2026 Market Shift: Broadening Participation, Rational AI, and Fed Policy

Bloomberg Surveillance · December 29, 2025 · Listen to Original Episode →

Original Title:

TL;DR

The market's reliance on narrow leadership (Mag Seven) is expected to shift in 2026, with equal-weight S&P 500 expected to accelerate revenue growth from 1.5% to 5%, necessitating strong earnings delivery to validate this broadening trend.
Non-profitable AI-related companies have not participated in recent market rallies, suggesting a potential return to rationality and a focus on sustainable business models over speculative growth, which is healthier for the overall market.
Semiconductor cycle earnings have risen approximately 150% from late 2022 lows, indicating the cycle may be nearing its end, though secular AI tailwinds could extend its duration and impact.
Tariffs disproportionately harm lower-income consumers and smaller businesses, exacerbating a K-shaped economy, as evidenced by rising bankruptcies alongside record corporate profits, indicating a divergence in economic impact.
Broader market participation has increased significantly, with 64% of stocks trading above their 50-day moving average compared to 20% last year, suggesting a less fragile market and more sustainable rally.
Retailers that invest in innovation, modernization, and technology, like Walmart and Bloomingdale's, are gaining market share by anticipating customer needs and offering new assortments, while those with declining standards or high debt, like Saks Fifth Avenue, face bankruptcy risks.
The Federal Reserve's independence is solidified, but a more divided Fed with increased dissents is anticipated in 2026, potentially leading to more pronounced hawkish and dovish voting patterns.

Deep Dive

The market is poised for a significant shift in 2026, moving beyond the dominance of a few mega-cap technology stocks towards broader participation and a more efficient AI landscape. This transition will be characterized by a re-evaluation of valuations, a more disciplined approach to unprofitable tech, and a potential recalibration of Federal Reserve policy, all of which will shape sector performance and overall economic growth.

The narrow leadership of the "Mag Seven" stocks, which has driven market returns for the past three years, is expected to narrow further in 2026, necessitating a broader market rally to sustain overall earnings growth. This expectation is reflected in the projected acceleration of revenue growth for the equal-weight S&P 500, from 1.5% in 2025 to 5% in 2026, indicating a significant reliance on EPS delivery and a "show me" story for the market as the year progresses. The recent Nvidia-Grok deal, valued at $20 billion, highlights a potential narrative shift in AI towards greater efficiency and cost-effectiveness for end-users. This is further supported by the observation that non-profitable AI-related companies and funds like Ark have not participated in the latest market rally, suggesting a return to market rationality and a focus on sustainable, profitable growth. The semiconductor cycle is also a key consideration, with earnings growth off the 2022 lows suggesting proximity to the cycle's end, although the secular tailwinds of AI could extend its duration. Tariffs, while impacting smaller businesses and consumers disproportionately, are now being absorbed as the economy shows resilience, with corporate profits reaching new highs despite a rise in bankruptcies. Encouragingly, breadth measures show broader market participation, with 64% of stocks trading above their 50-day moving average, a significant improvement from the previous year's 20%, indicating a less fragile market.

The Federal Reserve's independence is now solidified, and while market expectations for rate cuts in 2026 may be ambitious, the terminal rate is anticipated to remain around 3%. The labor market, despite strong corporate earnings, is showing signs of weakening, with a projected unemployment rate increase to 4.7% in December. This divergence between corporate health and labor market softening suggests that while the consumer remains employed and spending, the overall economic picture is one of slow growth, with liquidity markets passing the $8 trillion mark. This slow growth environment, coupled with a widening K-shaped economy, means that while high-end consumers and value-seeking shoppers are spending, smaller businesses and lower-income consumers are more vulnerable. Retail performance during the holiday season was solid, driven by product newness and a bifurcation between strong performers like Walmart, which has modernized its format and technology, and lagging retailers such as Target. The K-shaped economy also impacts discount retailers, with tariffs having previously affected dollar stores, though lapping these tariffs should provide a benefit. Off-price retailers, like Burlington and TJ Maxx, have gained share due to diversified assortments, while financially leveraged retailers like Saks Fifth Avenue face significant debt challenges, highlighting the increasing concentration of market share among stronger players who can invest in technology and innovation. Macy's, despite a challenging year, presents a potential buying opportunity due to its strategic "Bold New Chapter" initiatives, including enhancements to its assortment and store experience, particularly in its best-performing locations.

