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00:00 Josh
Well, let’s start right there, Tom. It says, uh, it looks like you are constructive. You do note risks. What are those risks in 2026, Tom? What do I need to be aware of?
00:15 Tom
You know, Josh, that the consumer kind of under underpins the growth story for 26 as usual in the economy. So the risk that we’re looking at is the potential for further weakness in the job market. If we were to see um an acceleration in layoffs where consumers become less confident about spending the money that they earn, you know, then that would be a different backdrop that that would uh you know perhaps not lead to that optimistic outlook for for 2026 that we see in markets.
00:46 Josh
You know, my old friend and colleague Larry Kudlow, Tom, always taught me, listen, concentrate on on profits. That’s what you need to focus on, Tom. What does profit growth look like in 2026? And is it broad, Tom, concentrated? What do you forecast?
01:06 Tom
You know, Josh, I think the the important thing on on Wednesday’s trading was that the market hit an all-time high, but it wasn’t tech that led the that the rally to the highs. You actually had highs in financials and industrials and that’s that broadening out of the of the markets to those more cyclical sectors like financials, uh materials and and uh and industrial stocks. And you look for earnings growth, you know, two of the top three sectors for growth rates are industrials and materials. So that’s that’s a broadening out of the economy.
01:34 Tom
It’s a broadening out of the market. You also see it down in midcap and small cap companies. and Josh, it’s almost like a a clean sweep where you’ve got Europe and Asia as well with positive earnings growth for next year.
01:50 Josh
You know, some strategists have come on the show, Tom. Honestly, they they they uh they sound a bit cautious about next year and the reason they’ll say is valuations. They’ll say we’re we’re looking just kind of stretched here. Granted we all know, Tom, valuation not a timing tool, but I’m curious what you make of that dynamic.
02:11 Tom
We think valuation can hold up here. I mean, as long as interest rates are are kind of stable to downward biased, if inflation is stable to downward biased, that usually holds inflation up pretty well and we’re not looking for, you know, infla you know, for you know, valuation to improve from here. We’re just looking to write earnings growth through higher stock prices. You already got that revaluation in in European equities, for example, where they were really kind of subdued and you got kind of a revaluation there.
02:44 Tom
And now you’re looking at 10% profit growth in Europe and and Japan, you know, high teens in in emerging markets and then broadly across the board in the US. So, we don’t think there’s there’s a a risk here of the multiple as long as inflation stays in check.
02:59 Josh
Tom, where where’s the Fed in all this? What’s your base case? How many cuts next year? And does the market require cuts, Tom, to move higher?
03:09 Tom
Yeah, our base case would be, you know, two potential cuts in in in 26. That gets the Fed down to kind of roughly a a neutral rate between three and three and a half percent. Um and then they can kind of gauge whether they they need to move off of that that neutral. Again, they’re they’re looking for inflation to glide down to their path. They’re looking for the labor market to kind of hold in there. That will kind of change their perspective on on the year.
03:36 Tom
We’ll get some insights into that next week when we get the minutes from their their their last meeting there in December. We’ll get some insights into what they were thinking there as they got to the end of the year.
03:47 Josh
Tom, another another theme you call out here, you see AI shifting from spend to profit. That’s interesting. What what are the what are the signs? What are the signals, Tom, as investors I should be watching to track that trend?
04:03 Tom
Yeah, you know, investors are going to see the companies that are making investments in AI, whether they’re tech companies, kind of building their own portfolio, or companies in other sectors using that tool to to improve profitability or improve their productivity. They’re going to look for the return on that investment. So, it’s no longer are you using AI or do you have an AI strategy? It’s what’s the return on that invested capital? And, you know, tech companies have had those really strong profit margins, you know, across the large cap tech space.
04:32 Tom
They’re going to look for that to hold in there and look for those other sectors like healthcare companies and financial services and other businesses that are investing in these tools to drive productivity.