Our panelists are (mostly) bullish on the economy and stocks. Tech is expensive but healthcare, utilities, and consumer names could rally in '26. Is the age of indexing over? By Lauren R. Rublin
If the stock market climbs a wall of worry, that wall is getting higher by the day. Take your pick: Pricey valuations, index concentration, circular finance, sticky inflation, and government debt are just a few of investors' many concerns. Then there is geopolitics, which took a shocking turn on Jan. 3 with the capture of Venezuela's president, Nicolás Maduro, and his wife by U.S. troops.
Yet, for all the worries, old and new, most of the investors on the Barron's Roundtable were in a chipper mood this year at our annual gathering, which took place Jan. 5 in New York. Most expect the U.S. stock market's growth streak to continue in 2026, fueled by rising earnings, falling interest rates, government stimulus, and consumer spending. What's more, they see many thriving companies whose stocks have yet to join the multiyear party on Wall Street -- but soon will.
No surprise, the future of artificial intelligence was an overarching Roundtable theme. Whether it lowers "the marginal cost of human intelligence to zero," as one panelist declared, or falls short of its promise, as another suggested, it is driving massive corporate spending and economic growth right now. Just for fun, we asked these 11 seers to identify other megatrends that will capture investors' attention in coming years. Their answers were varied and illuminating.
This week's edited Roundtable installment features the panelists' macro forecasts, including those of our newest Roundtable member, Christopher Rossbach, chief investment officer of J. Stern, a London-based investment firm, and manager of its World Stars Global Equity strategy. Chris is well versed in global investing and a die-hard fan of quality stocks, wherever they are traded.
We also include here the 2026 investment picks of John W. Rogers Jr., the founder, chairman, co-CEO, and chief investment officer of Ariel Investments, and Sonal Desai, chief investment officer and portfolio manager at Franklin Templeton Fixed Income. John continues to hold out hope for a long-overdue rally in small and mid-cap stocks, five of which he explores in detail. Sonal likes the prospects for seven fixed-income-oriented funds, and sees even more gains for gold.
We'll roll out the rest of the panelists' picks in the next two weeks. Read on for the first Roundtable update.
Barron's : This year began with a bang -- in Caracas. Where to from here for the markets, if not the world? Rajiv, kick things off.
Rajiv Jain: Our market view has shifted in the past 12 to 15 months. We believe the economy is softening across the board. We are seeing one- to three-year highs in the unemployment rate across almost all major nations. Inflation is unchanged, or higher. Interest rates are higher almost everywhere, except in China. Deficits are at a record percentage of GDP [gross domestic product]. There is still stimulus in the system.
The biggest driver of the economy seems to be the frothy stock market, which has seen a capex [capital expenditure] cycle, driven by AI. We are seeing signs of extreme late-cycle behavior, for example, in the debt financing of data centers. More than 60% of data centers are being built outside of hyperscalers [massive cloud computing companies] with heavy debt usage, far greater than in the dot-com era. Equity valuations are extremely high. In our view, you aren't getting paid to take risks. And that is without discussing geopolitics.
Where will the S&P 500 end the year?
Jain: We see significant downside to the market. A significant portion of earnings revisions are coming from capex. If Microsoft spends $100, it can write off that expense over a six- to 10-year period. But it shows up in revenue and earnings almost immediately at Nvidia or Broadcom or Amphenol. We believe earnings growth is going to slow down meaningfully for the biggest technology companies, not to mention semiconductor companies. We see the rate of change in capex peaking in 2025.
The biggest tech stocks driving the market are the companies ramping up capex. Amazon.com's capital spending is on track to be higher than its AWS [Amazon Web Services cloud computing] revenue. Google's capex is much higher than its cloud revenue. The company's margins went from 5% in 2023 to 22% last year as depreciation was extended to six years from three years. Go back four years, and the business was losing money on a net basis. We believe the true economic life of GPUs [graphics processing units] or TPUs [tensor processing units] is closer to three years.
The market for public cloud appears to be 90%-plus penetrated. The market leaders' growth has slowed. Public cloud and advertising are two key drivers for hyperscalers, but digital advertising penetration is also reaching 75% globally. The Magnificent Seven [ Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla] are mature, with slowing revenue growth and declining free cash flow. That should have a negative impact on the market -- and that assumes no blowup in the bond market or anything like that.
