On Air with Altair | 4Q2025
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U.S. ECONOMY ON SOLID FOOTING
The 2026 outlook is looking bright due to falling interest rates, continued AI spending and government stimulus via the One Big Beautiful Bill. The AI growth story has a lot of momentum. The biggest AI players spent many billions of dollars last year and Morningstar estimates that their spending will rise 20 percent in 2026. The One Big Beautiful Bill’s contribution for consumers will include higher federal income-tax refunds and businesses will get more generous depreciation and expensing. The bill also rolled back many regulatory requirements that could ultimately reduce costs.
FED POLICY FOCUSED ON JOBS
We think there will be at least two interest-rate cuts in 2026. Inflation is running slightly higher than the Federal Reserve’s 2 percent target but it is holding steady. This will allow the Fed to continue cutting short-term rates to support a weakening labor market. President Trump wants rates to be much lower than current levels, and the next Fed chair will be under pressure to make major rate cuts. But the new Fed chair is only one vote on the rate-setting committee – getting the other 11 members to agree will likely require persuasive efforts based on data and what is right for the economy.
FAVORABLE CONDITIONS FOR STOCKS
Even after three straight years of double-digit gains, we believe the U.S. bull market has further to run. While we like the outlook for large caps, we are staying broadly diversified and not chasing the biggest tech stocks, which are now a higher percentage of the S&P 500 than they were at the dot-com peak. We are also positive on small-cap and international stocks. Lower interest rates help small caps and they are poised to benefit from the spending increase built into the One Big Beautiful Bill. International markets are coming off their best performance in 16 years. They remain attractive for their lower valuations and economic growth potential.
OUR OUTLOOK
AI will stay at the forefront for U.S. stocks, but other sectors stand to perform well based on higher earnings growth. Attractive valuations look to provide additional tailwind for international stocks and small caps. We expect periods of volatility, but our clients’ diversified portfolios are designed with the goal of weathering market turbulence. And while inflation is a bit above target, we believe the Fed will prioritize cutting rates to protect the jobs market.