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Our next guest, a bit of a contrarian, I'm going to call hers, is not quite as bullish as some of our other guests have been about the outlook for equities in twenty twenty six. She's even talking maybe possibly a recession.
I don't know.
Let's talk it over with Christina Hooper, chief market strategist at Man Group. Christina, great to have you here in an early Happy New Year to you and your family. All right, let's talk about it. Are we going to be able to make this four consecutive up years by double digits in a row for US equities?
Well, that's a great question, Alexis, and I think we certainly could see that, but I think we have to anticipate more volatility, and in fact, I would expect some kind of significant sell off earlier in the year, foreshadowing an economic downturn, arguably a modest recession. And then are recovery. So I certainly think stocks US stocks could eke out gains next year, maybe even as much as a ten percent gain next year, but it will not be an
easy path to the end of the year. And I think that makes sense just given the kind of gains we've seen thus far and also the kind of vulnerabilities we're seeing with the US economy.
Talk to us about your economic call here, Christina A. What are you calling for in twenty twenty six and kind of what are the drivers there that maybe some folks in the market might be missing.
So if we think about twenty twenty five, and there were two key drivers of economic growth, consumers spending and AI CAPEC spending, and both of them could see significant declines in twenty twenty six. Let's take consumer spending largely driven by higher income consumers. Certainly they benefited from the wealth effect in twenty five. We saw how well capital markets did. Certainly if that could change in that could easily change in twenty six, especially if we do see
a sell off earlier in the year. But I actually think the bigger threat is an increase in unemployment. What we've heard from a number of companies is that they plan on layoffs related largely to AI, not entirely, that could easily accelerate and again tamp down consumer spending. Fear also can breed some reduction in consumer spending and for lower and middle income Americans. Of course, the issue has been affordability that doesn't go away. In my opinion, I
think it gets worse in twenty twenty six. It doesn't mean that inflation moves higher necessarily, but it means that they're still under the strain of higher than normal, above target inflation. So that can be very very problematic. Since we've relied so much on consumer spending, and add in the potential for reduction in or a slowdown in AI capex spending growth, this is an environment in which there
are more vulnerabilities. Access to rare earth resources is questionable. Also, just the ability to continue the build out of data centers from a financing perspective, as well as perhaps legislative opposition we're talking about Bernie. We've heard from Bernie Sanders arguing for as cessation on data center build out. We
could see more opposition growing, especially with electricity issues. That was one of the big concerns coming out of exit polls in the New Jersey race this fall, So a lot could certainly the strength of both consumer spending and ai CAAPX spending in twenty twenty six.
Yeah, that's a good point, especially with the midterm elections, right Christina. I mean, that's another big wild card that could affect things like regulation. I want to talk about precious metals though, because we've been talking about it a whole lot. Given the year that they've had, spot gold up sixty five percent year to date, silver up one hundred and fifty percent year to date, copper up better
than forty three percent year to date. Do you think there's still room in the portfolio to have these precious medals for investors and to what extent in the new year.
So absolutely, I think those are important, although relatively small components of investors' portfolios perhaps should be larger. I do think there is a lot. There are a lot of good reasons why, especially when it comes to gold. I think what we're going to see is more concerns around growing deficits. Not just a US problem, This is a problem in a number of countries. Questions about Fiat currencies and growing growing interest and perceptions of gold. As we
go to safe haven asset class. And what we know from history is that in almost every bear market, six out of seven bear markets, gold held up better than the S and P five hundred in most of those environments produced a positive return when stock sold off six out of six corrections. So gold has been historically a safe haven asset class, and I think it will be even more so going forward. But it also has other drivers that that mean it could perform well in a
variety of different environments. I think there's a place for silver, but we have to recognize that the volatility we've seen this year could easily continue or even exacerbate in the future.
Christina, we've had some really really strong earnings in twenty twenty five. What's the earnings outlook for twenty six years opinion? And is that enough to support risk assets?