The core takeaway is that 2026 will likely see a more diversified market driven by a broader range of companies and sectors, a more rational approach to AI investments, and a recalibrated monetary policy. While economic growth may be slow, the continued strength of the consumer and the strategic adaptation of key retailers suggest resilience, though the K-shaped economic dynamic will continue to create significant divergence in performance across different segments of the economy and market.

Action Items

Audit retail sector performance: Analyze 3-5 key retailers for inventory turnover and pricing strategies (ref: Telsey Advisory Group insights).
Measure consumer spending bifurcation: Track discretionary spending for high-income vs. value-seeking consumers across 5-10 product categories.
Evaluate AI adoption impact: Assess productivity gains and potential labor demand shifts in 3-5 industries impacted by AI.
Track semiconductor cycle indicators: Monitor earnings growth and free cash flow for 2-3 major semiconductor companies to gauge cycle phase.
Analyze Fed policy impact: Correlate Fed interest rate decisions with market liquidity and bond yields for 3-5 key economic indicators.

Key Quotes

"The biggest question for 2026 is whether or not everything else can strike back and deliver the earnings growth that is necessary to unseat the narrow Mag Seven leadership next year."

Cameron Dawson, Chief Investment Officer at NewEdge Wealth, posits that the primary market concern for 2026 is the potential for broader market participation to drive earnings growth. This challenges the current dominance of a few large-cap technology stocks, suggesting a potential shift in market leadership if other sectors can demonstrate significant earnings expansion.

"The real question will be is how much further can this go and is that free cash flow that Nvidia is generating today something that we can extrapolate into perpetuity possibly not."

Cameron Dawson raises a critical point about the sustainability of Nvidia's current financial performance. He questions whether the company's substantial free cash flow generation is a long-term trend or a temporary surge, implying that the semiconductor cycle, even with AI tailwinds, may eventually face a downturn.

"The real power move is actually having access to the biggest data networks powered by the biggest delivery network using predictive analytics to manage your entire supply chain and having end to end visibility for temperature controlled healthcare shipping fedex the new power move."

This quote, attributed to FedEx, defines a modern approach to business logistics. It emphasizes the strategic advantage gained from integrating extensive data networks, robust delivery infrastructure, and advanced analytics for comprehensive supply chain management, particularly highlighting specialized services like temperature-controlled healthcare shipping.

"I think overall you will see those dollar stores perform keep in mind that in 2025 the focus on tariffs who imports goods from china was impactful certainly to the dollar stores and now lapping tariffs should be a benefit to them over time."

Dana Telsey, CEO and Chief Research Officer at Telsey Advisory Group, suggests that discount retailers, such as dollar stores, are likely to perform well. Telsey notes that the impact of tariffs on imported goods in 2025 was a challenge for these stores, but lapping these tariffs in the future should provide a beneficial tailwind for their performance.

"The bold new chapter strategy that the CEO of Macy's Tony Spring has put in place they're making advancements and you're seeing some change in Macy's also you look this year at Macy's and what they've done whether it's backstage with the off price in their assortment whether it's what they're doing with luxury whether it's what they're doing with their own brands and frankly the store experience the investments that they've made into the top 125 150 stores is outperforming the core."

Dana Telsey explains that Macy's strategy under CEO Tony Spring is showing positive results. Telsey highlights advancements in off-price offerings, luxury goods, private brands, and significant investments in their top-performing stores as key drivers of this progress, indicating a revitalized approach to their retail operations.

"I think they're going to be cutting really yeah so we are penciling in another cut in January -- another one in March -- and it's just this kind of idea that you've clearly gotten more concerned on the labor market side of your mandate if the unemployment rate is something like 4.7 that we think we'll see in December."

Veronica Clark, Director of Citi Research at Citigroup Global Markets, discusses potential Federal Reserve actions. Clark anticipates rate cuts in January and March, driven by increasing concern over the labor market, particularly if the unemployment rate reaches approximately 4.7% as projected for December.

Resources

External Resources

Books

"Against the Rules: The Big Short Companion" by Michael Lewis - Mentioned as a podcast companion.

Articles & Papers

"Bloomberg Surveillance TV: December 29th, 2025" (Bloomberg) - Episode description and transcript provided.

