Valuations Price In Optimism, Market Breadth Needed for Returns

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Original Title: Bullish Calls for 2026 Emerge
Valuations Price In Optimism, Market Breadth Needed for Returns - Episode Image

TL;DR

  • Valuations are already pricing in significant good news for 2026, creating a high bar for substantial market returns and suggesting lower forward returns over the next three to five years compared to the past.
  • The narrowness of market leadership, driven by Mag 7 earnings growth of 200% versus 16% for equal weight over three years, necessitates a broadening of participation for sustained gains.
  • A potential catalyst for a broader market unwind could be the unwinding of AI optimism, which has driven recent performance, suggesting a watch item for 2026.
  • Emerging markets are favored for 2026 due to expected dollar depreciation, which boosts international markets by reducing dollar-denominated liabilities and improving fundamental valuations.
  • Gold is considered a "psychological commodity" with a powerful uptrend, but its overbought technicals suggest a potential consolidation phase despite its perceived invincibility.
  • Bitcoin faces a credible risk of going to zero due to the economic feasibility of a 51% network attack, a risk not present in gold, which has tangible value and diverse uses.
  • Tariffs are likely to become more strategic in 2026, focusing on repatriating strategically important manufacturing rather than broad economic disruption, as their impact on the overall US economy is relatively small.

Deep Dive

The market consensus for 2026 is overwhelmingly bullish, with no strategists anticipating a down year, driven by upward revisions to GDP and EPS forecasts. However, current valuations already price in significant optimism, creating a high bar for substantial returns and suggesting that forward returns over the next three to five years may be lower than the exceptionally strong past five years. The primary risk to this outlook is an external event that prompts a market reassessment of high valuations, rather than valuations themselves predicting a downturn.

The narrowness of market leadership, particularly the outperformance of the "Mag 7" companies which have grown earnings by 200% over three years compared to just 16% for equal-weighted indices, is a critical point. A broader market rally in 2026 hinges on a deceleration in Mag 7 earnings growth and a corresponding acceleration in other sectors. If this earnings divergence persists, it suggests that current market strength might be a temporary rotation rather than a sustained trend. Beyond technology, areas like healthcare and materials show underlying strength, though the prudent strategy involves moving closer to a neutral allocation given the significant tech overweight many investors currently hold.

While technology, particularly AI, has been the market's primary driver, a broadening of participation is anticipated. This shift suggests that value, mid-cap, and international markets, including emerging markets, are better positioned for growth. The depreciation of the US dollar is a key catalyst for international assets, particularly emerging markets, as it reduces the burden of dollar-denominated liabilities and boosts fundamentals. In contrast, while Bitcoin is an innovation, it is not a substitute for gold, as it faces the credible risk of network attacks and has less tangible value, unlike gold's established industrial and jewelry uses. The commodity market, excluding gold's influence, shows a more moderate upward trend in industrial commodities, suggesting a localized rather than a broad-based boom.

The perception of innovation has shifted from academic to corporate-driven, with US companies significantly outspending other regions on R&D. While comparisons to historical booms like the railroad era are tempting, current AI investment, though substantial, is not necessarily indicative of a bubble. The US dollar's weakness, decoupled from rising bond yields, is attributed to strategic tariff initiatives and the need to finance excess spending, suggesting that currencies like the Euro and Yen may still be undervalued relative to the dollar. Furthermore, recent economic convergence between Italy and France indicates a real shift, with Italy effectively utilizing EU fiscal support, though sustaining this rebound through private sector activity remains a key challenge.

Action Items

  • Audit AI trade: Analyze 3-5 key drivers of AI market optimism and their potential downside risks (2-week analysis).
  • Measure earnings divergence: For 3-5 sectors, calculate the difference in earnings growth between top-performing companies and the sector average over the last 3 years.
  • Evaluate factor ETF construction: For 3-5 underperforming factor ETFs, analyze their methodology for defining factors and identify potential improvements for better performance.
  • Track global earnings revisions: Monitor earnings revision trends for developed markets outside the US and emerging markets over the next 12 months.

Related Episodes

Key Quotes

"You have an environment now where there's not a single strategist on the street that is expecting a down year in 2026 certainly that is a shift from the last couple of years where you had some stragglers of bearishness left over after 2022's weak environment but we are in an environment where we're still seeing gdp forecasts continue to get revised higher you're seeing eps forecasts continue to get revised higher and the biggest challenge you have is that valuations are already pricing in a lot of good news so when you look at consensus they're expecting valuations to hold steady and earnings to deliver that does create somewhat of a high bar for big huge returns in 2026"

Cameron Dawson observes a prevailing bullish sentiment for 2026, noting that GDP and EPS forecasts are being revised upward. Dawson highlights that the primary challenge is that current valuations already reflect positive expectations, setting a high bar for significant returns in the upcoming year.

