AI Dominance, Fiscal Stimulus, and Labor Loosening Drive 2026 Markets - Episode Hero Image

AI Dominance, Fiscal Stimulus, and Labor Loosening Drive 2026 Markets

Bloomberg Surveillance · · Listen to Original Episode →
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TL;DR

  • The continued dominance of mega-cap tech stocks, driven by AI adoption and robust cash flows, is expected to outperform, despite concentration risk concerns, as capital markets cycles favor leading themes.
  • Fiscal stimulus and a strong consumer demand environment are projected to drive US growth to 2.75-3% in 2026, countering stagflation fears and supporting potential Fed rate cuts.
  • The labor market's gradual loosening, with a trending higher unemployment rate, supports the case for Federal Reserve rate cuts, as it signals reduced inflationary pressure and potential economic cooling.
  • Middle-market private equity presents an attractive growth opportunity outside of mega-cap tech due to stretched public equity valuations and the demand for compute infrastructure, particularly data centers.
  • Oil prices remaining stable, below $3 a gallon, psychologically benefits consumers and can bleed through to other sectors, though its direct impact on an outperforming energy sector is complex.
  • The Federal Reserve must reconcile its technical inflation metrics with the public's experience of high price levels to maintain credibility, emphasizing real wage growth as a path to improved consumer sentiment.

Deep Dive

Opening Thesis

The prevailing market outlook for 2026 hinges on the continued dominance of AI-driven mega-cap technology companies, a trend that is expected to persist despite increasing concentration risk. This dynamic is fueled by robust capital markets, substantial stimulus, and accelerating AI adoption, creating a virtuous cycle of earnings growth for leading firms, though potential economic headwinds and the politicization of the Federal Reserve introduce notable uncertainties.

Body

Julian Emanuel of Evercore ISI projects the S&P 500 to reach 7750 by year-end, emphasizing a "more of everything" scenario that favors the same factors driving 2025's performance: AI, stimulus, earnings growth, and volatility. He argues that the capital markets cycle inherently benefits leading stocks, dismissing concerns about market concentration, which has reached 40% in the S&P 500, a level still below markets like Korea's Kospi. This concentration is supported by strong corporate cash flows among these dominant tech firms, creating a virtuous cycle of earnings. While acknowledging the discomfort associated with this concentration, Emanuel suggests that opportunistic sector rotation may occur, with consumer discretionary and communication services showing potential, particularly those with significant AI exposure. He posits that 2026 will mark an acceleration of AI adoption, compelling global corporations to integrate AI to maintain competitiveness.

Andrew Hollenhorst of Citi Research anticipates a gradual rise in the unemployment rate to 4.7% by December, suggesting this loosening labor market, coupled with moderating inflation (partially due to tariffs fully flowing through), will enable the Federal Reserve to enact three or more rate cuts. He believes the Fed's dovish stance is influenced by a desire to maintain consumer momentum, especially heading into midterm elections, and a perception that some inflation concerns are transitory. Hollenhorst notes that while shelter price inflation is softening, the trajectory of other services and goods prices remains a concern, with the impact of healthcare subsidies on CPI data being a technical, rather than PCE, issue. He also acknowledges the public's experience of high price levels, distinct from the Fed's focus on inflation rates, suggesting a need for clearer communication on the difficulty of reducing price levels.

Sonal Desai of Franklin Templeton remains constructive on US growth, forecasting 2.75% to 3% driven by consumer demand and substantial private sector investment. She identifies fiscal impulse, particularly from the "big beautiful bill" and potential stimulus checks, as the primary inflation risk, leading to increased consumer demand and price pass-through by companies. Desai dismisses stagflation fears, attributing potential inflation primarily to fiscal stimulus rather than the oil price, which she anticipates will be moderated by political actions and potentially increased Venezuelan supply in the longer term. She expects a steeper yield curve as the Fed might be behind the curve on inflation, with 10-year yields potentially reaching 4.75% without triggering a recession.

Troy Gayeski of Future Standard highlights middle-market private equity as a significant growth opportunity outside of mega-cap tech, where public equity valuations are stretched. He notes that AI has spurred massive investment by hyperscalers into data centers, driving demand for compute power and propping up valuations. While acknowledging near-term risks related to AI adoption struggles, Gayeski believes demand for data centers will remain strong due to supply constraints and continued demand for computation. He suggests that while data center investments are attractive, particularly those funded by hyperscalers, the broader energy required to power these facilities presents a supply-side challenge that could enforce discipline on spenders. He anticipates that the true impact of AI on the "real economy"--driving productivity growth in sectors like medicine and chemicals--will become clearer in 2027-2028, with potential consequences for hardware valuations if this broad productivity boost fails to materialize.