Can you estimate per-share depreciation costs across the Mag Seven?
Jain: It is hard to specify on a per-share basis, but in Alphabet's case, there could be a six to seven percentage-point hit to earnings in 2026.
Also, we believe that stock-based compensation is becoming an issue. At Meta Platforms, SBC was 10% of revenue for the four quarters ended September 2025. Amazon's cumulative free cash flow in the past five years was lower than that of Philip Morris International. Free cash flow is meaningfully deteriorating across almost all of the large tech companies. Google hasn't seen any growth in free cash flow since 2021 once you adjust for SBC-related flows, even as its market capitalization has doubled. If the biggest tech stocks and semiconductor names fall, that will take down the broader market.
Who wants to take the other side of this trade?
Todd Ahlsten: I can. We remain positive on the market. We have a year-end target for the S&P 500 of 7500 to 7800. That presumes a price/earnings multiple of 22 to 23 times earnings, on $340 in 2027 earnings. We consider four factors: What does the S&P 500 look like as an asset class? Is the AI buildout a generational theme? How does the U.S. economy look? Our fourth consideration is global liquidity.
To break them down, the S&P 500 is an incredible collection of companies, unmatched globally, that are investing in leading-edge technologies. The reinvestment rate in the U.S., or capex plus research-and-development spending divided by operating cash flow, is about 50% higher than in the rest of the world. U.S. companies continue to innovate, generate higher returns on capital, and widen their moats. They are in the catbird seat to monetize AI.
Rajiv mentioned potential cracks in the AI story, but we think this is a generational investment theme. Companies will invest multiple hundreds of billions of dollars annually for many years to come. There will be some rugged terrain, and perhaps supply-chain and power shortages and drawdowns in certain stocks. But AI will lead to a massive wave of productivity, and be a moat-widening event for U.S. companies.
Third, the U.S. economy looks pretty good in 2026. We expect growth of 2% to 2.5%. The economy has been incredibly resilient no matter geopolitics, policy variability, or the level of interest rates. With the midterm elections approaching, we are going to get fiscal and monetary support. Ultimately, we will have to pay for it, but it could be supportive of markets this year.
Likewise, global liquidity will be a tailwind for asset prices in 2026. U.S. regulators are lowering banks' SLR [supplementary leverage ratios], which will free up capital. The Federal Reserve will probably cut interest rates a couple of times, and $10 trillion of U.S. debt will mature.
This could be a topping year for the market given all the fiscal and monetary stimulus, and the AI-buildout narrative could top for a bit. But we see upside to double-digit market returns in 2026. There are a lot of good places to invest.
Christopher Rossbach: As Charlie Munger, Warren Buffett's late business partner, said, "Micro is what we do, macro is what we put up with." We have had to put up with a lot of macro. I agree with Todd on the macro. The economy still looks robust. AI is a transformational technology, given the opportunity it affords to achieve productivity gains, and we think we are at the beginning of that process. We don't yet have the computing capacity, infrastructure, or applications to fully realize its potential.
Turning to the markets, however, valuations are much fuller than they had been. We have had 10 to 15 years of solid index returns. A lot of companies aren't just fully valued, but overvalued. Stock-picking is going to matter much more than it did. The index era is basically over. There are some great companies with good growth prospects selling at reasonable valuations, and other companies, particularly in the consumer space, that could turn around. These consumer companies are the cheapest part of the market, and could offer great opportunities this year.
Every year, it seems, this group declares it a stockpicker's market. Yet stock market indexes such as the S&P 500 and Nasdaq Composite gain even more altitude and prove difficult to beat. Why will 2026 be any different?
John W. Rogers Jr.: There is more pressure to own the leading stocks in the indexes than I have ever seen. When people buy the same stocks just because they dominate the indexes, it is a sign of a market top. The Mag Seven account for 50% of the returns of the S&P 500. In the 12 months ended Sept. 30, if mid-cap growth managers didn't match the Russell Midcap Growth Index exposure to Palantir Technologies and AppLovin, it resulted in a 9% lag to the index.
