Weekly Digest: Fast forward

One of the joys of a world where most of the catalogue is on demand is that you can binge-watch old TV programmes when the January social calendar is slow and there’s nothing about the weather that makes you want to venture outdoors for long. My wife and I were latecomers to the cop show Blue Lights, set in Belfast, and had no difficulty bashing through the first three series in a week. Back in the day, we would still be anticipating Series One, Episode Two! 

A Marshmallow Test for investors

But the trouble with this sort of world is that it makes everyone impatient. Where is the next hit going to come from? (We’re holding off on The Night Manager until we can have a good run of episodes of that - I never took the Marshmallow Test as a child, but I think I would have ‘passed’!) This mindset appears to apply equally to electorates, politicians and investors. Voters increasingly clamour for more handouts and politicians readily promise them. Many investors are constantly searching for the ‘next big thing’ rather than relying on the longer-term compounding of steady returns. And increasingly using borrowed funds to accelerate the process. This may produce a short-term sugar rush, but it can come at the expense of long-term fulfilment. As investors this year we may be facing a Marshmallow Test, which we’ll need to pass by balancing those timelines. 

Here we go again!

A week or so into the new year, the market pattern feels familiar. Global (and many regional) equity markets (in the ‘risk assets’ bucket) have made new highs. But the traditional safe havens of gold and silver have also hit new peaks. Bond markets are relatively unmoved, as they were in 2025. We have already had a slew of geopolitical headlines, starting with US intervention in Venezuela, which led on to threats to other countries and territories including Colombia, Cuba, Mexica and, of course, Greenland. If markets seem somewhat flummoxed by the situation, maybe it’s because there’s no precedent for one Nato member potentially invading another one.

The Middle East is also back in focus, with the situation in Iran becoming increasingly unstable and the potential for the US to become involved in regime change. And over the weekend we had a new episode in the saga of the US government interfering in monetary policy, as grand jury subpoenas were issued to the Federal Reserve and its Chair, Jerome Powell. The charge is one of misleading Congress as to the nature and costs of renovations to Fed buildings. The irony cannot be lost on those observing the demolition of the East Wing of the White House, to be replaced by a ballroom.  Already an unusual degree of opposition to this ‘lawfare’ is mounting among Congressional Republicans, potentially threatening President Trump’s as-yet-unnamed nominee to replace Powell when his term ends in May.

If you thought that 2025 was wearing, then the only consolation is that you are match-fit for more of the same in 2026 – with the added spice of US mid-term Congressional elections in November. I think we can take it as read that Trump will pull every lever available to drum up support. This year he has already asked federal agencies to purchase $200bn of mortgage bonds and proposed outlawing institutional purchases of residential property to combat the poor affordability of homes (another reason for his pursuit of the Fed). He has also suggested a twelve-month 10% cap on credit card interest rates (which tend to be in the 20s). Don’t rule out cash handouts.

The bottom line

At the end of the day, equity investors must cut through the noise and focus on the profits companies are producing. Here the outlook is favourable, especially as the probability of a US recession remains low. Forecasts are for US earnings to grow by around 15%, with emerging markets delivering the same or better. Expected earnings growth for UK and European indices is closer to mid-single-digits, but potentially subject to upgrades if their economic cycles pick up. However, there’s little optimism about domestic growth in the UK and much scepticism about Europe’s ability to apply more fiscal stimulus or lower regulatory hurdles successfully.

Figure 1: Continued robust earnings in the forecast*

First, we must draw a line under 2025 as we head into the fourth-quarter earnings reporting season, starting with the big US financial services companies. This is one of the sectors that has made a new all-time high already this year. Merger and acquisition activity is on the up and there is the promise of more initial public offerings this year, with huge ‘tech-forward’ private companies including OpenAI, Anthropic and SpaceX potentially coming to the market. No doubt such activity has the potential to mark a short-term peak in sentiment, especially if it sucks cash from other parts of the market, but let’s get there first. 
The development of generative AI is one big theme that will persist into this year. It’s pretty clear that capital expenditure on data centres will remain robust, at least for this year, with potential bottlenecks in, for example, energy supplies being a longer-term concern. A potential supply crisis at PJM, one of America’s biggest grid operators, is front page news in the Wall Street Journal today, for example. Even so, investors remain keen to see some return on this spending. That, in turn, will rely on more productive uses of AI tools by the users. Here I would focus more on corporate users than individuals. 
 

One of the few companies explicitly to break out the benefits of AI is US logistics firm CH Robinson. It cited the automation of millions of manual tasks with fewer human errors, the ability to quote on new business in seconds (not hours or days), better customer service and the ability to optimise prices dynamically. Its shares rose 56% last year. Now that might not be on a par with AI-chip giant Nvidia’s almost thirty-fold gain over the past five years but imagine if more companies begin to report similar experiences. One of the key aspects of CHR’s success is that it created application-specific tools as opposed to using generic large language models. We would expect more companies to follow that path as adoption of the technology advances. Of course, competitive advantage means there could be losers too, and avoiding those will be key to investment success.

A little 'aggro' may be worth it

Investors appear to be contemplating some shift in market leadership this year (Figure 2 compares returns for the US tech sector and the wider index). Cyclically sensitive shares, those with lower valuations and smaller companies have started relatively strongly, especially in the US. And it’s positive and healthy that overall progress has been made despite a lacklustre performance from the Magnificent 7 leading technology shares.

Figure 2: US tech sector vs index total returns

It’s very rare for equity markets to fall when earnings are rising strongly. That tends to occur when interest rates are going up because central banks are trying to rein in activity. But they-re generally in rate-cutting mode for now. The average strategist’s target is for a 10.5% gain in the S&P 500 by year-end. That even builds in a modest decline in prices relative to forecasted earnings, which is prudent. If returns in 2026 end up looking like 2025, we’ll happily put up with the aggravation.