Closing Takeaway

The market's trajectory in 2026 is heavily reliant on the sustained strength of AI-driven mega-cap tech, supported by fiscal stimulus and accommodating monetary policy, yet significant risks loom from increasing market concentration, potential inflation, and the politicization of the Federal Reserve, while private equity offers a more accessible growth avenue outside the dominant tech giants.

Action Items

  • Audit AI infrastructure spending: Analyze hyperscaler capital expenditures for 3-5 key AI components to identify potential over-investment risks (ref: data center demand vs. supply).
  • Measure AI adoption ROI: Track productivity gains in broader industries (e.g., medicine, chemicals) for 3-5 companies to assess AI's real-economy impact.
  • Evaluate consumer inflation perception: Reconcile Fed's inflation metrics with public experience by tracking price level changes for 5-10 essential goods/services.
  • Assess labor market loosening: Monitor unemployment rate trends for 3-5 months to inform Fed policy decisions on interest rate adjustments.

Related Episodes

Key Quotes

"everything that worked last year is going to keep on working the temptation to choose something new find that new thing why aren't you embracing it so the issue here is and again this concept of concentration risk if you go back and to the beginning of the century when the top 10 stocks were 25 of the way in the s p 500 there was a thought that that could not be exceeded we're now at 40 and frankly again if you think about concentration risk you look at a market like korea where in the kospi you've got two stocks that account for 45 so so the point is the math doesn't work for these stocks not to market perform or outperform but the truth is is that the capital markets cycle has yet to fully play out and the beneficiary of a robust capital market cycle time and time again are the stocks that led you into the cycle"

Julian Emanuel of Evercore ISI argues that the market concentration seen in the S&P 500 is likely to continue, drawing parallels to other markets like South Korea. He explains that the stocks that led the market into the current cycle are historically the beneficiaries of its continuation. Emanuel suggests that despite potential discomfort with this concentration, the underlying math and the capital markets cycle support these leading stocks.

"and for us what we think is going to happen in 2026 is you're going to go from the inflection year 2025 for ai adoption to the year where it accelerates when corporate you know global corporates realize that if they don't find ways to drive revenues and cut costs through using ai they will be at a competitive disadvantage"

Julian Emanuel of Evercore ISI forecasts that 2026 will be the year artificial intelligence adoption accelerates significantly. He explains that global corporations will recognize the necessity of integrating AI to enhance revenues and reduce costs, or risk falling behind competitors. Emanuel views 2025 as the inflection point for AI adoption, leading into this period of accelerated implementation.

"the issue here is long term it's likely a moderating influence for oil prices and if you think about oil prices staying you know flat for longer that's bullish for long dated bonds"

Sonal Desai of Franklin Templeton discusses the long-term implications of events in Venezuela on oil prices. Desai suggests that these events are likely to moderate oil prices, and if oil prices remain stable, this would be a positive factor for long-dated bonds. She connects this to potential Federal Reserve policy, implying that stable oil prices could influence decisions regarding interest rates.

"we do think that can happen in the jobs report that we're going to get this week with the participation rate coming up a little bit maybe that's going to push the unemployment rate higher but what i would really emphasize is that that broad trend towards loosening in the job market"

Andrew Hollenhorst of Citi Research anticipates that the upcoming jobs report may show a slight increase in the unemployment rate, potentially due to a rise in the participation rate. Hollenhorst emphasizes that the broader trend in the labor market is one of gradual loosening. He believes this trend is consistent with the Federal Reserve's potential to reduce policy interest rates.

"we have a clear slowing trend in shelter prices i do think that some of those concerns about inflation will dissipate over the course of this year but they may rise first before they dissipate later this year"

Andrew Hollenhorst of Citi Research notes a clear slowing trend in shelter price inflation, which he believes will contribute to dissipating inflation concerns over the year. However, Hollenhorst cautions that inflation may initially rise before it begins to decline. He suggests that while shelter prices are a key indicator, other factors could influence inflation's trajectory.