I come from Chicago. The University of Chicago helped to make indexing popular. I have a lot of respect for the great thinkers such as [Vanguard founder] Jack Bogle and [economist] Burton Malkiel, who argued that indexing is the smartest investment strategy. But capitalization-weighted indexes have become concentrated today in so few stocks and industries that benchmarking investments to an index could lead to massive underperformance in the next five to 10 years. We expect that to open the door to a new period of stock-picking.
Ahlsten: S&P 500 companies, ex-the Mag Seven, are in an unbelievable position to monetize the massive investment wave in AI, widen their moats, and drive higher margins and earnings growth. They account for more than 70% of the index's expected 2026 net income, and they are undervalued. Some people think an AI selloff could lead to a market crash. I look at it another way: These companies have a massive opportunity.
Rogers: I'll add one other thing. Warren Buffett bought stocks in the Dow Jones Industrial Average when he started out in the 1960s. The Dow 30 reflected domestic industries. It was considered a great index. The S&P 500, with 500 names, was later thought to be even better. I haven't read any academic research about this, but maybe today's index isn't what it was supposed to be. Maybe it has morphed into something different than what its creators had thought. Everyone drinks the Kool-Aid and wants to own the index. But no one is doing the research to see whether equity indexes are as well constructed and relevant today as they were in the past.
Abby Cohen: I want to talk about valuations. If stocks are inexpensive, investors can deal with unpleasant news. But if they are fully priced, or pricing in a scenario that is wonderful, that is a risky situation with little margin for error.
The S&P 500, which is market-cap weighted, is trading for about 23 times forward earnings. On an equal-weight basis, it is trading for 17 times earnings. The gap is extraordinary, and speaks to the point others have raised: The opportunities from a valuation perspective aren't in the large-cap names any longer. They are in smaller-cap names.
If you take a more rigorous valuation approach based on discounted cash flow, the S&P 500 is in challenging territory. Thus, I find myself looking not only at the pleasant consensus economic and earnings forecasts, but also at what could go wrong. There is a long list in 2026.
What are your biggest concerns?
Cohen: AI-related capex has pushed up not only S&P 500 earnings but also U.S. GDP in the past couple of years. We should think about what will happen in the likely event this spending slows.
Another area of concern is private credit. A lot of money is going into this area, which has allowed companies to stay private for longer. But there is a lack of transparency regarding the quality and value of these investments.
I worry about crypto. Only a fraction of crypto-related transactions are for economic purposes. As crypto has become more widely used in the U.S., often through stablecoins, the use of margin debt has increased. Stablecoins can be backed by U.S. Treasuries but also by uninsured deposits at the issuing institution. There has also been a weakening of regulatory oversight and little international coordination.
We haven't talked about the U.S. debt situation. The federal debt has been growing, which is unusual when the economy is doing well. The Congressional Budget Office estimates that the 2025 omnibus spending bill will add $3.5 trillion to the debt over the next decade, and it isn't assuming a recession. An increase of this magnitude is disturbing.
Another potential risk relates to threats to Federal Reserve independence, which has been critical to our success as a nation and the dollar's status as a reserve currency. Lastly, for now, if the U.S. feels comfortable going into Venezuela, the Chinese may feel more comfortable going into Taiwan, which is vulnerable to naval blockades. There is also a global reliance on Taiwan's tech sector, which supplies 25% of memory chips and 45% of logic chips. Any destabilization there is a potential problem.
Most of these concerns pertained to last year, too, yet the market rose. Where do you expect stocks to end this year?
Cohen: My earnings outlook isn't as robust as Todd's, so I see a valuation for the S&P 500 in a range of 6700 to 7000. I don't see large gains for the index, but I see a rotation into stocks that haven't been winners, as Chris discussed. Some parts of the U.S. market offer good value. The U.S. consumer looks pretty solid. There are opportunities in healthcare, and diversification into international stocks makes sense. Last year I spoke about opportunities in some of the markets in East Asia. They did well because they were inexpensive and had good earnings growth. I would expect a rotation into some other markets this year. Later I will talk about India.
