Michael Zeuner: 00:09
Welcome to The Wealth Ennterprise Briefing. This is Michael Zeuner, one of the managing partners at We Family Offices. I’m joined today by our head of macro, Sam Sudame. It’s early in the new year, and rather than take a look backward into 25 which we did a fair amount of last year, we’re going to we’re going to do an assessment and talk about where we think the world is today from a capital market perspective, from a geopolitical perspective, and what that might mean for investors as we head into this new year. Sam, welcome, Happy New Year. Michael, thank you. Sam, same to you. You and I have this conversation all the time about the difference between sentiment and fundamentals. Maybe you could just give us your view as we head into this new year. First of all, why does, why do the why does that difference matter. Why do we pay attention to how people feel about the market versus what the fundamentals in the global capital market environment are?
Sam Sudame: 01:13
That’s an outstanding question, Michael. So when we look at equity strategy, we look at fundamentals and Sentiment. Sentiment is very short term driven. It’s how people feel. You’re feeling optimistic or feeling pessimistic. If one is optimistic, they tend to buy stocks and vice versa. Sentiment drives a lot of the returns in a stock market over very short periods of time, say, within one year, it is one of the major drivers of return. But as we look beyond that horizon, in that three to five year horizon, it’s really the bottom up fundamentals, and those fundamentals are generally earnings. Is it really going to be earnings that drive also drive dividends? That is the return that you actually tend to keep. In terms of sentiment, markets go up and down based on that sentiment, on how people feel. You know, there’s a saying in the markets, because the sentiment the market give it and the market take it away. That’s what sentiment does. You don’t generally get to keep the sentiment over a long period of time, because it washes out the up and the down feelings wash out.
Michael Zeuner: 02:29
So so always keeping an eye on sentiment is important, but not getting distracted by sentiment. So to the extent that right now, let’s, let’s, let’s divorce sentiment from fundamentals. Let’s start with fundamentals. Okay, what are you seeing as we enter 2026, from a macro economic perspective, about the fundamentals?
Sam Sudame: 02:55
So the fundamentals in the US market look very solid. In fact, last year, despite everything, we had a double digit earnings growth rate. Expect that to continue in this upcoming year, and the reason is why. And it’s when we look back at what is the economic environment that these profits can grow in, we think that we’re seeing a transition of a stagflationary environment in 2025 to one of inflationary growth in 2026 what I mean by that is there are some very solid drivers of economic growth coming into 2026 The first of these is fiscal stimulus. From the one big, beautiful bill that was passed last summer. So in the first half of this year, many US households will receive checks from their tax rebates. This was part of the obla corporations will have new tax code changes to help them invest more, to write off capex expenses. So there’s going to be solid fiscal stimulus that OPA can add its estimated maybe 0.8% of GDP growth. It will actually offset the negative impact from the tariffs from last year. Second of all, we have monetary stimulus the Fed is expected to lower rates twice this year. Now, last year, we spoke on how I think the US economy didn’t need it. I still think the US economy does not need it, but nevertheless, the Fed is on a path of lowering interest rates probably twice that is likely to help improve borrowing costs, so that should also benefit the market. And then third is going to be a very powerful cylinder of economic growth, and we saw that last year. Remember, last year, the first half of the year, the economy was generally in recession. What we had called the hero of the economy was aI capex spending in 2026 the AI capex spending is expected to grow very nicely and healthfully from 2025 as you see, the hyper scalers scale up even more, and this is a very powerful cylinder of economic growth.
Michael Zeuner: 05:23
So among all of those macro factors, Sam, right. Green light, right, flashing green light. What kinds of fundamental metrics, as they started to come in, if they started to come in differently than we’ve been seeing, what would start to worry you about the sustainability of that positive fundamental outlook?
Sam Sudame: 05:42
So we think the cycle is going to be well girded for this year. But what are the signs that are showing that it’s not going to happen? We would see weakening labor markets. We would see weakening consumption. We would see weakening investment, where the AI capex theme that we have is actually starts to sputter or even go into reverse. Some of the signs that we’re looking for would be if vacancy rates and data centers start to rise right now, they’re extremely tight, showing a strong demand. If we start hearing from hyperscalers that their backlog is starting to fall where companies are not deploying AI as much as we think that could cause an over investment in AI. This would cause the macro cycle to start to slow down. Other signs that could happen is inflation rises more than expected. If inflation rises more than expected, the Fed may not lower rates as we expect. If we start seeing trouble in the lending markets, lenders become more cautious. These are all signs that the economic growth that we think will happen in 2026 will not actually material.