"if you think of the ai one of the nice things you can find are other sectors with tremendous growth in healthcare and it's not because of my engineering background we're very excited about robotic surgery infusion care not maybe as juicy as ai's been the last two to three years but very good upside and limited downside"

Troy Gayeski of Future Standard highlights healthcare as a sector with significant growth potential, particularly in areas like robotic surgery and infusion care. Gayeski acknowledges that while these areas may not be as dynamic as AI has been recently, they offer strong upside with limited downside. He presents this as an attractive alternative investment opportunity within the broader market landscape.

Resources

External Resources

Books

  • "The Big Beautiful Bill" - Mentioned in relation to tax benefits and potential consumer spending stimulus.

Articles & Papers

  • "Bloomberg Surveillance TV: January 6th, 2026" (Bloomberg) - The source transcript for this analysis.

People

  • Julian Emmanuel - Mentioned for setting an S&P price target and discussing market performance drivers.
  • Lisa Abramowitz - Co-host of Bloomberg Surveillance.
  • Amary Horter - Co-host of Bloomberg Surveillance.
  • Bernie Sanders - Mentioned in agreement with Ron DeSantis on constraining something, though the specific constraint is not detailed.
  • Ron DeSantis - Mentioned in agreement with Bernie Sanders on constraining something, though the specific constraint is not detailed.
  • Donald Trump - Mentioned in relation to his administration's influence on market winners and losers, and his business background.
  • Rodriguez - Mentioned for her experience in the oil patch, with an endorsement from Donald Trump.
  • Tom Barkin - Richmond Fed President, discussed for his comments on clean economic data.
  • Andrew Home Horse - Mentioned for his base case forecast of the unemployment rate rising to 4.7%.
  • Mike - Mentioned in relation to the hawkish tilt of the FOMC and the labor market.
  • Rich - Mentioned in relation to the hawkish tilt of the FOMC and the labor market.
  • Troy Kowski - Mentioned for his writing on middle market private equity as an oasis for investment.
  • Michael Semblis - Mentioned for his comments on copper prices and electricity needs for data centers.
  • Torsten Slok - Mentioned for his observation that 7% of total investment grade issuance in 2024 came from the tech sector.

Organizations & Institutions

  • Evercore - Employer of Julian Emmanuel.
  • Bloomberg Audio Studios - Producer of Bloomberg audio content.
  • Apple - Platform for podcast subscriptions.
  • Spotify - Platform for podcast subscriptions.
  • Franklin Templeton - Mentioned in relation to fixed income outlook and US growth.
  • Federal Reserve - Central bank discussed for monetary policy and interest rate decisions.
  • JP Morgan - Mentioned in relation to comments on copper prices and electricity needs.
  • OpenAI - Mentioned as a company at the cutting edge of AI infrastructure, driving competitive pressure for hyperscalers.
  • Google - Mentioned as a company with a different proposition than Oracle regarding profit.
  • Amazon - Mentioned as a company with a different proposition than Oracle regarding profit.

Websites & Online Resources

  • Bloomberg Terminal - Platform for accessing Bloomberg information.
  • Bloomberg Business App - Platform for accessing Bloomberg information.
  • Bianco Research - Mentioned as the source of Jim Bianco's work on inflation perception.

Podcasts & Audio

  • Barkley's Brief - A podcast from Barkley's Investment Bank analyzing market themes.
  • Bloomberg Surveillance Podcast - Daily podcast offering insight from markets, economics, and geopolitics experts.

