2026 Key Questions

January 7, 2026

As always, our outlook has some big unresolved questions that need answers.  I’ve separated these into two buckets:  

(1) questions that WILL be answered, and

(2) questions I hope will never be answered.

Questions that will be answered in 2026:

AI growth

How sustainable will be the growth tailwind from AI capex spending?  And how much economic productivity will the economy benefit from increased AI usage?

Market valuations

As discussed ad nauseum in our companion market outlook post, the market PE is elevated but nowhere near all-time highs.  Will that PE keep rising in pace with the prior 10 years?

Workforce recession

Unemployment is rising, and job growth is barely positive.  This is largely due to a recession in US manufacturing, trade uncertainty, and (possibly) AI job losses.  Some bulls say that the lack of job growth is due to slower labor force growth (due to immigration shutdown).  And the unemployment increases are only modest.  Those are valid arguments.  But still, the trend lines are pointing in a bad direction.  Will these trends turn around in 2026?  Or will we dive deeper into a workforce recession?

GDP Growth

Unlike the workforce, GDP growth is still fairly steady at the moment.  Spending by high-end consumers remains robust, and productivity gains are very strong.   The current thinking is that productivity is coming from better technology. (ie, work from home, AI, internet-of-things, etc).  I see no reason why those trends should not continue in 2026.  So we could get a bifurcation in the economy – GDP growth remains strong, despite a weak labor market.

USMC Negotiation

Everyone remember NAFTA?  Well, that was replaced by the USMCA in 2020.  It was negotiated by the first Trump administration.   USMCA is a comprehensive agreement that negotiates nearly every aspect of trade and tariffs between US, Mexico, and Canada.   It is set to last until 2036, but it mandates a “review” every 6 years.   2026 will be the first “review” of the USMCA.  Needless to say, this will be drama-packed.  Mexico and Canada remain the United States’ two largest trading partners.  So uncertainty around trade policies with those two countries continues to cause economic uncertainty in all three countries.  

New Fed Chair

At some point this month, President Trump will nominate a new member to the Federal Reserve.  That new member will be his nomination to be the new Fed Chair when Jay Powell’s term expires in May.  As a reminder, Fed decisions are made by vote of a committee of 12 members.  However, the Fed Chair is the most prominent member and has the power to “set the tone” for upcoming policy.  Who gets picked and how they manage the Fed will have a big impact on the market.

Inflation dead?

Inflation has still not returned to the Fed’s target of 2%.  However, in 2025, tariff policy boosted the prices of goods presumably in a “one time” fashion.  (Unless of course we get more tariffs in 2026.)  Could this be the year when overall inflation falls back below 2%?  That certainly would be music to the market, as it would allow for further rate cuts towards 3% or maybe below.  

Questions that I hope will never be answered

US leaves Nato?

With the current drama over Greenland, the probably that the US leaves Nato is greater than zero.  What would happen?  Well, the two immediate effects would be a rise in “global risk” and increasing threat to the US dollar as the world’s reserve currency.  The rise in “global risk” would be most pronounced.  If European countries ask the US military to leave (as some EU officials have said), then the US would lose a vast amount of power projection over Russia and the Middle East.  Needless to say, market PE multiples would likely drop meaningfully to account for this increased global risk.  

“US Intervention in the US”

This is a grab bag of things.  Constitutional crisis.  More intervention in private company activity.  Deployment of troops with borders.  New disease epidemic.  National disaster.  Etc etc.  There are lots of “big things” that might occur.  And in a normal administration, we could predict with reasonable certainty what the response would be.  But the Trump Administration has less predictable reactions.  And that creates uncertainty.  The stock market hates uncertainty.  

Russia attacks Nato?

Late last year, Russian drones made several “incursions” into Nato airspace.  If this goes a step further into open hostility against eastern Europe Nato members (aka, former Soviet states), the reaction of the Trump administration remains unclear.   Open warfare between Russia and Nato seems very unlikely, given (1) Russia would get crushed in a conventional conflict, and (2) the chance of it spilling into a nuclear conflict would be too great of a risk.  But still, possible.

China Invades Taiwan

I saved the big one for last.  This is the biggest “known” risk at the moment.  You can plot the ramifications of this on a scale from least-bad to worst-bad.   On the “least” side of things, China takes Taiwan’s semiconductor manufacturing plants without much pushback from the US and its allies.  This lack of response could be either because our military was not in a position to react soon enough, or because China attacked in a manner that made it impossible for us to stop them.