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Jan 15

First Quarter Forecast and Opinion

The economic outlook for 2026 is constructive, with GDP growth in the US estimated to be around 2%, and worldwide growth around 3%. Analysts expect S&P 500 earnings to grow at 15%, marking another strong year for corporate profits. Most sectors are expected to report robust earnings growth, with technology and industrials anticipated to increase by double digits, and overall corporate revenue growth at around 7%.

Stock valuations remain elevated, with the Cyclically Adjusted Price-to-Earnings Ratio (CAPE) ratio at 39, the second highest level in 150 years. As opposed to the dot-com era, current valuations are better supported in many sectors by earnings growth and business fundamentals, but they are still elevated. Transformative AI technology continues to present both opportunities and concentration risks.

Inflation appears to be moderating after the bump produced by last year‘s tariffs. The December consumer price index rose by 2.7% from 12 months earlier, but remains distorted due to the six-week government shutdown and thus risks being higher in reality. Inflation for consumer staples like food, electricity, and natural gas remain high, however, which is why “affordability” has become the primary topic of this year’s midterm elections. To boost affordability, as well as his party’s sagging popularity, Trump announced last weekend that he will be imposing a cap on the nation’s $1.23 trillion of credit card debt issued by banks. This would not be legal, because credit card regulation is set by Congress, not the president, and even under some sort of national emergency declaration, or the “Defense Reduction Act”, there is no credible legal pathway for a president to impose consumer credit interest caps absent Congressional authorization. Even if there were, banks would respond by instantly recalling much credit card debt from creditors, which would be highly contractionary for the economy. Banks would respond by closing accounts, slashing credit limits, tightening underwriting, standards, and millions would lose access to credit, negatively impacting consumption.

Other Trump “affordability” measures ahead of the midterms include planned restrictions for private equity groups on buying single-family homes to mitigate the housing supply crunch, and the announcement of a plan to purchase $200 billion of mortgage back securities to lower mortgage rates. On January 15, Trump announced measures to push the largest electricity grid in the US, PJM Interconnection, to make large technology companies pay for their own electricity needs due to AI data centers. The intent was to bring electricity prices down that have risen, on average, by as much as 10% in 2025 due primarily to data center demand.

The Trump administration has made several recent policy initiatives that have Wall Street on edge. On January 12, Fed chairman Jerome Powell said that the White House was threatening him with a D.O.J. criminal indictment over his renovation of the Federal Reserve building, which was approved by Congress years ago. Powell issued a press release calling this a pretext by President Trump to pressure him to cut interest rates. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president“ Powell said. “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead monetary policy will be directed by political pressure or intimidation.“

This is important because if Wall Street loses confidence in the Fed’s independence, the $32 trillion US treasury bond market – the largest market in the world - will suffer. If investors lose faith in the Fed’s ability to fight inflation through its interest rate policies, they will sell longer dated treasury bonds, increasing yields, and tightening credit throughout the economy, which is bearish for the stock market, the bond market, and the credibility and credit rating of the United States. A growing chorus of Republican and Democratic Senators, corporate leaders, three Ex-Fed Chairmen, five former Treasury Secretaries, and eleven global central bankers have loudly criticized the move by the D.O.J., potentially upending Trump’s choice to run the Fed in May. The larger the US federal debt, the more fragile this market becomes.

Trump‘s successful extraction of Nicolas Maduro from Venezuela has left the rest of the government in that country intact, which is why American oil companies are calling the country “un-investable“. In the past, Exxon, Mobil, Chevron, and Conoco Phillips have had billions expropriated by the Venezuelan government, and are loathe to commit any further capital, despite Trump‘s boasting that the industry would invest $100 billion to rebuild the Venezuela energy sector with US security guarantees. There has been no change in the regime, no change in statutes on legislation, no framework for moving Venezuelan oil in the ground to the United States, and no apparent plan of any kind. Trump‘s goal of rebuilding the industry in Venezuela has been thwarted by the perception that doing so is too risky and that there is no mechanism to rework the existing crumbling oil infrastructure there. Thus, the impact on oil prices so far has been nil.

The bellicose measures taken by the Trump administration against Venezuela may only be the beginning of a series of offensive geopolitical movements. The administration has committed to spending $1.5 trillion on their military budget for fiscal 2027, citing “troubled and dangerous times“. This comes at a period when the national debt now exceeds $38.5 trillion, or $111,000 per American. Precious metals, such as gold and silver have soared accordingly, as investors seek safe havens from a declining dollar, inflation, decreasing geopolitical stability, and ever mounting credit concerns, which are signaling unprecedented distrust in the US dollar and have caused it to lose 10% against other world currencies in 2025. Rumors of US military ambitions against Cuba, Colombia, Mexico, Iran, Canada, and Greenland are boosting defense stocks to new highs.

It should be noted that the forces that led to the government shutdown in November-December of last year will raise their head again at the end of January 2026 when the short-term funding bill expires. This will again create polarization in Washington and some possible volatility in markets.

The global space economy was on the order of $450 billion last year, with strong growth led by the private sector in satellite services and launch services. Advances in AI, robotics, and autonomous systems are boosting operational efficiencies and expanding what is possible in orbit. Space has become a domain of national and economic security competition among major powers (US, Europe, China, India), which is driving both public funding and private investment and accelerating technology adoption and investment flows. It is likely that SpaceX goes public in 2026, which will draw considerable public attention to the sector and may continue to drive valuations in the sector.

Gold and silver are not the only metals that are rallying. The world is consuming 30 million tons of copper per year, only 4 million of which is recycled. Mining entrepreneur Robert Friedland, at the Energy Business Summit hosted by USC in September, was quoted as saying that “To maintain global 3% GDP growth, we have to mine the same amount of copper in the next 18 years as we mined in the last 10,000 years (combined)….without electrification…data centers...solar and wind and the greening of the world economy.“ The United States is dependent upon China for almost every critical mineral. Japan’s recent aggressive language about Taiwan toward China was met with Chinese export controls on January 6^thof rare earth metals, permanent magnets, and other critical minerals required to produce defense technologies. Subsequently, both copper and rare earths have rallied in 2026 to reflect global demand and supply imbalances.

Grant Rogers