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Let's get straight to the point. Then, we will reach 7,700. That's the headline. It's shaping up to be a pretty decent year . Not as robust as the one we had this year. Why that objective? Well, we've had 3 years of 20% gains, as the S&P will likely close near 7,000 this year. Therefore, I believe there will be a slowdown in what the market can do next year.
But I think that 10% hides what will be a very turbulent year, similar to this year, where we had tariffs and a Federal Reserve that became aggressive again. Next year is one in which the Supreme Court could overturn the tariffs, and then we'll have a new Fed that will be put to the test. So I think we could have what looks like a bear market in 2026.
We finished strong. I mean, even with the new Fed and, you know, it's divided, as we learned once again yesterday. We know from what the president wants to do in terms of who he wants to appoint that the bias will be towards flexibility. Correct. So why all the turbulence surrounding that particular issue?
Mm, you're right. I think the real message next year will ultimately be that the Fed's backup option is back in play. So, you have one option of support from the White House and another from the Fed, which favors stocks. But before all that can happen, the new Fed chairman must be confirmed. It takes about 90 days from the time of nomination until confirmation.
And the markets always put the new Fed chair to the test . That's why I think the period from January to October will be a test for the Fed, even though we know it will be a dovish Fed and that this will lead to a support option. I think we're going to have, at least if you believe in the outlook, which is your own prerogative, a cut in an economy that is strengthening.
I mean, at the end of the day, that's what matters most. Isn't that partly what the last few days, yesterday and today, have been about? Yes. I mean, in my opinion, even though people presented it as an aggressive cut, it's actually quite bullish for stocks because the Fed is once again weighing the downside risk to the economy, which means the Fed's support option is back in play.
Furthermore, as you know, quantitative tightening has ended, and although it is not officially quantitative easing, the absence of tightening is equivalent to easing. I mean, you can call it whatever you want. If the effects of whatever they're doing are almost the same as what you'd call QE, the conclusion is that stocks went up and rates went down.
Yes. And if that remains the case, it will be difficult to go against the stock market in that scenario. Correct. And the right groups are responding, as you highlighted, small-cap companies reaching all-time highs, financials rebounding, and now what we want is for the ISM to improve, but if the real estate sector improves, then we will see a real expansion next year.
Look, when you're still talking about a wall of worries, I feel like that's already debatable. I mean, I felt it was debatable in the last few months, but once we get into the new year, do we really have a wall of worries? As I said, we expect the economy to strengthen. The Federal Reserve will have a more moderate stance, even with a new person in charge.
You will experience some of the impacts of the great and wonderful bill. You'll have what should be a better environment for mergers, acquisitions, and even initial public offerings. We could get some of the biggest we 've ever seen in the AI space, not to mention the AI trade itself. Is that really a wall of worries?
Well, those are definitely tailwinds, Scott, but in our conversations with customers we found skepticism about the valuations. Alright . Fears of an AI bubble. Fair. The Supreme Court's annulment of the tariffs is causing unrest at a time when the midterm elections are on people's minds. Would that be positive for the stock?
Well, it is and it isn't, because now it makes the policy and the chain reaction of economic effects uncertain again, because if the tariffs remain— and remember that the markets don't expect them to remain—then we can annualize many of the effects. But if we now talk about them being reversed, with some companies suing for refunds and then new tariffs arriving, that increases the lack of visibility.
So, on the topic of AI, how does the breakdown occur, and what propels the market toward your target of 7,700, and what falls behind? Well, I think the technology sector will probably have to digest the huge profits made this year until early next year. And we know that when technology starts to stagnate, people wonder if it's the end of leadership and the market will fall, or if it's just a turnover, and that's controversial.
Well, isn't that what's happening right now ? Yes, and you can see that the feeling hasn't improved in light of that. People have become bearish because of that. They've become bassists. I feel like this is confirmation of exactly what a bullish story would want to be. You might have, you know, a step back in the technology trade.
But man, if you get a rally in equal weight, a rally in the Russell, and a rally in all these other areas, that's what prevents the market from being affected by the underperformance of technology. That's a rational explanation. That makes perfect sense, but in our conversations with customers, people are more bearish now because technology is stagnating.
And this occurs against the backdrop that for 75% of the weeks this year, sentiment in the AAII has been negative . It's something you only see in the middle of a bear market. So I think people are somewhat entrenched in their pessimism even when we come out strong, and I think that will continue next year.
Wow, I mean, I don't know who you 're talking to. I feel like it's hard to find people who are bearish, so we have a couple of people at the desk that we're going to bring into the conversation now to see what they think. Cameron Dawson of NewEdge Wealth and Brian Levitt of Invesco, both here in Post 9.
