December 2025 Webinar

Market Overview & Speedometers

• We implemented a recalibration scoring methodology of the speedometer framework, shifting from a continuous 0–100 scale to seven defined scoring levels to better display our changes, our methodology remains unchanged, just the display.
• Corporate earnings speedometer (changed): We raised the earnings dial modestly within neutral as earnings breadth improved exiting Q3, margins proved more resilient than expected, and participation broadened beyond technology.
• Geopolitical risk speedometer (changed): We upgraded geopolitical risk from red to yellow, reflecting reduced market sensitivity as conflicts have stabilized into more predictable patterns as equity markets have more muted responses to geopolitical events.

Inflation

• Inflation continues to moderate, moving into a range that provides the Federal Reserve flexibility to cut rates without reigniting price pressures.
• Shelter inflation has cooled but remains a swing factor should rate cuts stimulate renewed housing demand.

Labor

• Job growth has slowed materially, with payroll gains averaging roughly 60,000 per month and unemployment rising to 4.4%, making labor the primary macro pressure point.
• We attribute weaker hiring to employer uncertainty, demographic aging, and skilled labor supply constraints along with signs of AI productivity gains rather than sole broad AI-driven displacement.

Consumer

• Consumer spending remains the anchor of economic growth, supported by asset appreciation and income gains among higher-income households that account for the majority of aggregate spending.
• Credit stress is concentrated in subprime segments, while prime borrowers remain stable, reinforcing the persistence of a K-shaped consumer environment.

Federal Reserve Policy

• We expect the policy rate to trend toward a 2.75%–3.25% range by the end of 2026, consistent with a gradual easing path toward the Fed’s estimated neutral rate near 3%.
• Recent rate cuts were largely insurance-driven amid data disruptions and softer labor trends rather than a response to deteriorating growth.
• Dissents within the FOMC reflect a transition phase, with upcoming voter rotation expected to tilt the committee modestly more dovish.

Equity Markets

• Our base case targets the S&P 500 at approximately 7,600–7,700 by year-end 2026, implying roughly 11%–12% upside supported by earnings growth and productivity gains.
• AI-driven efficiency improvements are increasingly visible across healthcare, financial services, retail, and industrials, extending beyond mega-cap technology.

Fixed Income Markets

• Fixed income delivered strong returns in 2025, supported by attractive starting yields, stable credit, and easing rate volatility.
• We expect short-term rates to decline further while 10-year Treasury yields remain rangebound in a 3.75%–4.25% range, producing a steeper and more normalized yield curve.
• Positive real yields and curve roll-down provide a favorable backdrop for intermediate-duration strategies.
• Credit conditions remain healthy, with defaults near long-term averages, though selectivity remains critical in high yield and private credit.

International Markets

• We see improving relative prospects for non-U.S. equities as valuations remain attractive and foreign fiscal and monetary flexibility exceeds that of the U.S.
• A softer dollar during the Fed easing cycle should further support international returns and diversification benefits.

Five Key Takeaways

1. The macro backdrop into 2026 is stable, characterized by moderate growth, easing inflation, and diminishing recession risk.
2. Speedometer upgrades to corporate earnings and geopolitics reflect improving fundamentals and reduced market sensitivity to global risks.
3. AI-driven productivity gains are transitioning from a concentrated tech theme to a broader economic tailwind.
4. Equity leadership is expected to remain rotational, reinforcing the importance of diversification and active management.
5. Fixed income offers renewed return potential through attractive yields, curve normalization, and generally sound credit fundamentals.

In Summary

We expect 2026 to unfold in a stable growth environment, with positive GDP growth in the U.S. as well as globally. Expect continued monetary policy easing and both fiscal stimulus and some fiscal restraint in the U.S., with fiscal stimulus primarily front loaded in the first half of the year. Globally, expect foreign fiscal stimulus to increase. Broadening market participation in the equity markets continue to be supported by the AI narrative along with consumer spending. Fixed income should remain a meaningful ballast, with a normalizing yield curve, positive real yields, and healthy credit conditions supporting returns.

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