"Valuation is a very poor timing tool it has no predictive power on one year forward returns but it does have predictive power once you start looking out three four and five years so you're at an environment or at a point where you can say we shouldn't be surprised if forward returns are lower over the next three to five years than they were over the last five years where they have been extraordinarily strong"

Cameron Dawson explains that while valuation may not predict short-term market movements, it can indicate potential for lower returns over longer periods. Dawson suggests that investors should temper expectations for the next three to five years, as returns may not match the exceptionally strong performance of the past five years.

"One of the reasons why we have seen such a powerful degree of outperformance and narrowness of the market is because earnings have been narrow the most startling stat is that over the last three years you've seen the mag 7 grow earnings by 200 but the equal weight has only grown earnings by 16"

Cameron Dawson points out that the market's outperformance has been concentrated due to narrow earnings growth. Dawson provides a striking statistic, noting that the "Mag 7" companies have seen 200% earnings growth over the last three years, while equally weighted stocks have only grown by 16%.

"There has been this dynamic that you might call inattentive blindness the idea because people have been focused on just one thing which has been ai and tech there's a lot of good things and happening outside of just those areas so look at some of the strength that we've seen in some healthcare names look at some of the strength that we're seeing in some of the materials"

Cameron Dawson suggests that an "inattentive blindness" has occurred, where focus on AI and tech has overshadowed positive developments in other sectors. Dawson specifically mentions strength observed in healthcare and materials sectors as examples of areas that may be overlooked.

"We find the case for both with emerging markets probably the leading the charge between the two what are the drivers here we continue to see with high conviction an environment of dollar depreciation dollar depreciation will favor international markets broadly but with emerging markets in particular there is a re rating of fundamentals because as the dollar goes down the level of liabilities for these markets as they're mostly dollar liabilities goes down so boost from a currency perspective and boost from a fundamental perspective"

Alessio de Longis explains that a depreciating dollar is a key driver favoring international markets, especially emerging markets. De Longis elaborates that a weaker dollar reduces the burden of dollar-denominated liabilities for emerging market economies, providing both currency and fundamental boosts.

"My latest is a new paper called gold and bitcoin and i argue in that paper that bitcoin is not a substitute for gold so to be clear here bitcoin is a great innovation and i'm a big fan of the space in general in terms of what it can do i believe stable coins for example are the first killer app of the decentralized finance space but be careful of bitcoin it is now the case that it is economically feasible to launch an attack on the bitcoin network and what that means is taking over 51 of the computing power of the bitcoin network and it is feasible"

Campbell Harvey argues that Bitcoin is not a direct substitute for gold, despite its innovative aspects and potential in decentralized finance. Harvey expresses concern about the economic feasibility of attacking the Bitcoin network by controlling over 51% of its computing power.

Resources

External Resources

Books

  • "Gold and Bitcoin" by Campbell Harvey - Discussed in relation to a paper arguing that Bitcoin is not a substitute for gold.

Articles & Papers

  • "Gold and Bitcoin" - Mentioned as a paper authored by Campbell Harvey.

People

  • Cameron Dawson - Chief Investment Officer at NewEdge Wealth, providing market perspective.
  • Alessio de Longis - Head of Investments and Multi-Asset Senior Portfolio Manager at Invesco, explaining investment positioning.
  • Campbell Harvey - Professor of Finance at Duke Business School, discussing market innovation and historical comparisons.
  • Lisa Mateo - Provided updates on newspaper headlines.
  • Bill Ackman - Founder of Pershing Square Capital Management, who contributed to a GoFundMe for a bystander and is starting a reward program for similar acts.
  • Donald Trump - President, who praised a bystander for saving lives.
  • Anthony Albanese - Australian Prime Minister, who recognized a bystander.

