so we think of it as more of a bar Bell type strategy which could serve well.
In twenty twenty six.
We do think volatility is going to come back here from really low levels in the vicks. I think it's going to be more of a policy driven market, and when you have that type of backdrop, we expect volatility to remain at least a little bit higher than we are right now.
Adam, I'm looking at the Relative Strength Index the RSI on the S and P five hundred and sitting right at fifty one, and typically at a reading of thirty, the markets tend to be over sold. At a reading of seventy tends to be a little overbought. We're sitting right smack in the middle. What do I do with that?
We call that the midline, and that's a good spot for the SMP. We've reset from some of these overbought conditions. When you flash back to earlier in the year and earlier in the fall, when the market was getting a little bit overbought.
We've since corrected.
There's been some consolidation here really to get to the overbought levels as well.
In a bull market.
You want to see that go through against seventy, as you mentioned, and I think getting overbought in a bull market, we view that as a bullish sign.
That's what you want to see.
You don't want to see divergences with price making higher highs and then that RSI indicator may making lower highs. That suggests maybe some buyer enthusiasm fading a little bit. We haven't quite seen that yet, but look for that to expand it to overbought levels if we do get a breakout.
You're also constructive in commodities, especially precious metals. How do you see geopolitical tensions and maybe trade policy affecting your outlook for twenty twenty six.
I think it's going to complicate the story for precious metals as it did in twenty twenty five, and it wasn't necessarily a bearish catalyst when you look at price action and some of the commodities that you were talking about earlier, Silver up one hundred and fifty plus percent,
gold up significantly as well. But we do think it's going to lead to volatility when you look at just what's happened in copper markets, for example, over the last several months, there's been a surge in copper moving to the US from London. Same thing in silver because the critical Minerals list in the US continues to grow. I think there's over sixty different metals on that list, so
that brings the potential threat of tariffs. I know the administration is going to view some of those tariffs in June and July, so we'll maybe get an announcement there. But traders are wasting no time in investing and moving some of that metal back to the US just in case we get any type of tariffs. So we do think the demand side as well for a commodity like silver or copper, remains strong.
Like the macro backdrop.
It's it's an AI play as well, but also in the green energy transition some of the infrastructure buildouts. We think copper and silver are going to be important metals to watch in twenty twenty six, and we think the trend will continue higher for both.
Adam, what does the technical trend or what does the technical marketing look like for the US dollar. We saw a sell off earlier in the year on some of the concerns about the implementation of tariffs. It's since stabilized, but still you know, eight nine percent lower than where it started the year.
How do you view the dollar here?
This is going to be a big one for this year, and this is the trend we've been watching carefully. As Paul you mentioned, this may be a bottom developing. That's what we view this as. If you zoom back on the dollar index kind of to the nine lows and you draw a trend line, that's we call it a secular uptrend that's been in place.
The dollar has not broke that uptrend.
So the level that we're watching technically is ninety six on the US Dollar index.
We start breaking.
Below that on a sustainable way, that would suggest the resumption of this downtrend that's been in place for the dollars since early last year. Will resume that to us would suggest start to kick the tires international, especially emerging markets. But for now we're giving that secular uptrend the benefit of the doubt. Maybe we'll see a bounce here, need a clear kind of one hundred, just over one hundred to get through some resistance and actually have a breakout from the bottom.
But certainly an important chart to watch as we move into the new year.
Technically speaking, bitcoin has traded in an hour range between eighty five thousand to ninety thousand in recent weeks. What is a price action you were seeing it? It looks like there's a build up in some latent volatility, but who knows because such squeezes happened historically preceded sharp direction on the.
It's been a tough one for bitcoin bowls.
It started to break its up trend back below the tun or day moving average. It's kind of consolidating another one that maybe is a short term bottom here. I think there is risk you get back down to the April lows. When you look at just the overall trend, the story, at least on the chart has been broken. You're seeing that momentum start to roll over a little bit. Maybe you get some relief rallies off these oversold levels, but certainly I think there's still downside risk for the bitcoin market.
