Capital Market Outlook

Summary

• U.S. equity markets and the economy followed a typical midterm election pattern in 2026, with economic growth accelerating to a peak earnings momentum before anticipating a slowdown in 2027.
• Price-to-earnings (P/E) ratio valuations are compressing to reflect the expected deceleration in earnings growth, while a maturing expansion is spreading profit growth to more sectors of the economy.
• The transition from maximum monetary accommodation to a midcycle balance between accommodation and restraint is expected to prevent economic overheating without requiring overly restrictive policy.
• Q3 2026 GDP data showed growth reaching a peak of 3.4%, driven by consumer spending averaging 3.8% over the past six months and an AI investment boom growing at a midteens rate.
• Private sector purchases grew at nearly 5%, though GDP growth was lower due to imports of Asia-produced technology gear for the AI buildout subtracting from domestic demand.
• Analysts' earnings revisions have started to roll over, indicating that while earnings are still growing, the rate of growth is likely to slow as the second derivative of growth turns negative.
• The Federal Reserve is shifting from rate cuts to removing accommodation with rate hikes, which adds to the odds of momentum loss in 2027 as credit spreads widen for weaker balance sheet borrowers.
• Historical data indicates the S&P 500 gains an average of 4.4% in the first year of postwar tightening cycles, with declines more likely under aggressive tightening and gains under gradual tightening.
• U.S. imports from China have dropped from about 20% ten years ago to less than 10%, yet overall trade continues to grow in line with the global economy through reglobalization into new trade spheres.
• The 2025 U.S. National Security Strategy and China's latest five-year plan both prioritize economic security, industrial capacity, technological leadership, and capital market strength.
• U.S. companies account for 75% of market capitalization within 18 cutting-edge industry arenas identified by McKinsey, which generate about 50% of revenues and drive global growth.
• New technologies associated with the singularity have higher margins than old economy sectors, suggesting earnings are on a new, higher-growth trajectory unlikely to revert fully to historical norms.
• Election results reflected sentiment to slow the AI data center buildout, leading to revaluation of beneficiaries, while disapproval of the Iran War contributed to lower energy prices, inflation expectations, and interest rates.
• The West has shifted toward elements of China's economic playbook, including state subsidies, promotion of national champions, strategic industrial policies, trade tariffs, and screening of foreign investment.
• China's share of global manufacturing output rose from 8.7% in 2000 to 18.1% in 2010, surpassing the U.S. as the world's largest manufacturer, with China now accounting for roughly 28% of global manufacturing.
• China's share of world exports increased from 4% in 2001 to 15%, roughly on par with the combined market share of the U.S. and Germany, with the nation on course for an annual merchandise trade surplus exceeding $1 trillion.
• Investment returns are now determined by geopolitics, energy costs, trade protectionism, and national security in addition to traditional metrics like earnings, cost of capital, and valuations.
• Capital expenditures by the 15 largest data center developers are expected to top $1.4 trillion in 2027, representing 3.5% to 4% of U.S. GDP.
• Total gigawatt capacity under construction for information technology is around 34GW, with the U.S. accounting for approximately 70% of this capacity.
• AI-tied firms raised over $460B in debt financing in 2026, more than double the amount from 2025, while the highest-rated data center bond yields rose from below 5% to around 7%.
• The 15 largest publicly listed data center companies are estimated to need $2.5 trillion in revenues in 2032 to achieve a return on invested capital equal to their weighted average cost of capital.
• Equity indexes sold off on November 5, 2026, due to concerns that a Democratic sweep could add short-term policy uncertainty around AI, deficits, and oil.
• Portfolio considerations suggest using weakness in equities and fixed income as an opportunity to rebalance, with a focus on higher-quality, less leveraged segments as financial conditions tighten.
• 10-year Treasury yields are near 5% with real yields above 2.5%, offering attractive income potential that favors moving out of cash and extending duration.
• Economic forecasts project real U.S. GDP growth of 2.3% in 2027, with CPI inflation expected to decline to 2.5% and the Fed funds rate ending the period at 4.38%.
• Asset class views indicate an overweight stance on U.S. Large-cap equities and a neutral stance on International Developed markets, while maintaining a neutral view on Europe due to exposure to manufacturing-heavy economies.
• Sector returns from November 2 to November 6, 2026, showed Energy down 11.9% and Information Technology down 6.9%, while Consumer Staples rose 1.9% and Real Estate rose 1.1%.