Our first thoughts for 2026.

December 15th, 2025

Please note that this will be the last weekly newsletter until January 12th.

We take the opportunity to wish our readers a warm holiday season and a healthy & prosperous New Year !

Thoughts of the Week

It is that time of the year again, when we bring the crystal ball out. In 2025, we had a few non-consensus thoughts that proved correct. In mid-December of last year, we talked about a potential big drop in the dollar and that China/Hong Kong could outpace the US stock market, and for these reasons we held an overweight position in Emerging Markets. We still see these two trends continuing into the start of the new year, but most probably with much less intensity.

Of course, trying to forecast how financial markets will finish in twelve months from now always looks like mission impossible, especially when seismic events have taken place. During the last three years, the AI revolution and Russia’s aggression have totally dominated the investment landscape as capital has flooded just a handful of industries and companies. Hence, the first thing to consider is whether this extreme bifurcation can continue or maybe the time has come for capital to spread into other, more traditional themes and sectors, which have been left in the doldrums by investors.

We have to acknowledge that we are entering the new year with all asset classes expensive vs. their own history. This fact alone points to expecting lower returns in 2026, but it should not necessarily produce a bad year. A few words first on the global macro-economic conditions. Economic growth in the Eurozone and other parts of Europe is expected to accelerate, due to the increased government spending, while we make note of the still very high savings rate of the European consumers, which bodes well for higher consumer spending in 2026. The US is in a peculiar situation where the ferocious spending on AI is boosting the economy while the wealth effect from the record stock market highs helps consumer spending of the top income Americans. But at the same time, the savings rate has fallen to multi-year lows, credit card balances have maxed out and unemployment is creeping higher, as inflation is at 3%. China seems to have stabilized its property market and the government has a put a corporate and market friendly hat on, while it has embraced the AI revolution. Interest rates around the worlds are relatively low and liquidity is ample, as also evidenced by the growing money supply.

This global environment is friendly for equity markets, and primarily for Europe and Emerging Markets. Especially for the latter, we will maintain our overweight stance for now, with our focus being primarily in Asia. An important factor to watch is the extreme concentration of the S&P500, which we have recently highlighted several times. We have already discussed the option to reduce exposure in index-linked positions and either assume a more active strategy in the US market or move capital in other indices such as the Dow Jones or the S&P500 equal weight. In Europe, perhaps it is time to become a bit contrarian and start reducing the expensive defense stocks and other industrial names, which have already discounted the rise in German government spending next year. If the government spending materializes and economic growth accelerates, it would be beneficial for consumer-related stocks (luxury, autos, apparel etc.) as well as the so-called cyclicals (energy, materials etc.) which we favor at this stage. Already these categories have started outperforming during the last quarter of the year, a trend which could become stronger in the following months. We are also looking into sectors and companies which can improve their operating efficiency, margins and hence profitability through the use of AI. Under this lenses, healthcare and financials stand out.

Bonds remain a big question mark. The continuous rise in long-term yields has confirmed our view which we expressed a few months ago to avoid long duration bonds, but in EUR they have reached again levels that are at least tempting. However, there are many reasons why we can still see higher yields, such as better economic growth, higher fiscal deficits, reforms in the Dutch pension plan, the ECB holding rates steady and perhaps raising them in the second half etc. Hence, we enter the new year with unchanged strategy, focusing on the short-end, favoring Emerging Market debt and acknowledging that credit spreads are too low to expect any meaningful gains from the traditional bond market. Positions in flexible bond funds should be increased, instead.

What caught our attention

The FED cut rates by 25bp, as expected. There were three dissents, two who voted for no rate cut and one who voted for 50bp, the recently appointed "puppet" of Mr. Trump. In the press conference, Mr. Powell said that the bar for the next cut is high and at the same time the median forecast of the committee members calls for just one rate cut in 2026. This is in stark contrast to the 3-4 cuts that the bond market had started to price-in and adds to the potential pressure of global yields to move higher, which we recently outlined.