So I certainly think the outlook is, in my opinion, a bit weaker. I think again there are vulnerabilities there, especially when it comes to consumer related companies, but not exclusively there, and of course if one thing goes wrong, multiple things can go wrong. So I would anticipate tepid
earnings growth. But again I think that we're going to hear from companies that will relay to us in first quarter earnings calls excuse me fourth quarter earnings calls in the first quarter, that the situation is getting more difficult, especially when it comes to consumer spending, and that there will be more layoffs. And I anticipate again there will be a lot of negative sentiment or increase in negative sentiment as we move through the early part of twenty
twenty six. So I think again we'll see earn growth, but I think it's going to be significantly lower than most anticipate as they sit here at the end of twenty twenty five.
Christina, want to touch on the bond market before we let you go. You said, I was looking at your note. You said you expect bond vigilantes to come out in greater force in next year. Why do you think that's true and what kind of an impact might that have on I guess like the ten year treasury yield.
So we've certainly seen some hints of it in twenty twenty five, for the US, for Japan, for the UK, for France. There are a number of countries that do not appear to be on a fiscally sustainable path, and I believe bond bond holders are growing more concerned about countries like the US. We saw some real hints of it, especially as the One Big Beautiful Bill worked its way through Congress, because of the potential for increased piscal depthsits. So I think this is a year in which we're
going to see some greater punishment. I think the yield goes up significantly, which can very well weigh down on stock prices. But I wouldn't be surprised to see the tenure. You'd get close to or get to five percent in twenty twenty six.
All right, bringing us some fresh ideas for this market at twenty twenty six, Christina Hooper, chief market strategist at Man Group.
Stay with us more from Bloomberg Surveillance coming up after this.
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This economy, what's the economy going to look like in a twenty twenty six inflation, job growth, economic growth. Let's check in with our next guest, Ian Wyatt he's a chief economist at Huntington Bank. He joins us via zoom Ian. Thanks so much for joining us here. I love to get your backdrop how you're kind of framing out your economic outlook for twenty twenty six.
Yeah, we've really looked at it. We always like to look at it through a few key themes. I think one of the key themes we see is there's still largely a healthy consumer, but you kind of have that case shaped split, So we do see households when we talk to companies. We're seeing it in the data. Now. We were anticipating three and a half four percent raises coming to most consumers. You have Social Security coming in at almost three percent. In terms of the COLA adjustment.
You have a lot of people with as you know, our previous guests mentioned decent equity gains and potentially decent equity gains going forward. So you have that wealth effect for upper income households. How or for lower income households, we still see the stress. We see that delayed effect
of inflation. If you think about inflation, really it tends to hit with a lag for a lot of people, even if it's being measured in more of a linear basis, Like you know, we only buy a car every three four years, so that you know, that rise and used car prices took a while to spread across households, as well as the rise in interest rate center and we haven't seen that much of a decline in that area.
So we see it.
We see a healthy consumer. We think that drives spending. Next year, we think that drives growth. We're targeting one and a half to two percent growth. And we think also though a little bit of a tight labor market keeps inflation somewhat elevated two seven, two eight next year. Part of that really is the immigration story. We think that's one a huge story and the implications are incredibly widespread. So that's another theme we've really been talking about this year.
You are we going to see the immigration story, as you put it, play out in the jobs report coming up on January ninth and in subsequent jobs reports.
Do you think, oh, no question.
When we talk to companies, you know, it's kind of fascinating. First of all, it's the supply story. Although as we're seeing the unemployment rate ticking up, the supply of labor hasn't was growing at a tremendous CLIPID a bit slower. We think that that slows consumption spending next year a little bit. So you have that, but you still get a little bit of a tighter labor market than at that lower end. So over the next few months, yes, we expect that it just limits the potential growth rate
of the economy in terms of job growth. So that's one area. Another I think we're going to see a lot more automation. You know, I was talking to a company that makes high end lawnmowers basically for golf carts, golf courses, that kind of thing, and they said, and this is not the only company where I've had this conversation, but only Onaldmowing company, And they said, look are golf course clients. They're interested in the automated mowers, the ones
that basically operate without without human inter interaction. And they're much less concerned about cost than they were a few months ago, because they're really worried that they just can't find the labor. And so at that lower end and a lot of those manual jobs. We were an economy pretty reliant on immigrant labor, and so that's that's sort of playing out in a lot of different areas and.