Sonal, what is the outlook for fixed income?
Sonal Desai: First, I want to talk about Venezuela. What happened wasn't unprecedented. The U.S. has a history of intervening in Latin America. We did it in Panama in 1989. What happens next is unclear.
Medium term, U.S. involvement should send oil prices lower. Venezuela was supplying around 800,000 barrels a day in the recent past, down from well over three million in the 1990s. I keep reading about the U.S. robbing Venezuela, but American oil companies had their Venezuela facilities expropriated in 2007. If U.S. and international companies can begin producing oil again in Venezuela, the price of crude will eventually come down. That could be negative for Canada, the other supplier of heavy crude, and the Canadian dollar. From the bond market's perspective, one implication would be the possible restructuring of PDVSA's [Petróleos de Venezuela's] debt, and Venezuela's sovereign debt.
The first several people who spoke today had little to say about Venezuela, which gets to the broader impact, or lack thereof, on markets. This particular geopolitical development is unlikely to have a substantial or lasting impact on markets.
Regarding the economy, my GDP forecast tops Todd's. I expect the U.S. economy to grow by 2.75% to 3% this year.
Ahlsten: I like that.
Desai: Consumption will be strong owing to fiscal tailwinds. Whether the deficit should have been expanded in the way it was expanded is a separate matter from the growth impact. Then, if the government sends out $2,000 tariff-rebate checks, as has been discussed, that will be substantially more even than the $1,400 helicopter drop in the first quarter of the Biden administration. The overall fiscal impulse will have a significant impact on consumption and inflation.
Second, the hyperscalers will have spent close to a trillion dollars from 2025 to 2026. That adds to the supportive growth backdrop. Third, the changing regulatory regime is important to the extent that it gets banks back into the business of lending.
Banks make money when there is an upward-sloping [Treasury] yield curve, and I expect the yield curve to steepen significantly this year. I would expect inflation to remain at the current 2.75% to 3% annual rate. The Fed shouldn't have cut rates by 25 basis points in December. [A basis point is a hundredth of a percentage point.] I don't think two more rate cuts are warranted this year. We might get one cut, but even that isn't currently called for.
I tend to be less alarmed than others about the issue of Fed independence, largely because we already have a dovish Fed. We haven't had a hawkish Fed chair since Paul Volcker. That said, further loosening [of monetary policy] would be a mistake at this point. I have said for a while that I think the neutral federal-funds rate [the rate that neither stimulates nor restricts growth] is closer to 4% than 3%. If additional rate cuts take the fed-funds rate down to 3.00% to 3.25%, we will essentially be looking at zero real rates.
That isn't a good place for an economy with productivity growth of 2.25% to 2.50% and inflation running close to 3%. The 10-year Treasury yield is higher today than it was before 1.75 percentage points of rate cuts. Clearly, the market is paying attention to inflation and the fiscal outlook. The 10-year Treasury yield could scale 4.50% this year, and approach 5% with significant further fiscal expansion.
Against this backdrop, I wouldn't be looking for major spread compression in fixed income. Emerging markets look attractive. The dollar came into last year overvalued against other currencies, and is now close to fair value against the euro. It is massively overvalued against the yen.
Scott Black: The accumulated national debt is $38.6 trillion, or 1.22 times nominal GDP. Money supply has been growing, and the Fed is no longer winding down its balance sheet. To the contrary, balance-sheet assets have been creeping up a bit. We have a $1.7 trillion fiscal deficit. The Fed is buying short-term paper. Who is going to fund long-term bonds? If the 10-year yield goes up to 4.5% to 5%, does that change the ballgame for the equity market?
Scott, you may have answered your own question.
Henry Ellenbogen: Every year there are reasons to be concerned, and this year is no different. I recently reread last year's Roundtable. Only two panelists thought the market would go up in 2025: Todd and me. I have the same concerns as the rest of you, and if the 10-year Treasury yield breaks 5%, the stock market will struggle.
We should also be concerned about the U.S. relationship with China. The issue isn't Venezuela. But if you believe the bond market and our relationship with China are under control, there are reasons to be positive about stocks.
