Talk of the Tape: Is 2026 market optimism too high?

Mike Santoli (Senior Markets Commentator) 00:00.000

Uh, talking the tape, are these expecta expectations too hot or are they just right? Let's ask MJP's Brian Vendik, 3414 Research is Warren Pies and CBC contributors Sandhill Global Advisors Brenda Vingello. Welcome to you all. So, so Brian, I'll I'll pose that to you. You know,

Mike Santoli (Senior Markets Commentator) 00:17.480

a client comes to you and says, "We want a great three-year run. Some of the leading stocks are up huge. Maybe I have uh, you know, heavy allocation to equities. What are we doing now? We adding risk, we subtracting it, we just moving it around to other areas areas?

Brian Vendig (CIO) 00:30.760

Well, I think, Mike, the fourth quarter is a great indicator of that because I think investors are being a little bit more conscious about valuations and making sure that they're not overpaying for growth. Because we've seen in the short term, obviously valuation stretch on the

Brian Vendig (CIO) 00:43.640

growth side of the house, but we've also seen earnings come out for next year, expecting 15% growth year-over-year, more contributions coming from areas outside of tech. And I think also when you think about a tax incentives, deregulation, neutral fed, that plays a little bit

Brian Vendig (CIO) 00:58.520

more into the cyclicals, so financials, industrials, real assets, catching a bid, and I think investors are thinking about positioning. So, that's that's I think where investors are going into 2026.

Mike Santoli (Senior Markets Commentator) 01:09.120

So, you would essentially ride that type of a rotation into next year.

Brian Vendig (CIO) 01:14.280

I don't think this is the backdrop to pull off of risk. Wow I think I think the key is diversification and also making sure that you're watching the yield curve because I think the one thing in the horizon is if yields get above 4.5% on the tenure, we have seen that as an

Brian Vendig (CIO) 01:28.360

indicator of a risk off sentiment. Yeah.

Mike Santoli (Senior Markets Commentator) 01:31.440

We are not. And just really just to amplify your point and uh you know Brenda we can start here. The S&P over the last basically two months uh is essentially flat. We got the 6900 in the S&P late October. Uh you've seen uh financials up about 5% since then. Transportation stocks

Mike Santoli (Senior Markets Commentator) 01:47.480

up 5%. Software down seven. Home builders down. Of course crypto has had it rough. So how are you viewing things in terms of whether this is just kind of a stutter step in the tech led rally uh Brenda or is it an enduring change?

Brenda Vingiello (CIO) 02:03.280

I don't think it's enduring change, but I think it's healthy to have a little bit of a pause, especially on the tech trade that was responsible for so much of the strength that we saw from April really through September. So but I do think when we look at fundamentals, I think

Brenda Vingiello (CIO) 02:19.640

the story continues to be strong. Our concern is that is very well defined and everybody is expecting 2026 to be a strong year. And generally, markets perform best when there is some level of skepticism, which maybe we've had a little bit of that in the tech trade more recently.

Brenda Vingiello (CIO) 02:38.880

But nevertheless, when there's a little bit of skepticism and there's room for upside surprise. And we look at this coming year, we have projections for mid-teens earnings growth for the S&P 500. Valuation is elevated, expectations for economic growth are high. So it just we we

Brenda Vingiello (CIO) 02:56.960

have to ask ourselves, where is the upside is going to come from. And I I think it could come from areas outside of tech. If other companies and industries can really figure out AI. And what we saw over the summer, especially with the MIT survey that came out, is that a lot of

Brenda Vingiello (CIO) 03:12.560

companies were were working with AI, but not having a lot of success. Um so if we start to see that success grow and manifest itself in better profitability in some of those sectors outside of tech, then I think that could be where the surprise comes from. But we think it's

Brenda Vingiello (CIO) 03:29.120

really important to stay disciplined in this environment. And so, we have generally been trimming equity as markets have been at or near all-time highs, and we expect to continue to do that as next year progresses.

Mike Santoli (Senior Markets Commentator) 03:41.880

Well, Warren, I mean, I guess you're kind of in that camp of folks expecting further, you know, kind of good things here. The 7850 on the S&P, your year-end target for next year. What what gets us there in your view?

Warren Pies (Co-Founder) 03:54.880

Yeah, I mean, I think you have when you stand at the beginning of a new year, you have kind of a process of elimination go through because we're never going to see all the the wiggles that happen throughout a year. So we have the big picture is Fed is easing. I think that's

Warren Pies (Co-Founder) 04:07.080

pretty well known. It's just a matter of how much, two, three cuts, we think three. We don't see a recession. I mean there's been some fiscal contraction, but we still have, historically high fiscal deficits, and we think those will expand in the first half of the year due to

Warren Pies (Co-Founder) 04:21.040

the big beautiful bill impacts. And then we have earnings growth accelerating. We have Q4 earnings estimates. This is really important. Q4 earnings estimates have accelerated And that's not what you see usually seasonally. This is the fastest acceleration of Q4 earnings we've

Warren Pies (Co-Founder) 04:35.200

seen since the post-COVID recovery in 2020. So when you put all that together, it's really hard in my opinion to to construct a bare case. I understand the valuation point, but we've we've looked at that and they they don't concern us. In fact, I think what we see is margins

Warren Pies (Co-Founder) 04:51.440

expanding by 90 basis points in the Fed cutting and so again, we can't we've never seen it a year historically where multiples even contract under those conditions. And so, it's all lined up. I think the the Goldilocks environment that we've been in really post-liberation day is

Warren Pies (Co-Founder) 05:06.600

going to be with us at least through the first half of the year. That's when I think all the cyclical disinflation that's in the pipeline continues to come through. If there's going to be a problem next year, I think it's going to be later in the year when we start to identify

Warren Pies (Co-Founder) 05:20.540

the end of the Fed's cut cycle and in the rates market it's going to have to reckon with what that means exactly in the yield curve may normalize. But up until that point, I think it's they're pretty strong tailwinds to the bull market.