We're going to get the one the benefits of the one big, beautiful build, presumably in twenty twenty six. How did you guys kind of model that out?
We saw a couple of ways. We're seeing that hit and we've heard it from clients too, So it's a mix of you know, what we're modeling what's reasonable. We see that as maybe close to zero point four point five percent growth to GDP you get a positive benefit obviously similar tax rates. On the investment side. It's really a shift I think we have from structures to equipment.
So in the previous administration, you had a lot of factors that were you know, the Chips Act, you had EV mandates, you had a lot of things driving construction activity and manufacturing. We had record manufacturing construction activities. So really a structure story, a building story. We see that pulling back, you know, I think we've seen that in a lot of categories, and the construction activities got in
pretty narrow. It's pretty much data centers, energy empower related to data centers and infrastructure because still some of the infrastructure money is out there and there's a lot of infrastructure spending, but otherwise, we see a lot of weakness in the construction category, but on the investment side, the one big beautiful bill in terms of equipment, the equipment
side's pretty strong. We're hearing that broadly that a lot of companies are looking at that immediate depreciation expense advantage and we're seeing orders. We add I did a finance or I was in Pittsburgh a couple of weeks ago and we had a client come into one of our rms there saying, Hey, I need four million dollars before the end of the year because I want to lower my tax bill and I'm going to buy a bunch
of equipment. And that's playing out. You know, we see that as zero point one point two percent, really driving a shift though in the investment mix, the investment mix shifting from structures to equipment.
Ian as a chief as chief economist over at Huntington Bank, what's your outlook for rate cuts from the Fed next year? How many do we get, if any at all?
Oh, we expect obviously the paw we'd anticipate and we said, you know, going into December, we said, you know, one more cut and then pause. We thought that was pretty well signaled you know, I don't think we're any sort of miracle workers here. We're just listening to the FED in terms of that kind of signaling. And when we saw the FED minutes come out yesterday, that was confirming that idea that we're we're in the pause stage now. If we look back to twenty four and twenty five,
we had pauses at the beginning of the year. Those didn't end till September in both kid cases. We don't think it lasts that long this pause. We expect one more cut come March. Then of course Pal's term ends in May. I think there'll be a couple more cuts likely, So it probably puts us right around three percent over the course of the year. But if we look at the forecast, if we listen to the FED governors, we're
getting pretty close to that neutral rate. And what that neutral rate means, of course, is that the FED really views it as they're not stepping on the gas for the economy. They're not hitting the brakes for the economy. They're just sort of letting a glide. We're in a glide path right now. They still think they're hitting the brakes for the economy. And as we get closer to that neutral rate. We think the FED governors, some of those governors who are really open to cuts now are
going to become more resistant. This is going to be a more hesitant Fed. We still expect, partly because of a somewhat tight lower end labor market, especially in areas like healthcare services when you're talking about lodging restaurants, We think that those wage increases are going to keep pushing up some price increases across the board, and that's roughly a third of the CPI is the services we were talking about there. So we expect that that plays into
a couple more cuts this year. Still, you have a pretty soft labor market that gets the FED moving. The federally cares way more about the labor market than the stock market, and that gets them to do a couple more cuts. But we think, you know, you get close to three, you're really at that neutral rate where some of those dubbish voices maybe get a little more hawkish.
Yep, yep, all right, Ian, thank you so much, appreciate getting a few minutes of your time. Ian, whytt he's a chief economist over there at Huntington Bank. Stay with us. More from Bloomberg Survail. It's coming up after this.
