HOW I SEE IT – by Bruce

Policy Driven/When uncertainty is highest/Broadening

Volatile equity markets - as I mentioned last week seems to be all government policy driven - as earnings are coming in quite good this season.

Positives:  AAII investment sentiment survey - 43.2% bullish/ 24.1% neutral/ 32.7% bearish - bearish reading climbs this week - again I think it’s all government policy.

RBC CM Strategy Spotlight - First, our main takeaways from week one of 4Q25 reporting season were that the companies that reported generally had a cautiously optimistic view on 2026, were particularly mindful of geopolitical risks, see a resilient and healthy consumer, and continued to emphasize productivity and efficiency improvements in their discussions of AI impacts to their own businesses. Second, we run through some of the more interesting points of discussions and questions from our year ahead outlook meetings with US based equity investors last week. These were optimistic on the domestic economic backdrop, along with questions on how long the low-earnings quality trade in small cap will last and our thoughts on how US equities price geopolitical risk.

Charts - Midterm elections - usually change is on the way. Party in the White House has lost seats in 20 of the past 23 midterms. One of the best scenarios for investors is a split Congress.

Charts - The Fed and yields - current market expectations are for a June and October 25 basis point rate cut.

Charts - AI could power the next productivity boom. In the past, it was electricity then computers and now transformational AI.

Fidelity - "Despite geopolitical tension, markets are quietly rebalancing. Beneath the surface, leadership is broadening and mega caps are pausing - a constructive shift in market tone. Textbook example of bullish broadening - not a zero-sum rotation. Breadth is healthier than it was in 1999. Momentum is normalizing. AI sensitive stocks are no longer surging ahead. Commodity sensitive names are now leading. Put/call ratios and investor surveys indicate bullish sentiment, but not euphoric. EPS growth is still driving the market. Earnings growth not valuations is driving equity returns.”

Ned Davis Research - “As we learned last year policy uncertainty matters less when the global economy is in solid shape. For now, the economy is holding up well. Our Global Recession Probability Model just updated for February, and it moved lower into the low-risk zone. Other leading indicators such as global macro sentiment and PMI’s look favorable too. US economy appears in good shape based on Q3 data and a tracking GDP now estimate of 5.1% for Q4.”

Jim Paulsen – “Careful what you wish for - Historically the best returns of the stock market come when uncertainty was the highest. Investors should embrace, not fear, uncertainty. Since the US economic policy uncertainty search into its highest quartile once Trump was elected, not only have stock market returns been fantastic, but participation across the stock market has broaden substantially. Uncertainty may be uncomfortable, but it also appears to be profitable. Wars, political discord, government shutdowns, no economic data releases, constant threats, tariffs as a way of life, widespread domestic political discord, bizarre executive order policies, legislation by the court system, constant political  demonstrations, and an economy managed by dot plots and press conferences. Simply put, uncertainty rules, so don’t run for a cover- INVEST. As recession fears recede, stock market participation to broaden - Stock market leadership could change dramatically. My guess is while recession fears may remain elevated during the next few months, they are likely to fade considerably during the second half of 2026. Stock market leadership could prove to be radically different from what it has been so far in this market.”

Dr Jeremy Siegel - “Believe markets has legs. Stronger economy. Value stocks & small caps lead 2026. Expect 2 rate cuts. Short rates very important to stocks. Tax cuts coming good for consumer. Strong GDP. Leverage good for small caps.  2026 year of AI user not just supplier - costs reduce & margins expand. Labor market will rotate. Not a recession. Consumer sentiment climbs 56.4.”

Tom Lee - “It’s been a good earning season so far. Now we are 10% reported and 81% our beating. QE is essentially starting when we get a new Fed chair - that’s going to be positive dynamic for stocks in 2026. The market tracking is strong in the first part of the year. We’re expecting draw down that feels like a bear market mid-year - then we will rally the fourth quarter. We like industrial’s, financials, and small caps. Buy the dip-stay on target still the most hated V shaped rally.”

Dave Picton - "The new K shaped economy has taken hold, and its consequences are shaping policy, markets and investor positioning. We have fiscal policy stimulus without a recession. Rising asset values have boosted household net worth and spending. A more supportive, global environment - opportunities for continued growth outside the US.”

Negatives. Fidelity - What to watch - Earnings and valuations may be peeking. Central bank policy could become politicized especially in the US. US dollar and long bond yields are unusually quiet. Global rotation is real and under exposed portfolios could miss it.

Watching Trump at Davos - the US is exporting its political dysfunction.

China is exporting their deflation.

Ned Davis - The accumulation of these policies whittles away at US growth and asset class exceptionalism and will likely contribute to continued US under performance.

Canada Top Risks 2026 report – “Militarizing the maple. A dependency trap. A Cruder world. A failure of immigration. The charter strikes back.  Eurasia Group risks.  US political revolution. Europe under siege. China’s deflation trap. AI eats its users. Zombie USMCA.“

Bear markets – “The next bear market might look exactly like historical data suggest and still be radically different if the correction is due to a reassessment of AI growth forecast.”

Brian Westbury – “The Fed Chose Politics. We prefer an independent Fed that pursued a monetary policy with zero to minimal inflation. Hopefully the next leader of the Fed will bring us closer to that ideal.”

Investment strategy – “Value investing. Never invest in a business you can’t understand and beware geeks bearing formulas” - Warren Buffett

Stock of the Days: CNQ, BLK, GDDY, ISRG

 

 

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