The Swiss National Bank (SNB) left rates unchanged at 0%, also as expected, admitting that inflation has been lower than expected. It also lowered its inflation forecast for next year to 0.3% (from 0.5%). In terms of what happens next, negative rates appear to carry a very low probability, as the central bank knows that imported inflation at -1.3% (due to the strong CHF) is the main culprit behind the very low inflation. At the same time, the SNB raised its forecast for economic growth and putting everything together one can conclude that managing the currency (i.e. drive it weaker against its major trading partners) will do the job to stabilize inflation comfortably above zero.

Fears about the side-effects of huge AI spending resurfaced, after Oracle's quarterly results. The company published slightly lower than expected revenues, but raised its guidance of how much it will spend in the next quarters. With a stressed balance sheet already, the market became instantly nervous on Oracle and many much smaller companies who are also spending hugely with money they don't have and that they have to borrow heavily. If the return on capital for this spending does not appear in 2026, it would definitely spell trouble for parts of the Technology sector.

The ECB meeting on Thursday will gather attention. There is almost zero probability of any change in interest rates, but the market will anxiously look for hints of what next year has in store. Last week, Mrs. Schnabel, for many seen as Mrs. Lagarde successor, said that she is ok if the market starts pricing rate hikes for the second half of 2026. At the same time, Mrs. Lagarde said that in their last projection exercises they upgraded expectations for growth and "my suspicion is that we might do that again now". With higher expected growth ahead, and inflation around 2%, interest rates appear to be now at their bottom. Whether we see a hike or not in late 2026 is anybody's guess, but this is definitely not priced in valuations of European expensive growth stocks.

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Markets reaction

Global equities were mixed, which is the side-effect of the extreme weight of Technology on benchmark indices. In the US, Nasdaq fell by 1.6% dragging the S&P500 down with it (-0.6%), but the small caps index Russell 2000 rallied by 1.2%, and the Dow Jones rose to a record high with a 1% gain for the week. In Europe, most of the indices had a mildly negative week but with wild daily rotations between defense stocks on one side of the trade and consumer-related stocks on the other. Asia was broadly positive, with Hang Seng being an outlier (-0.5%) as the weight of Tech-related companies has significantly increased this year.

The bond market was weak. The USD yields rose by almost 10bp, with the 10yr reaching 4.20%, close to significant technical levels (4.25%) which could accelerate the selling if broken. The German yield also rose and the 10yr is now trading close to 2.90%. Corporate credit was under some mini stress, with spreads of Tech companies in the US rising, after Oracle's report.

Precious metals had a blast. Gold rose above 4300$ and Platinum is attacking the 1800$ price tag. But the "metal of the week" was Silver which registered a new record high at 64$, before profit taking took it down to 62$.

The dollar was weak, despite the fact that the FED meeting cast doubts on many rate cuts in 2026. The EURUSD spiked to above 1.1750 and it could be soon making an attempt to break out of the significant resistance at 1.1850, which we had highlighted when the pair was last trading there.

Chart of the week:

Is this year's US underperformance the start of something bigger or just a blip ?

The above chart shows the performance of the S&P500 vs the MSCI World ex-USA index. The reason it is more useful to use the global index that excludes the US market is that its weight in the MSCI World index is almost 70%, so its returns are "contaminated" by the performance of the US market. When the bar is green, then the S&P500 has outperformed the world, and in red the opposite. As can be seen this year (and if nothing changes dramatically in the remaining few trading days) the US market will underperform the rest of the world (ROW) significantly. Now for those with experience in financial markets of only 10 or 15 years, this looks very abnormal and even shocking, as they have been addicted to the US supremacy during that period. But if we take a longer look, since the 1990s, there have been extended periods during which the US was underperforming the rest of the world, just like in early 2000 and for a few years until 2010. And this is now the multi-trillion dollar question : are we getting again in a multi-year period of US equity market underperformance or this was just a blip and things will continue as "normal" for the years to come ?

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : UBS