You can't understate what is going to happen to productivity in this country. Based on where AI is now, the marginal cost of intelligence in white-collar work is going to zero over the next several years. I'll give you some examples. MercadoLibre is doing seven times the number of transactions it did several years ago, even as the number of customer service specialists has fallen to 7,000 from 10,000. Rocket Mortgage has said that it can serve 50% more clients per loan officer. In the physical world, trucking companies are using AI to leverage better data systems. XPO has 2% less labor hours per shipment, even with shipments down 6% this year. To Chris's point, you have to get your data in the right place. You have to build the right workflows. Most important, you need agile management.
Abby, your old firm [Goldman Sachs] has said productivity will increase by about 150 basis points a year each year over the next 10 years. There will be a wide dispersion in productivity gains between companies that use AI and those that don't. In coding, people say AI has led to about 30% more efficiency. The tools are getting better. I mentioned customer service. Harvey AI is doing the same in the legal space.
All this means a couple of things. Productivity will spread beyond the Mag Seven. I'm seeing the increase in productivity across my portfolio of companies and in early-stage companies in the private market. We are going to see a good IPO [initial public offering] market this year for agile companies harnessing the zero marginal cost of human intelligence to drive revenue higher and costs lower. And you will see a lot of large companies that can't harness this technology. They will either be left behind and shrink, or ramp up the learning curve. The U.S. economy didn't see a lot of productivity gains in the 2010s. Now, we are on the cusp of significant gains and that will drive markets.
Ahlsten: Leading-edge transistor chips have 100 billion to 200 billion transistors. They will have a trillion transistors by 2030. Exponential innovation will feed into what Henry is saying. It is pretty mind-boggling, and it is a deflationary force that will accelerate over time.
Desai: It doesn't have to be deflationary. That assumes the pie remains the same. Before the iPhone was developed, there were no app developers. That opened up a whole world. We don't know the limits of what we can do, or what the new economy will look like. AI may kill a lot of jobs, but that doesn't mean there won't be new jobs.
Ellenbogen: On the consumer side, customers are unlikely to see benefits from future improvements in the frontier foundational models. What is really interesting are the Chinese LLMs [large language models]. They aren't the frontier but can do things for a tenth of the cost of U.S. models. Companies such as Duolingo and Airbnb are starting to use these low-cost LLMs. So, on the consumer side, costs will deflate.
That is very different from the enterprise side, where knowledge workers are using AI -- in our case to do investment research -- or look for novel drug targets, or improve productivity in coding. Enterprises will continue to pay a premium for better intelligence powered by frontier models, which continue to advance at a rapid rate.
Those who say capex is going to implode may be looking at consumer-oriented AI technology, which has become commoditized. They aren't taking into account advances in intelligence that will drive advanced applications and scientific breakthroughs. Over the next 10 years, we may have 50 years of advances in medical science. Companies that climb the productivity curve first will be able to cut costs, reinvest in their customers, drive revenue growth, and reinvest capital to create enduring competitive moats.
Can productivity increase by 10% to 15% without an attendant drop in employment, and thus market turmoil?
Ellenbogen: Companies don't all climb the curve at the same pace. I foresee an unequal playing field. The Mag Seven will do well, and a lot of smaller companies born in this era will climb the curve and unlock productivity gains.
Jain: I foresee disappointment. We talk to dozens of companies monthly and large consulting firms focused on the AI rollout. There is almost no evidence of profit-margin improvement. People use AI to summarize email and do ChatGPT-type searches. Ninety percent of ChatGPT use is outside the U.S.
An important MIT study came out over the summer that found that 95% of AI projects found no real use. In our view, Microsoft Copilot has been a total failure. Low-cost Chinese models are working well. DeepSeek offers API [Application Programming Interface] pricing at 1/30th of the cost of Gemini 3.0. GPU pricing is in free fall. Based on our research, Nvidia's Blackwell chips can be rented for $4.00 an hour. Blackwell chips are already being rented at a discount versus just a few months ago. If demand was so strong, why have Blackwell rentals been collapsing?
There are 200 neocloud companies today. Depreciation rates are out of line with reality. H200 chips, for example, were selling at 50%-plus off within nine months of release. A few large enterprises mentioned to us that real economic life when used for training is barely 18 to 24 months.