Michael Zeuner: 06:58
Okay and just to be clear, we’re not seeing any of those signs. We’re watching all of those metrics carefully. But, but the signs we’re seeing are actually the opposite, including the recent release of productivity, you know, figures in the US, which showed very strong productivity growth, which is a positive indicator for the kind of corporate earnings growth that we would expect to see stay strong.
Sam Sudame: 07:23
So you know going forward, the key going forward is productivity growth that you mentioned, when companies can do more with less, they can improve their profit margins via lower cost of goods sold. That higher profit margin will help boost stocks. Higher productivity means the economy can grow with less inflation. That’s actually good for the bond market. The Federal Reserve can then focus more on maintaining growth and less be less worried about inflation. In fact, it will move a very long term. We like to look at the long term as well. What really drives the stock market is the growth in GDP per capita, and that GDP per capita is under is rooted by technology and technological change.
Michael Zeuner: 08:16
Okay, now let’s try to overlay sentiment so the fundamentals are positive, not a lot of warning signs, right? The things we Sam, thank you, Sam. So now let’s, let’s try to overlay sentiment. Okay? And while we’re not short term traders, we don’t look at short term volatility. We’re long term investors. How does sentiment affect everything you’ve just been describing?
Sam Sudame: 08:44
Sure, so sentiment drives that short term return, in fact, on a day to day basis, what really drives a lot of that day to day movement is actually sentiment. How are people feeling? Are they optimistic? Are they pessimistic? If they feel good, that means they can start buying stocks, and vice versa over the you know, after a year, those good feelings, those bad feelings, tend to wash out. So you don’t get to really keep any of the returns from sentiment over beyond a year. What you get to keep are is earnings growth and dividends, and those are the solid fundamentals.
Michael Zeuner: 09:22
Okay. Now, one of the questions that I’ve been hearing, and you know, our colleagues, that we have been hearing from clients, is when they look at the world from a geopolitical perspective and not from a macroeconomic perspective. There seems to be huge changes happening geopolitically, whether we’re talking about Venezuela, whether we’re talking about Greenland, whether we’re talking about Ukraine and the United States, place in the world and how it exercises its power, is shifting quite dramatically. Right and to a certain degree that is affecting sentiment. But Sam, your your view, I would suspect, is that that really is not yet translating into any kind of change in the fundamental macroeconomic metrics that we’ve been talking about before. I guess, the question though, is, could it, are there things that we should be watching for, if anything, on the geopolitical side of things that could affect the capital markets?
Sam Sudame: 10:33
So over, what we’ve seen with many geopolitical events over the past is that they don’t tend to have a lasting impact. You know, we had talked and we did a podcast after the Ukraine invasion, in which, yes, there’s a knee jerk reaction, but ultimately the markets recovered. So overall, the answer to that is no, but it would have to affect the underlying structure of an economy. So for the United States, this hasn’t really affected our underlying structure at all, the underlying structure which therefore drives economic growth, and therefore earnings growth. You still haven’t seen it, although it does cause some worry or anxiousness in the short term, and that sentiment can drive markets again over the very short term.
Michael Zeuner: 11:21
And I presume you might see that play out more in the bond market than in the equity market.
Sam Sudame: 11:27
One is in the bond market, yes, but where it plays itself out more is in gold. So gold is seen as reaction, reacting to uncertainty. And last year, there was a lot of policy uncertainty, so gold went up and with geopolitical risk, that still keeps that level of uncertainty high. Because you see that investors, rather than turning especially global investors, rather than turning into to the arms of the US Treasury bonds, are actually buying gold instead as their risk hedge.
Michael Zeuner: 12:00
Right, and then you see this phenomenon where the yield curve steepens, where longer term rates go up, even if the Federal Reserve is lowering short term interest rates. And we’ve talked about that extensively before, including the term premium. Okay. Lots more to talk about. Sam I think we’ll leave it there for today, and next week, we’ll come back and we’ll talk about how an investor might think about how to position their portfolio in the face of the fundamental factors that you’ve discussed here.
Sam Sudame: 12:33
Thank you, Michael.
Disclosure: 12:36
The Wealth Enterprise Briefing is for informational and educational purposes only and does not consider the specific investment objectives, financial situation or particular needs of any listener. The information in the briefing is not a recommendation of any security and should not be relied upon as investment legal or tax advice.