You are not, you are not bassists. They're not bass players, are they? It's really hard to find a market that's in a clear upward trend, that has Fed support, fiscal policy support, where earnings estimates keep rising and GDP estimates keep rising, but this market has a price of perfection and expects perfection.
You have a forward multiple of 22.5 times, the earnings estimates look very full, about $309 per share. That includes 200 basis points of operating margin expansion . Therefore, it's definitely something you don't want to bet against: the great American power of margin expansion. However, it's quite a high bar to set.
But, going back to Tom's point, you're only in the 60th percentile in the institutional investor positioning survey. So there is still room for people to be reluctantly drawn into this market. Well, those are two ideas, two different ideas. There are the ideas, as Cameron says, of FOMO, of the pursuit of performance.
Then there's the realization of whether earnings will live up to expectations to justify the valuation Cameron suggests we're at , and to which we could expand. Yes, and I think we will. And you know, it's funny when you talk about listening to people's concerns , I mean, I think that's what I do. I hear people's fears all the time.
So they always sound somewhat pessimistic, but the context is still pretty good. It is in an environment where leading indicators are rebounding slightly. The Fed wants to loosen restrictions. Inflation expectations are contained. I mean, it's a good context. And our perspective at the start of the year at Invesco was about this expansion.
You know, many of the concerns we hear are about assessments, concentration. And the good thing about an environment with easing and a rebound in economic activity is that better value portfolios can be built, whether outside the US, small- cap or equal-weighted . You can build a better value portfolio and participate.
I mean, at 6,900 right now, the S&P has never been higher in terms of where it could close. And we're going to follow that through to the end. Just show optimism. You are, you are optimistic. I am an optimist. TRUE? I am optimistic. And look, when do I become less optimistic? If I have runaway inflation expectations, if I have credit spreads, they are not.
If I have the Fed having to become more aggressive, and they aren't. If credit spreads are skyrocketing, and they're not. No. So, for me, this is more about leadership. I am very convinced that this cycle continues. The question we have been debating is its direction. Are we gaining momentum here? And I think so .
And as momentum is gained , a different kind of risk is desired in the portfolio instead of 2023 or 2024, where global growth was doing nothing. Okay, let's stay on that topic and welcome another guest. Jonathan Krinsky of BTIG has a new note on small- cap companies today. So we wanted to bring it in to talk to you about it.
It's a pleasure to have you here, especially given the movement we've seen in recent days at least. Are we getting confirmation of a major breakup? Thanks, Scott. Well, there are a couple of points here. First, we had the Russell 2000 break out in September to new all-time highs, but the S& P 600, which is a small- cap index that has a yield component, really continued to struggle despite that breakout.
So, it was more of a lower-quality speculative breakout. And what we've seen in the last few days is that the S&P 600 is joining the Russell 2000 and is, you know, on a very narrow margin from reaching its own all-time highs. And when we think about small- cap companies, we're basically at the same levels as four years ago, in November 2021.
So, if this breakout can hold, there could be significant upside potential for the small-cap market. And at the same time, we are noticing some relative moderation or weakness in some of the "Magnificent 7". Nvidia has been performing somewhat poorly, and Meta is below its 200-day moving average. So, when you look at everything together and observe the relationship between small-cap stocks and the "Magnificent 7," we're starting to break out of a multi-year downtrend that began in 2022 and 2023.
I think it may have run its course, and it's definitely a theme we'll be watching as we approach 2026. So, it's okay that the "Magnificent 7" are relatively underperforming. You tell me there's still room for growth despite that, as long as the other parts of the market you mention continue to participate, everything is fine.
Well, yes, I think there's a difference between relatively inferior performance and outright weakness, right? And up to this point, I think it's really just a relatively inferior performance. I think the pullbacks in Nvidia and Meta are, you could argue, potentially changing the trends in Meta. It is probably one of the weakest of the "Magnificent 7", where the price is below the 200-day moving average and its slope may be tilting downwards.
So, if we start to see more "Magnificent 7" models featuring that configuration, it would be a major concern for the market. As things stand now, I think it's a function of what Tom was saying ; maybe you'll just get some lag or underperformance from the S&P. It might go up a little more, but the real profitability will be in small-cap companies.
Okay, interesting. We saw your note. We needed to talk to you about that , Jonathan. And thank you for your time. We appreciate you, Jonathan Krinsky , of BTIG. The lord of small capitalizations. We're having a good year. We've gone up 16%, okay? And much of this has been done in the last...well, not much, but a good amount we have seen in recent trading sessions .
Yes. Do you want to make another important prediction about this? Well. Small capitalization in 2026? You know, I just don't want to mess it up , Scott. That's why I'm subtly observing him. Because every time I feel confident about small caps, there's a kind of sudden disappointment. But it makes sense that small-cap stocks should outperform the market because the Fed is cautious and the ISM, which has been below 50, is finally going to rebound, and small-cap valuations relative to large-cap stocks have never been so cheap.