Most of the growth at the cloud hyperscalers is coming from start-ups, and who is funding these start-ups? More than half of the $150 billion that start-ups invested in the cloud was funded by the large tech companies. This is a giant, circular trade. I agree with Henry that a lot of smaller companies will see productivity gains from AI, but margins are falling at the cloud providers. There is an incentive for semiconductor companies and other tech companies to talk up the benefits of AI, but there is little evidence of profit-margin improvement almost anywhere because of AI, except at companies selling shovels to the gold diggers.
Before we move on, Henry, what are your expectations for the market this year?
Ellenbogen: I see a lot of the things that Sonal sees. The government is concerned about the midterm elections and will try to stimulate the economy further. Tariffs are going down from today's levels. Not only will we have more stability on tariffs, but the rate of change is positive. The consumer has been resilient, especially at the high end. Unless we get a significant upside inflation scare or see increased tension with China, the market could see low-teens growth, in line with growth in earnings per share. Actually, our relationship with China seems to have improved lately.
Cohen: I want to pick up on Henry's comments about companies' differentiated success in implementing AI, and Rajiv's citation of the MIT study indicating that many companies are just spending money without seeing value. As is often the case when there is a transition in the economy, there are winners off to the side, and one of those is now the investment banking industry.
Many small companies have benefited from private capital, which suggests there may be a pickup in the IPO market this year. In addition, there may be a significant increase in M&A [mergers and acquisitions] activity.
Abby mentioned deals. That is your cue, Mario. How does the new year look to you?
Mario Gabelli: When I speak to students, many are concerned about their jobs because of AI. Scott Black was a monk in 1450. He used to transcribe words by hand. Then Gutenberg came along with a press and Black was out of work. He had to re-engineer himself. The beauty of the American system is the ability to re-engineer and adjust.
The International Monetary Fund puts the global economy at $123.6 trillion. The U.S. is 25.7% of that; the European Union is 18.3%, and China is 16.7%. Higher costs are impacting consumers, and even the tax bounty we foresee in the spring won't have a significant impact on lower-income consumers.
U.S. real GDP will probably grow by 2.5% to 3% this year. Corporate revenue will rise because of the dollar's weakness. About 30% to 40% of S&P 500 earnings come from outside the U.S. LIFO [last in, first out] accounting is crippling margins, however, reflecting the higher cost of inventory hitting the gross profit line. We will find out in a few weeks whether the Supreme Court rules against the Trump administration's imposition of tariffs, although [Treasury Secretary] Scott Bessent may have alternatives to tariffs on imports from individual countries. Pretax profits should do well. Accelerated depreciation of 100% [a tax incentive] doesn't help earnings; it helps cash flow.
Equity multiples are a function of confidence and interest rates. If GDP rises 2.5%, the 10-year yield may climb to 4.5% to 5%. But on the other side, confidence is phenomenal.
During 2025, U.S. mergers, acquisitions, and deal activity rebounded, with total deal value reaching approximately $2.3 trillion, a 49% increase from 2024. The year was characterized by a resurgence of megadeals [greater than $10 billion] and increased private-equity activity, particularly in the second half, driven by interest-rate cuts, regulatory relief, and strategic AI demand. Technology, healthcare, energy, utilities, and financial services were the key M&A sectors. The business community is going to do just what Abby said: engage in corporate lovemaking. We will see more financial engineering, spinoffs, split-ups, and other deals.
As for stocks, we had a similarly great economy about 40 years ago, in 1987. Everyone was bullish. A firm named Leland O'Brien Rubinstein, or LOR, sold put options to protect portfolios. Does anyone remember this?
Cohen: Portfolio insurance!
Gabelli: Well, the market dropped 23% in one day. Now I am concerned about prediction markets, which are unregulated, and private debt, also unregulated. Other market mechanics are also worrisome: leveraged ETFs [exchange-traded funds], high levels of margin debt, an influx of retail investors. If and when we have a market correction for whatever reason, these things will accelerate it significantly.