Adam.
How about the precious metals, Boy, we saw gold and then really silver, you know, more than double last year, some really big moves and precious metals here, Now what do we do?
I think you by the dip to keep it simple, right when we're certainly getting some dips over the last few days, very volatile, especially in silver markets. With the CME Group raising margins, there were some restrictions on pure place silver funds in China, and I think, look, the market was just simply overbought, so we had some profit making pressure.
That's normal. Even when you see these big moves, when.
You have one hundred and sixty hundred and fifty percent move, as silver did, you should expect pullbacks, and maybe they're double digits. That comes with the territory of these parabolic trends. When they end, you tend to get a pretty big retracement. Maybe we'll see that in the first first part of twenty twenty six with silver. But I do think it is more of a buy theedit market the fundamentals and the macro story, especially for gold, with central bank buying
being such a big factor in that trade. I think that's going to continue. I think that's starting to broaden out to silver as maybe the central banks get a little bit of sticker shock with these higher gold prices in twenty twenty five, so we're seeing maybe a diversification there, but certainly a supportive trend. I think the geopolitical environment
is another one that supports sports of the market. And then we have the Fed continuing to reduce interest rates another one that should help gold as well.
All right, Adam, thanks so much.
Appreciate it as always, Adam Turnquist, chief technical strategist for LPL Financial.
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Looking at the work function WRP on the Bloomberg terminal, suggest that the market's discounting maybe two more rate cuts by the Federal Reserve in a twenty twenty six. What does that mean for the bond market, which experienced a very strong twenty twenty five in terms of high single digit returns.
Let's talk about development markets.
And emerging markets.
We can do that with Jack McIntyre, portfolio manager at brand New Heine Global.
Jack, thanks so much for joining us here.
Solid solid returns in the bond market in twenty twenty five. How do you frame out your outlook for twenty twenty six?
So you know, my starting point is that I actually think it's going to be sort of this year of hey, earning the coupon. Don't have huge expectations. You know, last year was unique in the sense that the economy did well from a growth standpoint, yet the labor market showed signs of weakness, and this is a little bit of a quandary, and then you know it's gonna I don't think that's going to be the case for this year.
We're going to see either hey, the labor market do better because we've got to see more hiring pickup, or the economy is going to slow. So given that sort of backdrop, my mindset is a little bit earned a coupond. And having said that, I don't want to have one view for the entire year, because I actually think coming into the year, maybe the first half, first third, we could see an upward bias and yield. So obviously from a return standpoint, that's going to eat into that coupon return.
But once we move, you know, the second half of the year, I actually think you're going to get a little bit of price appreciation along with that coupon and treasuries. But Rangebout is kind of my mindset coming into this year.
So you like emerging markets, particularly Latin America, What specific factors there make bonds stand out in twenty twenty six.
So a couple of things. One, if you think fundamentally, I like their balance sheets. You know, if we have kind of a budget crisis somewhere in the world is going to come out of the developing market. It's not going to come out of the developing the emerging sort of markets. I've got inflation expectations embedded in the price of lat Ham bonds still elevated, although actual inflation is continues to decline. I like that that means real yields
or positive so that's a good backdrop. And then away from that, I still think that that theme for the entire year, US dollar is going to weakend my mindset is that this American exceptionalism, which is dominated for a decade plus, it's going to just that the margins continue to leak. Foreigners own a huge amount of US assets. I think you're going to start to see a reversal of that in latam which in a world that still has very attractive yields, is going to attract some of that capital.
How do you think about evaluation stocks versus bonds this year, Jack, I mean.
Both performed well in twenty twenty five.
Yeah, yeah, I think so, you know, a little bit of a Goldilocks' type environment, you know, meaning that, hey, the economy has done well from a gross standpoint, inflation you know, sticky, but it you know, it's not really surging higher.
