Production for Security Thesis Drives 2026 Economic Growth and Market Shifts

Key Quotes

"We're at new highs here I would kind of call them tentative new highs and we took a lot of fuel to get here and there's been a lot of rotation in this market as well both on a sector basis a market cap basis you're starting to see a lot of churn and so to me that's a healthy sign for 2026 might have to dial back expectations a bit it might not be quite as strong as this year but you're starting to see more guests arrive at the party if you will in terms of the broadening out of the market that's certainly good news."

Robert Teeter, Chief Investment Strategist at Silvercrest Asset Management, suggests that while the market has reached new highs, these gains are tentative and have been fueled by significant effort and market rotation. Teeter views this churn as a positive indicator for 2026, implying a potentially broader market participation, though he anticipates a moderation in growth compared to the previous year.

"one of the themes that we've seen has been that companies have been very slow to hire you've had a relatively soft labor market that's not great from a consumer standpoint but so far it seems to be pretty great from an earnings standpoint and that is a sign that some of these ai benefits are coming into play you're hearing more and more ceos talking about keeping head count flat while revenues are rising and so that's good for the earnings picture again not so great for the consumer picture although payrolls are still expanding albeit slowly and wages are still expanding also albeit slowly."

Robert Teeter highlights a disconnect between a soft labor market and strong corporate earnings, attributing this to the benefits of AI adoption. Teeter explains that companies are maintaining flat headcounts while increasing revenues, which bolsters earnings but presents challenges for consumers, despite slow but steady growth in payrolls and wages.

"my base case for next year is that we do see very solid earnings growth so kind of low teens earnings growth maybe a little bit of multiple compression though and part of that's just going to be a factor of some of this rotation maybe you get a little bit of you know pressure release valve out of the the mega caps that have been so strong and i think strong for good reasons but as you get some of that rotation multiples might come down a little bit so we're looking for high single digit gains from equities next year powered by double digit earnings gains."

Robert Teeter forecasts solid earnings growth in the low teens for the upcoming year, but anticipates some multiple compression due to market rotation, particularly from mega-cap stocks. Teeter expects this dynamic to result in high single-digit equity gains, driven by double-digit earnings growth.

"i think that's enough given where we are right now if you see multiples rise any further that could be problematic the real challenge for the fed is is that issue between gdp and labor market you know their mandate really is on employment less so on gdp and so whether they choose to focus on a softer labor market and respond to that with rate cuts whether they change the target at all in terms of whether they're concerned that that rates are over two those are some of the challenges that they'll be facing but i think so long as the backdrop is rates will be lower in the future that supports multiples and that's been our view all throughout the course of this year it doesn't really matter the pacing of the rate cuts just knowing that they're coming and knowing the path lower."

Robert Teeter believes the current outlook for rate cuts is sufficient for the market, cautioning that further multiple expansion could be problematic. Teeter identifies the Federal Reserve's challenge in balancing GDP growth with labor market conditions, noting that the Fed's mandate primarily focuses on employment. He concludes that the expectation of future rate cuts, regardless of their pace, supports market multiples.

"i really do think this concept of production for security is slowly kind of replacing esg as a main thesis for government policy and investment policy and ultimately corporate policy so that's where i see the growth and again i do think i think you mentioned earlier one of your next guests is coming on both small caps i think there's a big opportunity in the us here so i like mid caps i like global slightly better than big tech us right now."

Peter Tchir posits that the concept of "production for security" is supplanting ESG as a primary driver for government, investment, and corporate policy, indicating this shift as a source of future growth. Tchir favors mid-cap and global equities over large-cap US tech stocks, seeing significant opportunity within the US market, particularly in mid-caps.

"i really do think europe had the chance to kind of seize russia's frozen dollars or frozen reserves use that they didn't i think we'll probably get pushed towards a peace deal and it's going to be favorable to putin and weirdly i think it's going to be very favorable to the us i know this administration wants to lock in rights for us companies in both russia and ukraine at the back of any peace trump is very angry that after the iraq war us companies didn't get a good deal and have a long lead time in iraq he wants that for russian ukraine so i think that could be really interesting."

Peter Tchir suggests that Europe missed an opportunity to seize frozen Russian reserves, and anticipates a peace deal in the Russia-Ukraine conflict that will favor Putin. Tchir believes this outcome will paradoxically benefit the US, as the current administration aims to secure rights for American companies in both Russia and Ukraine following any peace agreement, drawing a parallel to Donald Trump's desire for favorable deals for US companies after the Iraq War.