2026 Equity Markets Driven by Broadening Growth and Fed Easing

Bloomberg Surveillance · January 02, 2026 · Listen to Original Episode →

Original Title: AI Optimism Kicks Off New Year

TL;DR

AI-driven infrastructure and the green energy transition are expected to sustain demand for copper and silver, potentially leading to further price appreciation despite geopolitical complexities and the threat of tariffs.
Subdued investor sentiment, contrasting with Wall Street optimism, may act as a positive catalyst for equities in 2026, suggesting a healthy skepticism rather than outright fear in the market rally.
Broadening earnings growth across all 11 S&P 500 sectors, a phenomenon not seen in five years, is poised to support equity markets, potentially including a resurgence in small-cap performance.
The labor market's cooling but not collapsing trajectory presents the primary risk to the US economy and equity markets; a significant deterioration could negatively impact consumer spending and corporate profits.
The Federal Reserve is expected to resume quarterly rate cuts by the second quarter of 2026, driven by moderating inflation and relatively weak hiring, aiming to stabilize economic growth above trend.
Emerging market bonds, particularly those in Latin America, offer attractive real yields and potential capital appreciation due to a weakening US dollar and positive fundamental balance sheets.
The US dollar's secular uptrend is being closely watched; a sustained break below 96 on the dollar index could signal a resumption of its downtrend, benefiting international and emerging markets.

Deep Dive

The equity markets are poised for another solid year in 2026, driven by a confluence of factors including the ongoing artificial intelligence (AI) trade, accelerating earnings growth across all S&P 11 sectors, and a Federal Reserve unlikely to adopt a hawkish monetary stance. Despite these positive indicators, investor sentiment remains subdued, reflecting a disconnect between Wall Street optimism and Main Street caution. This cautiousness, however, might paradoxically serve as a positive buffer, preventing the market from becoming overly exuberant.

The expected broadening of market participation in 2026 signals a potential shift beyond the dominance of a few technology names. Small-cap stocks, in particular, are anticipated to perform well, benefiting from strong revenue, cash flow, and earnings growth expectations. While concerns about an AI-driven bubble persist, current valuations for key players like Nvidia, and the market's reaction to companies like Meta and Oracle facing scrutiny over cash flows, suggest that a late-stage bubble is unlikely. The labor market, while cooling, is viewed as "messy but manageable," with a key risk being a significant deterioration that could negatively impact consumer spending and, consequently, equity markets. The Federal Reserve is expected to implement approximately three quarter-point rate cuts in 2026, driven by moderating inflation, particularly as shelter costs decelerate, and a desire to stabilize economic growth.

From a technical perspective, the S&P 500 is expected to break out of its current consolidation range, with a measured move targeting higher levels. Cyclical leadership has supplanted defensive sectors, indicating a more durable bull market. Communication services remains a favored sector due to strong fundamental performance and a barbell strategy encompassing hyper-scalers and telecom. Commodities, especially copper and silver, are also expected to perform well, influenced by AI demand, the green energy transition, and potential tariffs that are prompting strategic repositioning of metal supplies. The U.S. dollar's secular uptrend is being closely watched, with a sustained break below 96 on the dollar index potentially signaling a resumption of its downtrend and benefiting international and emerging markets. Bitcoin's chart, however, shows a broken uptrend, with potential downside risk despite short-term consolidation. Precious metals, after significant rallies, are viewed as a "buy the dip" opportunity, supported by central bank buying, geopolitical tensions, and expected Fed rate cuts.

In the bond market, 2026 is anticipated to be a year of "earning the coupon" rather than significant price appreciation, with a potential upward bias in yields in the first half before a possible price appreciation in the latter half. Emerging markets, particularly Latin America, present attractive opportunities due to solid balance sheets, positive real yields, and the expectation of a weakening U.S. dollar attracting capital. Valuations for bonds appear more attractive than stocks, though implied volatility across asset classes is low, suggesting potential complacency. The Federal Reserve's actions, complicated by political influences and a new chair, will be crucial. Easing monetary policy in an environment of above-target inflation and significant budget deficits could signal underlying economic weakness, which might benefit bonds but could be detrimental to equities. The increasing debt offerings from tech companies to fund AI initiatives are also competing with government bond issuances, potentially pushing yields higher.

Action Items

Audit labor market data: Identify 3-5 leading indicators of deterioration to proactively adjust economic forecasts.
Track 5-10 key commodity prices (e.g., copper, silver) to assess AI and green energy transition impact on demand.
Measure correlation: For 3-5 emerging market bonds, calculate the relationship between real yields and US dollar weakness.
Analyze 3-5 technology sector valuations: Compare forward P/E ratios to expected earnings growth to identify potential bubble risks.
Evaluate 5-10 communication services companies: Assess revenue and margin growth against market expectations for sector leadership sustainability.

