First, Merry Christmas and Happy New Year to all. It is such a pleasure to work with each of you. My life is fuller because of the Christmas gift that you are to me. Moving forward, please be aware that in the first week of January, we will be moving most accounts to a moderate position of 60% stocks and 40% bonds. I will be emailing each of you a list of the positions, in addition to backup info on the new model. Please look for it in your emails. Can the Market Rally Without AI and a Dovish Fed? Stocks weathered more mixed tech news and conflicting economic data last week to eke out a small gain, but the price action of the past few weeks gives us insight into an increasingly important question once year-end positioning and window dressing stops and the calendar flips to 2026, i.e., can the market hold up if AI Enthusiasm and a dovish Fed aren’t helping it? The reality is that two of the most important pillars of the rally (AI Enthusiasm and expected Fed rate cuts) will not be in place as we start 2026. Regarding AI, it appears that we are moving into a phase where there are megacap winners (Micron) and potential losers (Oracle), depending on specific performance, and that fracturing, while not demonstrably bearish, will remove a broad, tech-driven tailwind that propelled the S&P 500 in 2025. Turning to the Fed, there’s a lot of uncertainty regarding future cuts, but the bottom line is that with the Fed very divided, regardless of who is the new chair, it’ll be hard to get the FOMC to pivot dovishly. And while there may be a rate cut in 2026, for all intents and purposes, the Fed is on hold. So, can the market hold up without those two previous tailwinds (AI Enthusiasm and dovish Fed)? The answer is yes, but only as long as economic growth stays solid. A few weeks ago, we showed that as long as economic growth is solid, the rest of the market can rally even if tech is weak. Similarly, the rest of the market can also rally even without the idea of looming Fed rate cuts, but the key is that growth stays solid and we do not have a slowdown scare. That does not imply that the uncertainty of the election will not play a part in the performance. It will, and that will be the principal reason for volatility, not AI or the Fed. As we look to 2026, the key is economic growth and the Midterm elections. If economic growth can hold up, then the “rest of the market” can rally. If the elections become more uncertain, that rally can be spotted. The rest of the market can be defined easily as RSP over SPY, but more broadly as cyclical sectors such as financials, industrials, materials, and consumer discretionary. From a style standpoint, it means value over growth. Which is one of the major themes of our new portfolio in January. We’ve seen this play out over the past month, as RSP has outperformed SPY, rising 4.6% compared to 3.0%, driven by solid economic growth. This has helped stocks broadly look past some fracturing of AI Enthusiasm and a hawkish turn by the Fed. Bottom line, this market will enter 2026 with weakened bullish tailwinds from AI and the Fed, but that doesn’t mean this market can’t 1) Hold 2025 gains and 2) Extend them as long as economic growth stays solid and there is more certainty to the elections. We will be watching both the economic gains and the elections. For now, taking a little more conservative position makes sense going forward. Securities and Advisory Services offered through Geneos Wealth Management Inc. Member FINRA/SIPC |