But you already mentioned that there will be this tension within the Fed environment due to a new chairman. If that leads to some kind of volatility or turbulence, as you say, won't that ruin the operation? Yes, I mean that in the short term it will . I think next year will feel like a full cycle again.
You know, a rebound at the beginning, turbulence and maybe a bear market, you know, a 20% drop like we had this year, but then we came out very strong and maybe a final rebound at the end. What do you think about that? Small-cap stocks have been the classic "be here for a while, not for a long while" trade, because since they peaked in 2021, we've had these little bursts of outperforming relative performance, and then they give it all back.
So they have hit new, relentless relative lows, and the reason is that the cuts in earnings estimates for small-cap stocks have been relentless. You started this year expecting a 40% growth in earnings. You got a six. Next year, there is an expectation of 50% growth in profits. That's why valuations of small-cap stocks look so cheap on the surface relative to large-cap stocks.
However, I don't think that small-cap gains necessarily deserve the benefit of the doubt that they can achieve that 50%. Rate cuts help because small capitalizations have a lot of debt and a lot of floating-rate debt, which should help with some interest expenses. But again, just because the consensus expects it doesn't mean you're going to get it.
I'm still thinking about this idea that Tom talks about, that you could have a bear market moment in 2026 before things sort themselves out. That's not going to feel very good. He won't . Do you agree with that? I mean, let's look at the S&P year-to-date total too, because we've had incredible performance in this market.
And there were a couple of moments where we needed a V-shaped recovery after big drops, and we got it each time, including the most recent one, where we've now completed the cycle and finished the V. As Mike Santoli likes to say, "We really finished the V ," and we were able to close at record levels.
Do you think this is a scenario that could happen? Well, there would have to be a catalyst, because, I mean, you have a 5 to 10% drop almost every year. To reach a 20% drop, you would probably need a considerable amount of political uncertainty or something to go wrong with the AI sector. And so, uh, my feeling is that it won't be because of the AI sector in 2026.
So, the idea of political uncertainty, I mean , the background really since the day of liberation has been a growing political improvement or a move towards greater clarity. Personally, I don't think a new Fed chief is going to push for that. To a large extent, as you say, Scott, it's because they're going to lean towards a moderate stance.
Now, if the market feels that the federal funds rate is going to 2% and long-term rates need to adjust, then yes, valuations should adjust in the market. But if it's: " Well, we could see low rates at 3% instead of 3.25 or 3.5," I don't think that's a 20% drop in the market . AI actions. I mean, obviously they're underperforming today, but there's still a lot of news being generated in that space.
OpenAI is launching its latest version of ChatGPT. Sam Altman was live on this network earlier today for an exclusive interview. McKenzie Sigalos provides us with an even deeper analysis of some of these stocks. Are we going to see more dispersion within the group? We ca n't talk about the " Magnificent Seven" as if they still operate as a monolith.
They don't. And they probably won't. TRUE? They do it and they don't. They are all largely connected to the same mega-theme. So I would say the answer is both yes and no. It's like they're all genetically related, but they don't all have to have the same career, you know? Um, so I don't know how to answer that, Scott.
I'll just say that yes, there was a time when you simply spoke of the " Magnificent Seven". Do you want to own the Magnificent Seven as if they were a monolithic group that trades as one, when what has been an arms race is now a battle? They're fighting amongst themselves about everything. You know, some do business with each other, but they're also fighting each other for AI supremacy.
Now, when we look back at the last industrial revolution, which was the development of the internet, with its infrastructure, mobile phones, Cisco, switches, telecommunications infrastructure, mobile operators and spectrum, they all peaked months apart and their correlation reached one when the bear market began.
So they will be listed as a group, even if we think they are separate. Do you agree with that? I think we're learning that AI is extraordinarily competitive, and that's what we see with this change between Google and OpenAI, about which one is better. This is markedly different from the near-monopoly businesses that these companies have been able to use to generate extraordinarily abnormal profit growth.
Therefore, a competitive business that requires a lot of capital implies a lower return on invested capital, which is very different from what these businesses used to be. How would you see it? I completely agree and I was also going to use the word monopolistic. It's a radical change, isn't it? These are businesses where , if you used social media, you knew where to go.
If you used to shop online, you knew where to go, but now everyone is competing in the same space and it's a heavy investment. So there's a bit of a difference, and you can see it even with Oracle, not necessarily one of the "magnificent 7" companies, but certainly one of the major hyperscalers. You know, you start looking at the debt-to-EBITDA ratio in some of these companies and that becomes a challenge.
So, yes, I don't think they're all going to be priced uniformly here. There will be winners and losers. It will be fun to watch and it will be fun to talk about it many times in 2026, which I know we will. Guys, thank you so much for having us all here. Leave Mhm.
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