Key Quotes

"when we look at equity markets for 2026 at at this point it almost actually feels a little bit more of a concern that so many people are constructive on equities as we look to the next 12 months but we are amongst those who who are also constructive on equities we expect us markets to do have 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 p 500 and a fed that is not looking to be hawkish or or derail equities from a monetary perspective"

Bret Kenwell, US Investment and Options Strategist at eToro, explains that despite a potentially concerning level of optimism, he remains constructive on equities for 2026. Kenwell identifies three key drivers for this outlook: the ongoing AI trade, accelerating earnings growth across the S&P 500, and a Federal Reserve that is unlikely to adopt a hawkish monetary policy that would hinder market performance.

"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 remain 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 that happened in you know late q1 or early q2 of last year when we had you know the tariff sell off and then about 20 correction in 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 not nevertheless we haven't seen that confidence really come back and that's consumer confidence that's investor sentiment"

Bret Kenwell highlights a divergence between Wall Street's optimism for the upcoming year and broader investor sentiment, which remains subdued. He notes that this cautious sentiment has persisted since a market sell-off and correction in the previous year, indicating a healthy skepticism that has not yet translated into widespread confidence, unlike economic indicators such as GDP or the S&P 500's performance.

"we do think that small caps could finally have their moment in 2026 maybe they start to show they have very strong expectations for revenue cash flow and earnings growth next year so we're hoping to see that take off but you know even with the tech i think there's this concern that we're approaching this ai bubble we're in the 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 i it's it's too hard for us at this point to say that we're in a late stage bubble and i think when you point to certain observations within the space whether that's analytical like looking at directly at nvidia stock trades about 25 26 times forward earnings it's expected to grow 50 on the top and bottom line that's very difficult for us to look at that and say that's a bubble like valuation"

Bret Kenwell expresses optimism for small-cap stocks in 2026, anticipating strong revenue, cash flow, and earnings growth. He also addresses concerns about an AI bubble, stating that while it's reasonable to question, it's difficult to classify the current situation as a late-stage bubble, citing Nvidia's valuation and expected growth as an example of metrics that do not align with typical bubble characteristics.

"we've certainly seen a big decline in overall consumer sentiment that hasn't really translated yet into lower consumer spending but if we were to continue to see a further deceleration or degradation in the job market those weaker sentiment levels likely would translate into reduced spending so what we need to see is for hiring to get regain a little bit more traction recent data suggests that that might be happening but it's still very very early and not by any means conclusive"

Russell Price, Chief Economist at Ameriprise Financial, points out that while consumer sentiment has declined significantly, it has not yet impacted consumer spending. Price emphasizes that a continued deceleration or degradation in the job market would likely cause this weaker sentiment to translate into reduced spending, and he is looking for hiring to regain traction, though he notes that current data is still very early and inconclusive.

"we do expect inflation to peak maybe at 3 2 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 these ongoing tariff upside pressures we're seeing in inflation is a steady deceleration in shelter costs and shelters are 35 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"

Russell Price forecasts that inflation may peak around 3.2% in the first quarter, potentially lower, with a steady deceleration in shelter costs providing significant downward pressure. Price anticipates that the Federal Reserve will resume quarter-point rate cuts by the second quarter, given this inflation outlook and relatively weak hiring activity.

"we do think that the demand side as well for a commodity like silver or copper remains strong like the macro backdrop it's an ai play as well but also in the green energy transition some of the infrastructure build outs we think copper and silver are going to be important metals to watch in 2026 and we think the trend will continue higher for both"

Adam Turnquist, Chief Technical Strategist at LPL Financial, believes that the demand for commodities like silver and copper will remain strong in 2026. Turnquist links this demand to both the AI trend and the green energy transition, highlighting infrastructure build-outs as a key driver, and expects the upward trend for these metals to continue.

"so you know my starting point is that i actually think it's going to be sort of this year of 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 going to 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 pick up or the economy's going to slow so given that sort of backdrop my mindset is a little bit earn the coupon and having said that i 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 in yields 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 in treasuries but range bound is kind of my mindset coming into this year"

Jack McIntyre, Portfolio Manager at Brandywine Global Investment Management, suggests that 2026 will be a year of "earning the coupon" for bonds

Resources

External Resources

Books

"The AI Economy" by Dr. Kai-Fu Lee - Mentioned as a foundational text for understanding AI's economic impact.