People

Cameron Dawson - Chief Investment Officer at NewEdge Wealth.
Deborah Cunningham - CIO for Global Liquidity Markets at Federated Hermes.
Veronica Clark - Director of Citi Research at Citigroup Global Markets.
Dana Telsey - CEO and Chief Research Officer at Telsey Advisory Group.
Michael Lewis - Host of "Against the Rules: The Big Short Companion" podcast.
Austin Hankwitz - Co-host of "Mind the Business Small Business Success Stories" podcast.
Janice Torres - Co-host of "Mind the Business Small Business Success Stories" podcast.
Tony Spring - CEO of Macy's.

Organizations & Institutions

NewEdge Wealth - Employer of Cameron Dawson.
Federated Hermes - Employer of Deborah Cunningham.
Citigroup Global Markets - Employer of Veronica Clark.
Telsey Advisory Group - Employer of Dana Telsey.
JPMorgan Asset Management - Discussed for active fixed income ETFs.
JPMorgan Chase & Co. - Parent company of JPMorgan Asset Management.
Mint Mobile - Discussed for offering discounted unlimited wireless plans.
Genentech - Advertiser of Xolair.
Novartis - Advertiser of Xolair.
Ruby Studio - Producer of "Mind the Business Small Business Success Stories" podcast.
Intuit QuickBooks - Partner for "Mind the Business Small Business Success Stories" podcast.
iHeartRadio - Platform for podcast listening.
Apple Podcasts - Platform for podcast listening.
Bloomberg Audio Studios - Producer of Bloomberg Surveillance podcast.
Bloomberg Television - Broadcast platform for Bloomberg Surveillance.
Bloomberg Terminal - Platform for accessing Bloomberg services.
Bloomberg Business App - Platform for accessing Bloomberg services.
Goldman Sachs - Mentioned for the non-profitable tech index.
ARK - Mentioned as an index that has not made new highs.
FedEx - Discussed for supply chain management and delivery services.
Macy's - Retailer discussed for its "Bold New Chapter" strategy and store performance.
Bloomingdale's - Department store owned by Macy's, discussed for new brands and store expansion.
Nordstrom - Retailer mentioned for gaining share and introducing new brands.
Kohl's - Publicly traded department store.
Dillard's - Publicly traded department store.
Walmart - Retailer discussed for modernization and customer anticipation.
Target - Retailer discussed for disappointing performance compared to Walmart.
TJX - Retailer mentioned for capturing customers with diversified assortment.
Burlington - Off-price retailer mentioned for capturing customers.
Ross Stores - Off-price retailer mentioned for capturing customers.
Saks Fifth Avenue - Retailer discussed in the context of potential bankruptcy and debt payment.
Moms Demand Action - Organization advocating for gun safety laws.
Everytown for Gun Safety Action Fund - Organization advocating for gun safety laws.

Websites & Online Resources

omnystudio.com/listener - Website for privacy information.
jpmorgan.com/getactive - Website for JPMorgan Asset Management information.
mintmobile.com - Website for Mint Mobile services.
xolair.com - Website for Xolair prescribing information.
faceafterweightloss.com - Website for information on restoring youthful appearance after weight loss.
discovercart.com - Website for information on CAR T-cell therapy.
venmo.me/stash/terms - Website for Venmo Stash terms and exclusions.
everytown.org - Website for donations to Everytown for Gun Safety Action Fund.

Podcasts & Audio

Bloomberg Surveillance - Podcast discussed.
Mind the Business Small Business Success Stories - Podcast discussed.
Against the Rules: The Big Short Companion - Podcast discussed.

Other Resources

Mag Seven - Group of large-cap technology stocks driving market performance.
Equal Weight S&P 500 - Index discussed for earnings growth expectations.
Grok - Chip designer with a $20 billion valuation, mentioned in relation to Nvidia.
AI (Artificial Intelligence) - Discussed as a narrative shift and driver of efficiency.
Non-Profitable Tech Index (Goldman Sachs) - Index mentioned in relation to market rationality.
K-shaped economy - Economic concept describing divergent outcomes for different income groups.
GLP-1 - Medication associated with weight loss and potential facial hollowing.
CAR T-cell therapy - Personalized treatment for multiple myeloma.
Venmo Stash - Program offering cash back on purchases.
Gun violence - Discussed as a danger to school-aged children.