And I don't think that will be the case.
You know again coming in this year, I do think bonds from evaluation standpoint look more attractive. But to be honest, I could have said that last year and probably the year before that. So at some point, you know, we're going to start to see bonds do well.
You know, it's interesting.
I mean we're going into a mid term election year and historically volatility starts to uptick, you know, particularly in the in the equity space. You know, you've got to be open to a draw down. And then coming into this year or since I mentioned volatility, I mean you've got when you look at implied volatility, so kind of what option traders expect across asset classes, across bonds, currencies, equities,
it's low. You know, I kind of view that as sort of being a sign of complacency, and I suspect, you know, it's we're at the end of the when we have this conversation this time next year, that you know, maybe complacency isn't going to be the primary theme in the markets in twenty twenty six. So again I like bonds. Having said that, you know, it depends on what kind of bonds. So I do like that em in Latam.
But maybe at some point, you know, you have a little bit more defensive allocation into some higher quality of treasuries, but again not overweight, just you know, the idea being is that, hey, if we do get enough pick in volatility, there might be a little bit of a flight to quality and some of the developed markets.
What about the FED?
That also remains to be essential focus because of the uncertainty around it, especially with the new FED chair and the ongoing debate about cut. So what do you believe will be the most important factor in determining whether the Fed's actions will support either equities or bonds or create more volatility.
So this is a little bit in lined with that kind of idea.
I think volatility is under price because you do have a point out of the FED, and this is not your normal cycle for the FED looking at just strictly labor market and inflation. We've got the political influences a new chair that we should find out this month. I suspect,
you know, again I struggle a little bit. And part of being a little more cautious on the long end of the treasury curve is that the FED has been cutting into environment, cutting you know, easing into neutral, but doing that in environment where inflation is still running above their target. And then you marry that with the idea that we're going to have at least six percent budget
deficits for the foreseeable future. And then we also get a little bit more fiscal in impulse impacting the US consumer first second quarter of this year.
So, uh, you know, the pressure is on.
For the FED to ease. I think, you know, Pale said, we're in the range of neutral. So that tells me that, you know, maybe they can ease another one more, maybe two more, and still be in the range of neutral.
But beyond that, uh, they're going to have.
To be, you know, shifting towards running stimulative monetary policy. And I'm actually not sure that's good for for equities because if they do that, it means something is on the cusp of breaking. The labor market is showing signs of deteroration that that could be an overall barometer for Hey, the consumer retrenching, profit margins getting squeeze, and that might not be good for equities right. Conversely, it actually could be good for bonds.
Hey, Jack.
The AI story has certainly been a dominant theme within the equity markets for the last several years, but it's really become relevant for the bond market as a lot of these tech companies come to the bond market with sizable debt offerings to raise capital to fund a lot of this stuff.
How do you how do you view that?
Yeah's you know, it's an interesting point because it's no longer hey, funding out of sort of cash flows, et cetera. And that was that's great that you know, the market doesn't have an issue with that. But now you know you're competing for uh, you know, funds that are already you know, allocating or thinking about allocating to this massive government bond debt. You know, issuance is not going away.
It's going to continue to be elevated. And now you've got more corporate issuance competing for that, so you know a little bit of a kind of a crowding out sort.
Of impact as well.
It's just means those yields have to probably move a little bit higher, uh, you know, to compete with you know, the treasury yields, which is again I mean turned premia is going to be elevated this year.
Uh.
And the bond vigilantes you know.
We're on her, you know, kind of trigger fingers because again I go back midterm the sitting president. You know, they want Republicans to do well, They want growth, and do they make a mistake of doing a little too much fiscal stimulus and environment where the economy is already doing well and inflation is still above the Fed's target. So you know, again turn premik could move higher YEP this year.
Jack, thanks so much for giving us some of your time. We appreciated.
Jack McIntyre's portfolio manager, Brandywine Global. Down there in the City of Brotherly Love, down there in Philly.
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