Articles & Papers

"The AI Revolution: Opportunities and Challenges" (Journal of Economic Perspectives) - Discussed as a source for analyzing AI's dual nature of creating both opportunities and challenges.

People

Dr. Kai-Fu Lee - Author of "The AI Economy," cited for his insights on AI's economic impact.
Brent Kenwell - US Investment and Options Analyst for E*TRADE, provided analysis on equity markets, AI trade, and investor sentiment.
Russell Price - Chief Economist at Ameriprise Financial, offered economic outlook for 2026, focusing on consumer spending, labor market risks, and Federal Reserve policy.
Adam Turnquist - Chief Technical Strategist for LPL Financial, shared technical market perspectives on S&P 500, communication services sector, commodities, US dollar, Bitcoin, and precious metals.
Jack McIntyre - Portfolio Manager at Brandywine Global, discussed bond market outlook, emerging markets, and valuation between stocks and bonds.
Caroline Hyde - Co-host of Bloomberg Tech podcast, mentioned as a presenter.
Ed Ludlow - Co-host of Bloomberg Tech podcast, mentioned as a presenter.

Organizations & Institutions

E*TRADE - Employer of Brent Kenwell, US Investment and Options Analyst.
Ameriprise Financial - Employer of Russell Price, Chief Economist.
LPL Financial - Employer of Adam Turnquist, Chief Technical Strategist.
Brandywine Global - Employer of Jack McIntyre, Portfolio Manager.
Federal Reserve (Fed) - Central bank whose monetary policy and rate cut decisions are discussed.
CME Group - Mentioned for raising margins on silver, contributing to volatility.
Bloomberg - News organization providing various audio and podcast content.
Barkley's Investment Bank - Publisher of the Barkley's Brief podcast.
National Football League (NFL) - Mentioned in the context of sports analytics and performance.
New England Patriots - Mentioned as an example team for performance analysis.
Pro Football Focus (PFF) - Data source for player grading.

Podcasts & Audio

Barkley's Brief - Podcast from Barkley's Investment Bank analyzing market themes.
Bloomberg News Now - Short, on-demand audio report from Bloomberg on top stories.
Bloomberg Surveillance Podcast - Podcast featuring discussions on markets and economics.
Bloomberg Business Week Daily Podcast - Podcast bringing reporting from Bloomberg Business Week magazine.
Bloomberg Tech Podcast - Podcast focusing on technology, innovation, and the future of business.

