Daily roundup of research and analysis from The Globe and Mail\u2019s market strategist Scott Barlow<\/p>\n
An upbeat take<\/p>\n
Evercore ISI strategist Julian Emanuel does not see evidence of systemic risk within the AI trade,<\/p>\n
\u201cNavigation \u2013 Signs of AI Systemic Risk\u2026 Still Largely Absent: 2025 has been eventful. With EVR ISI Strategy\u2019s Base Case for volatility on the way to 7,750 by year end 2026, 2026 is likely to be as eventful, if not more! In addition to a Bubble (30% in 2026), worries of a circular AI Economy breeding risks similar to past periods of exuberance such as 1980\u2019s Keiretsu in Japan and Dot.Com\u2019s \u201cvendor financing\u201d schemes have risen. ORCL\u2019s debt-driven expansion has been at the center of the debate. Broadly however, EVR ISI Strategy views signs of AI systemic risk as still largely absent. Equity shareholding across businesses is low. Broad, cross-shareholding capitulation risks remain absent. Businesses owning 10% of total equities, similar to the Y2K\u2019s top, would highlight a major \u201cred flag\u201d. And for Hyperscalers on aggregate, balance sheets are healthy. Nearly all hold more cash than debt \u2013 a flip to 10% net debt\/mkt cap would be a \u201cyellow flag\u201d. Free cash flow is sizeable, more downwards revisions would be worrisome, a flip negative a \u201cred flag.\u201d” <\/p>\n
Outlook<\/p>\n
The Wells Fargo strategy team summarized their forecasts for 2026 using a catch phrase,<\/p>\n
\u201cAs we detailed in our 2026 Outlook, \u201cTrendlines over headlines,\u201d we expect noisy headlines \u2014 around tariff developments, a new Fed chair, and the midterm elections \u2014 to add to market volatility throughout the coming year. However, we are focused on five durable trends already in motion that we believe will overshadow bouts of market volatility, fuel a moderate economic growth recovery, and boost financial markets in 2026:<\/p>\n
1. Tax cuts for individuals and businesses should encourage spending by consumers and businesses.<\/p>\n
2. Al-related investments appear poised to broaden and expand across sectors and should begin to lift productivity.<\/p>\n
3. The lagged effect of this year\u2019s Fed rate cuts, and our expectation for further reductions in 2026, should provide relief to interest-sensitive pockets of the economy like small businesses.<\/p>\n
4. Cost savings from deregulation should become increasingly noticeable.<\/p>\n
5. U. S. business profit margins could benefit from potential tariff refunds tied to a looming Supreme Court ruling on the legality of the bulk of 2025\u2032 s tariff increases.<\/p>\n
We view the U.S. as the engine of global economic expansion in 2026, supporting our preferred tilt toward U.S. assets in a diversified portfolio. That leadership should help stabilize the US. dollar\u2019s value. We believe Strong corporate earnings growth will power equity-market gains as the economy reaccelerates and Al and tech-related spending broadens across companies and market sectors. We favor U S. Large and Mid Cap Equities and see the most value in Financials, Industrials, and Utilities. We believe these sectors are more effective ways to lean into the Al theme at more attractive valuations than the more richly valued Information Technology sector, where we currently hold a neutral rating that still implies a full portfolio allocation.”<\/p>\n
Money flows<\/p>\n
Citi strategist Alex Saunders assessed global fund flows,<\/p>\n
\u201cWe give a flash update based on Citi equity sector flows. We saw long-only managers net buying last week with inflows in Tech, Materials, and Consumer Discretionary. They reduced exposure in Financials, Communications, and Industrials. Hedge funds were also net buyers, with inflows concentrated in Financials and Tech while they sold Consumer Staples and Materials. The top three sectors this week were Materials, Energy, and Industrials, while Tech, Consumer Staples, and Health Care made up the bottom three. Our market-implied regime analysis suggests that market internals are currently most correlated with the \u201cGoldilocks\u201d regime as the Utilities sector notably underperformed in the past month. Tech relative performance was flat, which is atypical of the \u201cGoldilocks\u201d regime; the previously highest \u201cTightening\u201d regime correlation took a steep downturn.\u201d<\/p>\n
Diversion<\/p>\n