My worries and wild cards for the economy and stocks include a soft labor market, higher inflation, and a higher 10-year Treasury yield. A selloff in the Magnificent Seven and AI-related stocks looks reasonable to me. Also, there will be a new Fed chair and midterm elections; there could be a second government shutdown; and I am concerned about geopolitical challenges in the Middle East, Ukraine, and elsewhere. The imminent U.S. Supreme Court ruling on the administration's use of the International Emergency Economic Powers Act to impose tariffs could invalidate these tariffs and force more than $100 billion in refunds to importers.
Put it all together, and what do you want to own? We hope every politician wants to spend money on advertising ahead of the midterm elections because we own shares in a lot of TV broadcasters. The government will stimulate the economy ahead of the election, as others have mentioned. But there could be investor fatigue thereafter, as the market may have discounted this stimulus. I expect stocks to end the year slightly higher, but it will be a choppy year.
Meryl, where do you stand?
Meryl Witmer: I am still staying focused on individual stocks. But given that I have only three picks this year and would categorize them all as special situations, I would say the market is on the pricey side.
Scott, you aren't a monk anymore. You are a Boston-based money manager. Give us your take on the economy and the market.
Black: Standard & Poor's is estimating $310.84 this year for bottom-up S&P 500 earnings. That represents an 18.1% increase year over year, which seems aggressive. I am estimating a 15% increase in earnings, to $302.
The S&P closed Friday [Jan. 2] at 6858.47. It is selling for 22.7 times my estimate of earnings. It is overpriced, considering the historical multiple is 16 or 17 times. The Nasdaq is trading for 25.6 times earnings. The Russell 2000 trades for 22.5 times, although 40% of the index has no earnings. Small-caps as an asset class aren't cheap. With earnings growing 15%, however, the market can rally 10% to 12% this year, barring some sort of shock.
We have talked about market concentration, and I have calculated the numbers. At year end, the 10 largest-cap stocks accounted for 39.6% of the S&P 500 and 53.7% of the Nasdaq, respectively. Yet, only three of these companies have P/E ratios way out of bounds. Apple trades for 33 times this year's estimated earnings. Broadcom has a P/E of 34, and Tesla trades for 200 times. The rest are high, but not outlandish.
Witmer: Well said, Scott.
Black: Thank you. Like you, we do a lot of mathematical screening. It is getting increasingly difficult to find good values, but most people aren't in the value branch of investing these days.
Another area we haven't touched on is the housing market, an important component of GDP. Housing is still moribund. The house price-to-income ratio is at an all-time high. There is pent-up demand for three or four million homes, but they aren't going to be built. Then there is the K-shaped distribution of wealth in the U.S. The top 10% of the population accounted for 49.2% of consumption last year.
The average American is hurting. Income inequality in the U.S. is the greatest it has been since the 1920s. It affects political outcomes, as we saw with the recent election of Zohran Mamdani as New York's new mayor. Another issue is that the interest on the federal debt is higher than the defense budget for the first time ever in this country. The defense budget for fiscal 2026 [ending Sept. 30] is $893 billion. The Congressional Budget Office puts the interest expense at $1.01 trillion. We are spending into oblivion and have lost control. But ceteris paribus [all things being equal], the stock market will do well this year.
David, give us your two cents.
David Giroux: We don't spend a lot of time trying to predict S&P 500 one-year forward returns. Our team spends 99% of its time trying to find the 60 best risk/reward ideas in the S&P 500 for the next five years.
Having said that, we do an annual, bottom-up, internal-rate-of-return analysis for almost every S&P 500 company once a year. It allows us to create five-year IRRs for each. Right now, that analysis indicates a 6.8% internal rate of return for the market over the next five years. That isn't great or disastrous. It doesn't assume that AI productivity will drive incremental margin expansion, or a bad-outcome event. Interesting implications emerge from our micro analysis.
Such as?
Giroux: Theoretically, there should be a strong relationship between a company's algorithm, or earnings-per-share growth rate plus dividend yield, and its price/earnings multiple on next-12-months earnings. Historically, the market has awarded firms with a lower risk profile, or lower beta, a higher P/E for a given algo. In the past two years, however, there has been a steady erosion in the relationship between algorithms and P/E ratios across industries. Within financials, consumer discretionary, and industrials, companies with 8% to 11% algos trade at materially higher multiples than companies with a similar profile in other sectors. For the long-term investor, that creates cross-sector arbitrage opportunities.