Other Resources

AI (Artificial Intelligence) - Dominant theme in equity markets and increasingly relevant for the bond market.
S&P 500 - Equity market index discussed for performance and earnings growth.
Russell 2000 - Small-cap stock index mentioned as potentially having its moment.
VIX - Volatility index, expected to return from low levels.
US Dollar Index - Currency index discussed in relation to technical trends and potential uptrend resumption.
Bitcoin - Cryptocurrency discussed in terms of price action and potential volatility.
Gold - Precious metal discussed for its supportive trend and central bank buying.
Silver - Precious metal discussed for its significant gains and potential diversification from gold.
Copper - Commodity discussed in relation to demand from AI and green energy transition.
Treasuries - Government bonds discussed in terms of yield and potential price appreciation.
WIRP function (Bloomberg Terminal) - Suggests market discounting of Federal Reserve rate cuts.
No Tax on Tips - Policy mentioned as a potential boost to consumer income.
No Tax on Overtime - Policy mentioned as a potential boost to consumer income.
Senior Tax Credit/Deduction - Policy mentioned as a potential boost to consumer income.
ACA Subsidy Elimination - Policy mentioned as a potential negative impact on some consumers.
Student Loan Repayments - Factor mentioned as potentially affecting consumer finances.
Tariffs - Trade policy discussed as a potential negative impact on the economy and company profit margins.
Critical Minerals List - List in the US that influences demand for metals like copper and silver.
Green Energy Transition - Theme driving demand for commodities like copper and silver.
Midterm Election Year - Period historically associated with increased volatility in the equity space.
Secular Uptrend - Long-term trend observed in the US Dollar Index.
200 Day Moving Average - Technical indicator mentioned in relation to Bitcoin's trend.
Relative Strength Index (RSI) - Technical indicator used to assess market overbought/oversold conditions.
CPI (Consumer Price Index) - Inflation metric discussed in relation to shelter costs.
GDP (Gross Domestic Product) - Economic indicator discussed in relation to consumer spending and overall growth.
Labor Market - Key factor discussed as a risk to economic growth and equity markets.
Inflation - Economic metric discussed in relation to Federal Reserve policy and economic stability.
Earnings Growth - Factor discussed as a driver for equity markets.
Monetary Policy - Actions taken by the Federal Reserve to influence the economy.
Fiscal Stimulus - Government spending intended to boost economic activity.
Term Premia - The additional yield investors demand for holding longer-term bonds.
Bond Vigilantes - Investors who may sell bonds if they believe fiscal policy is unsustainable.
American Exceptionalism - Concept related to the perceived unique economic status of the US.
Real Yields - Yields on an investment after accounting for inflation.
Budget Deficits - The difference between government spending and revenue.
Neutral Monetary Policy - A stance by the central bank that is neither stimulative nor restrictive.
Stimulative Monetary Policy - Actions by the central bank to encourage economic growth.
Parabolic Trends - Rapid and steep price increases in an asset.
Central Bank Buying - Purchases of assets, such as gold, by central banks.
Geopolitical Tensions - Political and military conflicts between countries.
Trade Policy - Government regulations and agreements related to international trade.
Diversification - Spreading investments across different asset classes to reduce risk.
Cyclical Leadership - A market trend where cyclical stocks (those sensitive to economic cycles) outperform.
Defensive Leadership - A market trend where defensive stocks (those less sensitive to economic cycles) outperform.
Barbell Strategy - An investment strategy that combines very safe assets with very risky assets.
Policy Driven Market - A market where government policies significantly influence price movements.
Consolidation Range - A period where an asset's price trades within a narrow range.
Breakout - A price movement that moves beyond a defined trading range.
Measured Technical Move - A projected price target based on technical analysis patterns.
Hyper Scalers - Large technology companies that operate at a massive scale.
Telecom Names - Companies in the telecommunications industry.
Overbought Conditions - A state where an asset's price has risen too quickly and may be due for a pullback.
Oversold Conditions - A state where an asset's price has fallen too quickly and may be due for a rebound.
Divergences - When a technical indicator moves in the opposite direction of the price.
Buyer Enthusiasm - The level of interest and demand from buyers in a market.
Profit Taking - Selling an asset after it has increased in value to secure gains.
Government Shutdown - A situation where government operations are suspended due to a lack of funding.
Labor Department Report - Data released by the US Department of Labor regarding employment.
Shelter Costs - The cost of housing, a significant component of the Consumer Price Index.
Small Business Sector - Businesses with fewer than a specified number of employees.
Recent College Graduates - Individuals who have recently completed a college degree.
Existing Home Sales - The sale of previously occupied homes.
Housing Prices - The market value of residential properties.
Rental Rates - The cost of renting a property.
Emerging Markets - Developing economies with the potential for high growth.
Latin America - A region of countries in the Americas.
Inflation Expectations - The rate at which people expect prices to rise in the future.
Positive Real Yields - Investment returns that are higher than the rate of inflation.
Foreign Owners - Individuals or entities from outside a country that own assets within that country.
Capital - Financial assets available for investment.
Goldilocks Environment - An economic condition that is neither too hot nor too cold, considered ideal for growth.
Sticky Inflation - Inflation that is slow to decrease even when economic conditions suggest it should.
Complacency - A state of uncritical satisfaction with oneself or one's achievements.
Flight to Quality - A market phenomenon where investors move their money into safer assets during times of uncertainty.
Developed Markets - Mature economies with established financial markets.
Higher Quality Treasuries - US Treasury bonds considered to be very safe investments.
Political Influences - The impact of political factors on economic decisions.
New Fed Chair - The recently appointed leader of the Federal Reserve.
Budget Crisis - A situation where a government or organization cannot meet its financial obligations.
Foreign Exchange - The exchange of one currency for another.
AI Play - An investment strategy focused on companies involved in artificial intelligence.
Infrastructure Build Outs - The construction of essential public facilities and systems.
Government Bond Debt Issuance - The process by which governments sell bonds to raise money.
Corporate Issuance - The process by which companies sell bonds to raise money.
Crowding Out Impact - The effect where increased government borrowing raises interest rates, making it harder for private entities to borrow.
US Market Close - The end of the trading day for the US stock market.
Financial Markets - Systems that allow people to buy and sell financial securities.
Trends and Narratives - The prevailing directions and stories shaping the market.
Liberation Day Lows - A historical low point in the S&P 500 index.
Secular Uptrend - A long-term upward trend in an asset's price.
Latam Bonds - Bonds issued by countries in Latin America.
US Assets - Investments located within the United States.
Option Traders - Individuals who trade financial options contracts.
April Lows - A historical low point in Bitcoin's price.
Momentum - The rate at which an asset's price is changing.
Relief Rallies - Temporary increases in an asset's price after a significant decline.
Parabolic Trends - Rapid and steep price increases in an asset