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Eric Sterner, the chief investment officer Apollin Wealth Management, joins us here in studio. You can be down there in Times Square here later on tonight it did ball drop, so a lot of fun down there. Eric, Thanks so much for joining us here. How are you what's the conversation you're having with your clients these days about setting expectations for twenty twenty six. We had three years of double digit returns for the equity markets. The bond market's
been really good for investors. They've if they had some gold or silver even better. How do you set expectations for twenty six?
Yeah, we've certainly been very spoiled the last three years with very strong returns kind of SMP five hundred. We're talking to our clients and just reminding them that while we know the market breath has been very narrow for the past you know, two and three years, we expect that to broaden out and between value stocks, large guy value,
small cap international. So now's not the time. Now's a good time, I should say, to rebalance the portfolio and to take a little off on the technology side, because I think there's plenty of sectors that have really strong returns going into twenty twenty six, both domestically as well as international.
Yeah, I'm glad you mentioned international as well, and Eric, give us if you can some specifics. I love specifics when guests can come on and join us names or ideas sectors outside of tech.
Sure, yeah, I mean so within Maybe I'll start off with domestically if some sectors I like, if that's financials had a tremendous year, and I expect you know, there's a little bump in the road when Jamie Diamond made that conroach.
And not the credit at Tricolor and First Brand.
Yeah, exactly, But I don't think there's any evidence of widespread concerns there. Even within the high yield market. We see investment grade levels within high yield, but I think financials, just with the interest rates coming down, I think we're going to see some more m and a activity pick up in twenty twenty six. In fact, during the government shutdown, more than nine hundred registration statements, including IPOs were filed
with SEC. So I was already expecting a big year in MA activity within financials, but now even more so as they worked through that backlog. And then another sector that really got its legs in the fourth quarter is healthcare. And healthcare has just been stuck in the rut for a long time, and it typically does with new White House administration, just because there's so much policy uncertainty. But
I think we're starting to get past that. And I think it's great with healthcare is that you have it's traditionally a defensive play, but I think there's so much innovation in there. Besides the AI. I think the weight loss drugs are the second biggest innovation in the markets right now, and there was a bottleneck and drug supplies there earlier year that's been cleared. A lot of these
biotech companies made a deal with the Weight House. We're in exchange for lowering prices, they're going to get more weight loss coverage with Medicare and potentially Medicaid, and that opens up those weight loss drugs the forty million more people and that industry is expected to be one hundred and fifty billion by twenty thirty, so I think that's another sector that I really like going into twenty twenty six.
And then on the international front, the valuations are still very attractive compared to US stocks specifically, I think Japan is just such an incredible story and still plenty of legs to go, and many people are surprised if you look at the past decade earnings per share. Cumulative earnings per share for Japanese companies are up over two hundred fifty percent, which exceeds the US, Europe, even the UK.
And now with Prime Minister Takashi bringing in some more pro growth policies, I expect stronger returns or more strong returns coming out of Japan.
Yeah, I mean international has been the place here is as good as the returns have been in the US if you look at EMEA. Much better returns here, I mean, led by Spain, particularly when you adjust for currencies. Spain adjusted for the currency's up seventy percent this year, just extraordinary. We've seen double digit games across Europe and a couple of the Asian markets, including Hong Kong. Kind of emerging
markets here. I think the chatter around emerging markets is just kind of a little bit louder and louder and louder over the course of twenty twenty five, and people were talking about that a little more. How do you guys think about that?
Yeah, I expect those returns again to still have some more lakes to them. I mean, typically you see emerging market because a lot of their debt is US denominate it. When the FED starts easing, you could see your merging market equities rally more. Certainly certainly seeing that especially with
the US dollar to depreciate. And we know this AI revolution is worldwide phenomenal, So some of those tech really centric nations, especially outside of China or benefiting of some of these companies redesigning supply chains away from China are benefiting. And even countries like Mexico as we're looking for more near shoring opportunities with the US, have benefited. So I think we could still see some strong returns have a marching markets going forward into twenty twenty six.