Organizations & Institutions

  • NewEdge Wealth - Mentioned as the affiliation of Cameron Dawson.
  • Invesco - Mentioned as the affiliation of Alessio de Longis.
  • Duke Business School - Mentioned as the affiliation of Campbell Harvey.
  • JPMorgan Asset Management - Mentioned for its active fixed income ETFs.
  • JPMorgan Chase & Co. - Mentioned as the parent company of JPMorgan Asset Management.
  • Finra - Mentioned as a member of JPMorgan Distribution Services, Inc.
  • Chase Sapphire Reserve for Business - A credit card offering rewards and benefits for business owners.
  • Adobe Acrobat Studio - Introduced as a tool with AI-powered PDF capabilities.
  • Public - A platform for building multi-asset portfolios and creating generated assets.
  • Open To The Public Investing Inc. - Brokerage services provider for Public.
  • Public Advisors LLC - SEC registered advisor for Public.
  • Verizon Business - Offers a "biz plan" for mobile services.
  • Mastercard - Offers solutions for B2B payment acceptance.
  • CVS - Mentioned for its community presence and services.
  • Bloomberg News - Mentioned for reporting on the Bondi Beach shooting.
  • Washington Post - Mentioned for a story on Gen Z's interest in physical media.
  • Pershing Square Capital Management - Mentioned as the affiliation of Bill Ackman.
  • European Union - Mentioned for its COVID support fiscal package.

Websites & Online Resources

  • jpmorgan.com/getactive - Website to learn more about J.P. Morgan's active fixed income ETFs.
  • chase.com/reservebusiness - Website to learn more about the Chase Sapphire Reserve for Business card.
  • adobe.com/dothatwithacrobat - Website to learn more about Adobe Acrobat Studio.
  • public.com/market - Website to learn more about Public's offerings and bonus for portfolio transfer.
  • public.com/disclosures - Website for disclosures related to Public's services.
  • verizon.com/business - Website to learn more about Verizon Business mobile plans.
  • mastercard.com/commercialacceptance - Website to learn more about Mastercard's B2B payment solutions.
  • omnystudio.com/listener - Website for privacy information.
  • bloomberg.com - Mentioned for listening to the podcast live.
  • spectrum.com/freeforever - Website to learn more about Spectrum's free home internet offer.
  • cvs.com - Website for CVS.

Podcasts & Audio

  • Bloomberg Surveillance - The name of the podcast.
  • Bloomberg Podcasts - Mentioned for subscribing on YouTube.

Other Resources

  • AI (Artificial Intelligence) - Discussed as a driver of the market and a focus of investment.
  • Mag 7 - Mentioned in relation to earnings growth and market outperformance.
  • Equal Weight - Discussed in contrast to Mag 7 earnings growth.
  • Value Cyclicals - Mentioned as an investment area better positioned in a broadening global expansion.
  • Small and Mid Caps - Mentioned as investment areas better positioned in a broadening global expansion.
  • Momentum - Discussed as a factor in ETFs.
  • Revenue - Discussed as a factor in ETFs.
  • Quality Factor ETFs - Mentioned as having underperformed.
  • Fixed Income ETFs - Mentioned in relation to capturing the US public bond market.
  • 60/40 Portfolio - Discussed as having returned in 2025.
  • Dollar Depreciation - Expected to favor international markets, particularly emerging markets.
  • Emerging Markets - Discussed as a favored investment area due to dollar depreciation and fundamental re-rating.
  • Emerging Markets Local Debt - Mentioned as an investment.
  • Emerging Markets Hard Currency Debt - Mentioned as an investment.
  • Tariffs - Discussed in relation to US economic policy and its impact.
  • Rare Earths - Mentioned in the context of China's production dominance.
  • Aluminum Production - Discussed as a strategic metal where China dominates production.
  • Bitcoin - Discussed as an innovation but not a substitute for gold, with a credible scenario of going to zero.
  • Stablecoins - Identified as the first killer app of the decentralized finance space.
  • Decentralized Finance (DeFi) - Mentioned in relation to stablecoins.
  • Chuck Norris - Used as a metaphor for gold's invincibility.
  • The Rock - Suggested as an alternative metaphor for gold.
  • Bloomberg Commodity Index (BCOM) - Discussed in relation to a commodity boom.
  • BCOM Industrial Commodities Index (BCOM IM) - Mentioned as showing movement higher.
  • Generated Assets - A feature on the Public platform allowing users to turn ideas into investable indexes.
  • Physical Media (CDs and DVDs) - Mentioned as having renewed interest from Gen Z.
  • Streaming - Discussed as a costly alternative to physical media for supporting artists.
  • Tidal - Mentioned as a music streaming service with high-quality audio and low fees.
  • Christmas Music - Discussed in relation to holiday listening trends.
  • Bystander Intervention - Discussed in the context of the Bondi Beach shooting and a reward program.
  • AI-Powered PDF Spaces - A feature of Adobe Acrobat Studio.
  • B2B Acceptance - A focus for Mastercard's solutions.
  • Virtual Card Payments - Increasingly demanded by buyers for invoices.
  • Morning Uncrustables Sandwiches - Mentioned as a protein-boosted snack.
  • Fiber Powered Internet - Offered by Spectrum.
  • B2B Card Payment Landscape - Evolving with buyer demands.

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