Summary
Highlights
Towards the end of 2025, a record government shutdown significantly impacted economic growth and data collection. Experts discuss key drivers for 2026, including 'production for security' focusing on domestic manufacturing for national security interests like chips, data centers, and critical minerals. Electricity emerges as a major election issue, with some states embracing deregulation while others resist. Tariffs are starting to impact company spending and growth forecasts, potentially slowing AI and data center investments and creating a drag on the economy.
A significant injection of cash is expected in the first half of 2026 due to tax cuts, primarily benefiting upper-end households, and full retroactive expensing. Deregulation and an expansion of credit, especially private credit, are also anticipated. While these measures are expected to boost growth to 2.3-2.5%, there's skepticism about how much companies will invest in growth versus using it as a buffer. The market and economy are diverging, with the market potentially becoming nervous while the economy hums along, benefiting smaller and mid-sized companies.
Despite a recent Bank of America survey showing the most bullish fund manager sentiment in three and a half years, there's a disconnect with the real economy. This optimism makes the market vulnerable to heavy selling with any hiccup. Tech companies are expected to be more cautious with spending, moving away from 'spend at all costs' mentality. Concerns exist in both private and public credit markets regarding funding data centers, AI, and energy production, leading to potential market headwinds until a degree of nervousness returns.
The US economy enters 2026 with uncertainties, including the labor market, AI market bubble concerns, and interest rates. While focusing on AI development, the real challenge lies in AI adoption across industries. Experts believe AI adoption will take hold, leading to significant productivity growth, especially if corporate America increases its adoption rate. Personal experiences illustrate AI's power for research, checking writing, enhancing presentations, and summarizing reports.
The bond market faces tremendous supply from both public and private sectors, with data centers alone issuing substantial debt. A significant deficit (6% of GDP) at this stage of the cycle raises concerns. There's a risk that the bond market's strong appetite might diminish, potentially leading to a repricing of risk. This highlights the importance of not relying solely on a central scenario but considering multimodal distributions and alternative outcomes, a lesson learned from recent years.
2025 saw mainstream crypto adoption with Bitcoin reaching new highs. The Clarity Act in the Senate aims to establish a market structure for crypto in the US, building on a stablecoin bill passed earlier. The Genius Act has led banks to explore stablecoins, anticipated to drive greater adoption, utilization, and efficiency in financial services. While leverage in Bitcoin is acknowledged as a risk, market structure legislation is seen as key to defining regulations and addressing such concerns, facilitating the market's evolution.
Tariffs, trade policy, and geopolitics were market movers in 2025, with uncertainty continuing into 2026. Companies are advised to prepare for ongoing volatility in specific product and country rates, and the introduction of new trade restrictions and incentives. Scenario planning is a crucial tool for executives to manage these unpredictable geopolitical risks. Geopolitical competition for scarce resources like critical minerals and fresh water, essential for data centers and electricity production, will also drive government policies and corporate strategies.
Capital is becoming another scarce resource, with geopolitical competition and the politization of capital allocation reshaping the global financial system. Sovereign debt issuance is at an all-time high, and growing debt servicing costs could lead to fiscal pressures in some countries, impacting private sector access and cost of capital. 'Sovereign AI' is a major theme for 2026, as governments globally prioritize accelerating AI value chains and algorithms within their economies for economic and national security, focusing on critical minerals, semiconductors, data centers, and data itself.