You talked about lower interest rates being a tailwind for financials, they could also be for those small caps. Russell two thousand taking a look here on the Bloomberg terminal up twelve percent year to date. Not too shabby, I mean, underperforming the other major indexes, but still solid respectable gains there. Even more so, what's your outlook for the small caps?
Yeah, I think twenty twenty five was the big year what international made to come back. I think twenty twenty six could be the big year where small cap makes come back. And it didn't have a bad year like you said, I mean the wrestle it was up. I think we could see stronger returns. Is just uh, that's a very interest rate sensitive sector. We know that the lagged effects of all the rate cuts and potentially maybe one to two more rate cuts, all the benefits to
domestic companies with the OBBA and deregulation. You know, these smaller companies have higher costs from a regulatory perspective. But the one thing that will continue this rally is really it needs the earnings. And right now, the earnings estimates are expected for small cap companies to be up sixty percent this year. Now, in the beginning of the year is typical for small caps that you know, they temper down those those expectations and you look at the last
twenty years. The projected earnings growth versus the actual earnings growth is about negative twenty percent from for small cap stocks. So if we're projecting sixty percent earnings growth for small caps and let's say we deduct that twenty percent, as we you know, throughout the y, we may see those expectations lower a bit. That's still forty percent earnings growth rate amongst small cap companies if that holds to the average,
which would really continue to drive this rally. The one item that I would just make noteworthy is that I am surprised that the Russell two thousand has outperformed the S and P six hundred, which is another small cap index. Russell two thousand and forty percent or so companies unprofitable, whilst S and P six hundred it focuses more on
profitable companies. I expect that to reverse this year, because I think there's going to be some months in the road and I think we're going to see some heightened volatility in twenty twenty six. But overall, I remain bullish, and I would just advise advisors to lean more into that quality factor. Companies with solid earning, solid balance sheets, and solid cash flows.
What do you at your firm. Is it pronounced apollan upolland yes, is it? Do you guys have a view on alternative investments and maybe what percentage that should be of a typical client's portfolio.
It varies, you know, certainly for our Apollum models, we design models more just on the public market asset classes, and then for very specific client situations, that's when we look to potentially incorporate private investments into our portfolios if they can afford the ill liquidity a great I'd say a good portion of our clients do have some private
investments in their portfolios. We think we like to take our typical asset allocation portfolio and then we basically substitute some of those asset classes in so we may complement the fixed income allocation with private credit. I mean, over the last ten years, the yield for the bloom Barclay's AD is about three percent, but private credit is all over ten percent. So for clients that are entering and retirement, that's why we think private credit could really boost the income.
And then we know there's less you know, publicly traded stocks in the markets right now, so that's why we think there's great opportunities. Private equity companies are staying private for longer, so we like to complement small cap exposure with private equity. So for our higher network clients, a
high majority of them do have those private investments. We really consider that a client by client basis, as opposed to creating portfolios with alternatives al rating involved or out allocated to them.
Eric, thanks so much for joining us. We appreciate it. Eric Sturner, he is chief investment officer Apollent Wealth Management. Stay with us. More from Bloomberg Surveillance coming up after this.
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Our next guest says residential real estate twenty twenty six will be a transition year and not a turnaround.
Here.
Let's see what she means there, at least a start of it, joins us. She's a chief economist for Bright MLS. Boy Lisa, Housing affordability has been the challenge for would be homeowners out there. Talk to us about kind of where we are as we enter twenty twenty six.
Yeah, you know, housing affordability has really been the major constraint on the housing market, and we're starting to see affordability improve a little bit, right. We've seen mortgage rates come down a little bit at their lowest levels, about as they've been all year. We've seen price growth slow a little bit, which has also helped, and so that's made it affordability a little bit easier. But boy, it still is a big challenge for those who are still
trying to get into the market. First time buyers, moderate income buyers are still facing a really big challenge in the year ahead.