Other Resources

  • AI (Artificial Intelligence) - Discussed as a driving force for market performance, corporate strategy, and investment.
  • S&P (Standard & Poor's 500) - Mentioned in relation to price targets and market performance.
  • Kospi - South Korean stock market index, mentioned for its concentration risk.
  • US (United States) - Mentioned in relation to economic forecasts, consumer demand, and market performance.
  • China - Mentioned in relation to market performance and tech companies.
  • Healthcare - Mentioned as a sector with potential opportunity for consumers and a focus of skirmishes.
  • Consumer Discretionary - Mentioned as a sector with potential for a turnaround and as a sector preference.
  • Communication Services - Mentioned as a sector preference.
  • Infotech - Mentioned as a sector preference.
  • Venezuela - Mentioned in relation to its potential influence on oil prices and as a factor increasing the chances of an AI bubble.
  • Midterm Elections - Mentioned as a political backdrop influencing Federal Reserve decisions.
  • Tariffs - Discussed as a factor influencing inflation and economic data.
  • Copper - Mentioned in relation to commodity market surges and build-out in Venezuela.
  • Latin America - Mentioned as a region becoming more interesting for investment due to a potential top in the dollar.
  • Don Roe Doctrine - Mentioned as a concept influencing investment in Latin America.
  • Oil Prices - Discussed as a moderating influence on inflation and a key factor for consumers.
  • Energy Sector - Mentioned in relation to potential winners and losers and investment opportunities.
  • Electricity Prices - Mentioned as an affordability issue for Americans, particularly in relation to AI.
  • VIX (Volatility Index) - Mentioned in relation to market sentiment and potential for pullbacks.
  • Fixed Income - Discussed in relation to outlooks, yields, and market absorption.
  • US Growth - Mentioned as a constructive outlook from Franklin Templeton.
  • Inflation Risk - Discussed as a primary concern for the first part of 2026.
  • Fiscal Impulse - Mentioned as a source of inflation risk and consumer demand.
  • Big Beautiful Bill - Mentioned as a source of tax benefits and potential inflation.
  • Rebate Check - Mentioned as a principal source of past inflation bursts.
  • Biden Administration - Mentioned in relation to fiscal policy and stimulus.
  • Labor Market - Discussed in relation to economic health, unemployment rates, and Federal Reserve policy.
  • Consumer Demand - Mentioned as a driver of economic growth.
  • Private Sector Investment - Mentioned as a tailwind for growth in the US.
  • Stagflation - Discussed and ultimately dismissed as the expected economic scenario.
  • Yield Curve - Discussed in relation to steepening and its impact on financials.
  • Dollar - Mentioned in relation to its potential top and diversification to the rest of the world.
  • Euro - Mentioned in relation to fair value against the dollar.
  • Canada - Mentioned in relation to being overvalued against the dollar.
  • Unemployment Rate - Discussed as a key indicator for Federal Reserve policy and economic health.
  • Core PCE Inflation - Mentioned as a measure of inflation above the target.
  • Financial Conditions - Discussed as a factor influencing Federal Reserve decisions.
  • Shelter Prices - Mentioned as a clear area of slowing inflation.
  • Non-Shelter Services - Mentioned as an area where slowing inflation is less clear.
  • Goods Prices - Discussed in relation to tariffs and other potential factors.
  • CPI (Consumer Price Index) - Mentioned in relation to healthcare subsidies.
  • PCE (Personal Consumption Expenditures) Inflation - Mentioned in relation to healthcare subsidies.
  • Healthcare Subsidies - Discussed as a technical issue potentially affecting CPI data.
  • Mortgage Rates - Mentioned as a factor in housing affordability and influenced by Fed rate cuts.
  • Price Level - Discussed in contrast to one-off changes in inflation, and how the public experiences it.
  • Wages - Mentioned in relation to real wage growth and consumer sentiment.
  • Real Growth - Mentioned as a desired outcome alongside wage growth.
  • Robotic Surgery - Mentioned as a growth area in healthcare.
  • Infusion Care - Mentioned as a growth area in healthcare.
  • Middle Market Private Equity - Described as an oasis for investment due to stretched public equity valuations.
  • Hyperscalers - Mentioned as companies driving competitive pressure and investment in AI infrastructure.
  • Compute - Discussed in relation to demand and supply for computation and storage.
  • SAS (Software as a Service) - Mentioned as an application driving demand for compute.
  • Data Centers - Discussed as an investment area, with considerations for demand, supply, and energy needs.
  • Venture Capital - Mentioned as a source of financing for growth areas.
  • Private Credit - Mentioned as a preferred source of financing.
  • Commercial Real Estate Lending - Compared to data center lending.
  • Hospitality - Mentioned as an area for lending.
  • Digital Space - Mentioned in relation to potential upside in private equity.
  • Energy - Mentioned as a sector for potential investment and as a component of data center needs.
  • Copper - Mentioned in relation to supply challenges for data center build-outs.
  • Political Will - Mentioned as a factor influencing supply-side challenges.
  • Hardware - Mentioned in relation to potential catastrophic impact if AI spending peters out.
  • Broadcom - Mentioned for a debt offering.
  • Oracle - Mentioned as a company without profit, contrasting with Google and Amazon.
  • Bitcoin - Mentioned briefly in relation to public equities.
  • Healthcare - Mentioned as a sector with growth potential.
  • AI Trend - Emphasized as a key factor for portfolio exposure.
  • Debt Markets - Discussed in relation to Broadcom's offering and a shift from using cash flow.

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