TUESDAY MARKET UPDATE
Welcome back to Profits & Insights.
We are approaching the holiday break, and like many of you, I will be taking some time off to be with family. Before I sign off for the week, however, I wanted to share a preview of our comprehensive 2026 outlook report.
In the short term, markets remain focused on execution. Nvidia ticked up on reports that it will begin shipping its H200 chips to China in February, navigating export controls to capture that massive market. Conversely, Starbucks continues to struggle with its shaky turnaround efforts, announcing a new CTO in hopes of fixing its digital friction.
-Nathan Reed
Research Spotlight
UBS: THE āSOFT PATCHā BEFORE ACCELERATION
The UBS View
UBS anticipates a supportive backdrop for 2026, though growth may be uneven initially. They forecast U.S. GDP growth near 2%, with inflation peaking slightly above 3% in the second quarter. They currently pencil in two Federal Reserve rate cuts in Q1 2026.
Their Allocation
They recommend allocating up to 30% of equity portfolios toward structural AI growth trends - specifically the application layer.
My Take
I believe UBS is underestimating the potential for rate cuts. Recent labor data suggests job gains may be overstated, and with unemployment ticking up to 4.6%, the Fed likely has more work to do. If energy prices continue to suppress inflation, we could see a more dovish Fed than UBS expects, which changes the calculus for bond yields.
BNY MELLON: A RETURN TO EARNINGS GROWTH
The BNY View
BNY Mellon argues that future S&P 500 gains will be driven by earnings growth and margin improvement rather than multiple expansion (people paying more for the same earnings). They see the U.S. dollar as vulnerable due to fiscal stress and note significant central bank buying of gold.
Their Allocation
They see a setup for a global small-cap revival, noting that small caps are trading at their cheapest levels relative to large caps since 2001.
My Take
This aligns with my view on market breadth. Small caps rely heavily on floating-rate debt. If borrowing costs fall as I expect, their balance sheets improve immediately. We saw this dynamic play out from 2020 to 2021 when the Russell 2000 significantly outperformed the S&P 500. A lower-rate environment in 2026 is the catalyst small caps have been waiting for.
JPMORGAN: THE INFLATION HEDGE
The JPMorgan View
JPMorgan is more cautious, warning of volatile inflation and the potential for stocks and bonds to sell off simultaneously. They emphasize that core bonds are vital, but insufficient on their own.
Their Allocation
They suggest adding real assets, commodities, and residential real estate - specifically rental housing in commuter markets - to build inflation resilience.
My Take
While I agree with the need for real assets, I want to address their implicit view on tech valuations. JPMorgan argues we are not in an AI bubble. I agree. In January 2000, the Nasdaq's average P/E ratio was 68. Today, it is closer to 33. Tech is expensive, yes, but it is supported by actual cash flow, unlike the dot-com era.