So what do we have to look forward to if you're wanting to get in a first time home buyer, which we know, I think the average age now of a first time home buyer is close to forty in this country, which is hard to believe. And lots of folks have given up owning home dream or delaying you know, lots of life milestones just because I cannot afford that home. Is that going to change in a meaningful way and in the new year, and if so, what parts of the country should those folks be looking at?
Yeah, you're absolutely right, this idea of becoming a homeowner. For first time home buyers, it's all tied up with all sorts of other life milestones right that people are either delaying or sort of taking another look at. And I think it is going to get easier for first time home buyers, but not in every market across the country. You know, there are places where inventory is still very
very tight. Places in the Midwest, places in the Northeast where it's very competitive, where homes are still selling above asking, where there's still multiple offers on homes. Other markets, though, parts of the South, parts of the Southwest, we're seeing a lot more inventory and frankly, a lot more leverage for buyers. And that's where first time buyers are thinker are going to have a little bit better options in the year ahead. That's what I did.
I left the metro New York area and went to Richmond, Virginia to get my first home to Affordability, as you mentioned, Lisa, is a key key issue here, but it's also if someone's going to buy a house, they have to feel pretty good about the economy, they have to feel pretty good about their jobs. Is that a tailwind or a headwind here in this marketplace.
Yeah, you know, I'm really thinking about it as a little bit of a tug of war. In twenty twenty six. We have lower mortgage rates, lower price growth, really bringing people into the market, making people want to get into the market, improving affordability. But at the same time, there is a lot of economic uncertainty. We're going to get some new jobs numbers here next week, but people are
feeling more uncertain about their own economic situations. And when people are feeling uncertain, they're less likely to do big things like buy a home or sell a home. And so there's going to be a push and pull between these economic anxieties and these more favorable affordability conditions. And right now, frankly, I don't think it's clear which one's going to win out.
All right, let's talk mortgage rates, because they are a part of the affordability issue. Paul, you said a moment ago six point three percent on the fixed thirty year. Right now, we were at seven percent at the beginning of this year. What's the range you think for the thirty year and the fifteen year that's popular for folks looking to refinance in the new year.
Yeah.
Our forecaster for the average rate on a thirty year fix to stay above six percent in twenty twenty six. You know, I think there are some forecasters who are saying that rate will dip below six percent, But I think there's a lot of unknown still, and so we're going to be watching. I think the key thing is for home buyers to not try to time rates. Think they can time them, or they can look at ways to sort of maneuver it. I think you have to decide when is the best time for you to buy.
But let me let me on the thing about affordability. Though, even if rates were at six percent, let's say at a four hundred and ten thousand dollars home, you still need the income of about one hundred and fifteen thousand dollars to qualify. That's much higher than the median household income in the US and really highlights how out of balance between income and home prices we've gotten over the last few years.
Why don't we just build more houses?
That would help, right, And so I think increasing the supply would help. But it's not just about supply. You know. We hear those high level numbers of what the housing supply gap is, but we need to build homes in the places that people want to live, right where there's job growth, where there's an economic opportunity, and those are the places where we need to see more homes be built.
We also need to see whether there are ways to free up homes by encouraging people who want to sell to actually do so, to get out from a mortgage rate that they don't want to give up. So I think there are ways to increase supply and that would help the affordability challenge.
What do you do to incentivize somebody to want to sell their home, especially if I'm not going to call it a buyer's market in twenty twenty six, but if it starts to move in that direction, what gets somebody out of their house?
Yeah? So I think there's a couple of ways to think about it. I mean, one is some people aren't moving because there's nowhere for them to go, right, Folks who might want to downsize don't see.
Nowhere to go.
So that gets back to that let's build more housing for peace people to downsize into, folks who are retiring and so on. But there may be other ways to provide incentives, tax incentives or other incentives that could encourage people to sell the home, maybe so they're not hit with a big tax bill. If they've got huge gains and the equity of their home, there may be ways to encourage people to sell there, but it's really going to be at the margins.
Yeah, Lisa, thank you so much for joining us. Always appreciate getting some of your thoughts least sort of at Chief Economists at Bright MLS.
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