This is a sign of speculative excess, and favors lower-risk stocks such as nonpharma healthcare, utilities, and software companies with low-to-mid-teens IRRs. Banks, industrials, and many consumer discretionary stocks look horrible. They have low- to mid-single-digit IRRs. Paying above-average multiples on above-trend earnings is the kiss of death for investors in cyclical businesses.
Now, let's look at the Mag Six plus Broadcom and Tesla. Their valuations are reasonable, with the exception of Tesla, which is no longer a stock but a personality cult or a lottery ticket trading at probably six times an aggressive sum-of-the-parts analysis. Amazon trades for 29 times earnings, Microsoft for 27 times, and Meta Platforms for 23 times.
Alphabet might be a little ahead of itself at 28 times earnings, given positive sentiment about Google's TPUs and Gemini AI applications, but the multiple isn't crazy. Apple is expensive but is launching a high-price foldable phone this year and is the cheapest of the Mag Six on the basis of price to free cash flow. Nvidia trades for 24 times earnings estimates that it is likely to beat, and Broadcom, at 34 times earnings, looks expensive but should profit from TPU growth and custom chips, and is much less expensive on 2027 estimates.
What is your larger point?
Giroux: The most expensive parts of the market are the cyclical areas I just mentioned, high beta, and stocks including Walmart, at 39 times earnings, and Costco Wholesale, at 43 times.
My last point concerns AI. About 33% of the S&P 500 is currently highly correlated to artificial intelligence pure-plays such Nvidia. What is fascinating is how much has changed in the past year with regard to AI. OpenAI, which had the leading LLM from a performance perspective, was leapfrogged by Gemini. Anthropic seems to be making good progress on the business side. Meta's latest version of Llama was a flop, and now it is in catch-up mode with a super team. Maybe the most important development is simply that we are seeing real competition within the GPU space, and it is likely that LLM companies and hyperscalers are going to have more than one option for GPUs.
Anthropic has basically proved that if you have enough engineering talent and time and willpower, you can do training and inference across multiple chip families, with an orchestration layer directing workloads to the best and most cost-effective solution. The emergence of GPU competition has the potential to redistribute rents within the AI ecosystem. That probably benefits Broadcom and Advanced Micro Devices at the expense of Nvidia, and it probably benefits cloud players such as Google, Amazon, and Microsoft.
Last January, no one here mentioned the prospects for gold or silver, which had thunderous rallies in 2025 and outperformed almost all stocks. What did those rallies tell us, and where are precious metals prices headed now?
Cohen: A few things happened. No. 1, the dollar fell sharply from an overvalued level. Inflation was also a concern. Many investors were looking for a hedge. Heading into the year, some people thought cryptocurrencies were an appropriate hedge, but that didn't work out. Precious metals became attractive, and not just in the U.S., but also in India, China, and elsewhere.
Energy is the largest component of commodities indexes, and moved inversely to gold. It seems that money came out of crypto and energy and moved into precious and industrial metals. Some of the flow-of-funds data support that idea.
Gabelli: Our gold expert, Caesar Bryan, was a barrister. He sold his robe and wig, joined a sell-side firm in London, and has now worked for us for 30 years.
I'm the Chinese government. The U.S. and I are going to have a challenge somewhere. I don't want to have dollars. I'm buying gold.
I'm in Dubai. I need a store of value, and crypto can get hacked. So, I am buying gold. Platinum, palladium, and copper are seeing the same dynamic. Gold has been a store of value for millennia. Governments have trust in it, and individual investors speculate in it.
Gold is trading for $4,300 an ounce. Does the former barrister have a price target for this year?
Gabelli: His gold fund was up 167% last year. He was going to retire. Now he is sticking around.
Desai: The dollar still dominates global central bank holdings. It is the euro that has suffered. Gold has risen, substituting for the euro as the second-largest holding for central banks.
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January 09, 2026 21:30 ET (02:30 GMT)
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