To the Truist Wealth twenty twenty six annual outlook. I'm Keith Lerner, chief investment officer and chief market strategist. Each year, we take a step back to look at where we are and where we're headed. And for twenty twenty six, our theme is the seventh inning stretch. And for us, it's really a moment to pause, to evaluate where we are in the cycle, and prepare for potentially what's coming next. You've often heard me talk about the weight of the evidence approach. And this approach suggests to us that we're neither early in the cycle nor at the end. If we take a step back, this economic expansion began in twenty twenty, and the bull market started in late twenty twenty two. But our work suggests both have room to run. We have to remember, history tells us expansions don't die simply because of old age. And of the seven probable markets that lasted beyond three years, every single one of them posted gains in year four. So before we really dive in, let me take a step back and really explain what we mean by this weight of the evidence approach, because it's really central on how we approach markets. This is our disciplined, data driven process of performing an actual point of view. We don't want to rely on any one indicator. We want to look at the big picture and the full picture. That means we are blending what our economic outlook is, historical trends with fundamental analysis. And then what's the market telling us? What are the market signals? So the bottom line is that this approach really helps us to identify higher probability outcomes. What we're really trying to do is avoid overreacting to short term noise and really allowing us to keep an open mind as the data evolves. So here's what we'll cover in today's outlook. You know, first, the big picture for the economy and markets in twenty twenty six, then we'll transition to some of those key themes for the next year using that that weight of the evidence approach. And finally, we'll tie this together into what it means for positioning in navigating navigating both opportunities and risk in the year ahead. Okay, so let's begin with the big picture with a focus on the economy. So globally, we expect somewhat of steady growth. But here at home, our head of US economics, Mike Squadellis, is forecasting an uptick in economic growth to about two point three percent. That's up from about one point eight percent in twenty twenty five. So I guess the question is, what's behind the improvement? And there's four key forces that we're focused on. The first is fiscal stimulus for consumers and businesses the one big beautiful bill. You'll likely see more of that in the first quarter. We also expect marginally lower interest rates from the Federal Reserve. And then also, somewhat steadier trade policy. Remember that the tariffs were such a shock last year. Over the next year, they're not going away, but we think it will be a little bit less erratic. And then lastly, we expect this ongoing CapEx boom from AI and technology to continue. So we put that all together. That suggests that we have this modest uptick that should extend the economic cycle. One question that a lot of people have been asking us about is regarding employment trends, which have been more sluggish. Our team actually estimates a slight improvement to about seventy five thousand jobs per month next year. And think about it, we had so much uncertainty next year. As we get some more clarity, we think that should lead to at least a slightly better employment outlook than the last year. But I think the other thing to keep in mind is monthly job gains are important. But what's likely even more important is we have one hundred and sixty million people working today and an unemployment rate well below five percent. What's really important is that wage growth for those one hundred and sixty million people stay above inflation to help power the economy forward. And that is our expectation. We still do have this two speed economy where the higher income households are benefiting from lower debt income ratios, the rise of stock market, and home appreciation. But we do expect the lower income households to get some benefit from these tax changes in the new year as well. Keep in mind, Americans are expected to see an aggregate boost in tax refunds of about one hundred and fifty billion dollars when they file their returns in early twenty twenty six. And a big part of that should go towards lower income. And that's actually bigger. The stimulus is bigger than the second round of COVID stimulus checks back in December of twenty twenty. Okay. So now that we've covered the broader economy, let's talk about what history tells us about the market potential for twenty twenty six. So as I mentioned, the current bull market began in October of twenty twenty two. Some call it the CHATGPT market. You may remember that CHATGPT rolled out in November, and the defining theme of this bull market has been tech in AI. But the big picture in our work suggests there's still room to run. Of the seven prior bull markets that lasted beyond three years, every single one of them posted gains in year four, averaging about fifteen percent. Now, I will caveat that seven percent is a relatively small sample, but at least that's a positive antidote to be familiar with. And here's another encouraging sign. Historically, when the Federal Reserve cuts rates when the market is near all time highs, as it did last October, stocks have performed well. In fact, when we look at this historically, a yield following when the Fed has cut rates around all time highs, the market has been higher ninety three percent of the time with an average gain of around thirteen percent. So that's also a positive. That said, I do want to make sure people realize twenty twenty six is a midterm election year, which tends to also bring positive but more moderate returns. In isolation, the average returns to our midterms is around eight percent. But we also tend to have deeper into year pullbacks. What does that mean? That means we also should expect some curveballs. And even though we're constructive, we certainly expect some periodic setbacks along the way. Okay, well, thanks for hanging with me. So far, we've covered the economy. We've talked about history. Now let's talk about the fundamentals. A big theme that's come up in my conversations with investors is around valuations. And valuations, by most historical measures, are elevated with the S and P trading around twenty two times forward earnings, which is rich by any standard. But I think it's important to note, when we look at this, starting valuations have shown almost no correlation with next year returns. They do matter. They tend to matter more for long term returns. And really, what tends to be more important in the short term is earnings, profit growth. And the good news is profits remain strong. In fact, we've been calling profits the north star of this bull market. But let's dig a little bit deeper into the valuation side. I think people have this thought in their mind that the S and P historical PE is sixteen. But I would argue today's S and P isn't really comparable to yesterday's S and P. Keep in mind, the technology sector today is more than thirty percent of the S and P. If we compare that back to nineteen ninety, it was just five percent. These technology companies typically have much higher profit margins, much higher cash flow, much stronger balance sheets. So in some ways, you would expect valuations to be higher than history because of that sector composition. We're also at record highs in profit margins as well. So as we think about the next year, even though valuations are elevated, we expect valuations to stay somewhat firm because of this economic uptick alongside lower interest rates that we expect from the Federal Reserve. And moving back to profits, which I call the north star of this bull market, when we look at the S and P and overlay that with forward earning estimates, they're moving in parallel for the most part. And as the stock market is close to all time highs, earning trends are also at all time highs. And the good news, as we think about the next year, is we expect low double digit earnings growth in twenty twenty six. That should be the key driver of market returns. I know there's a lot of discussion about whether tech is in a bubble or not. When we try to quantify this, our work suggests we are not yet in a bubble. And I'll give you a couple of statistics around this to quantify this. One, just looking at price, on a year over year basis, the tech sector is up less than thirty percent, still relatively strong. But when we look back in the late '90s in this technology bubble, the year over year returns were up more than one hundred percent. So again, we're up less than thirty percent on a year over year basis versus more than one hundred percent during the technology bubble. So it's far less extreme. And then when we look at valuations, the forward PE for the tech sector today is rich at twenty eight times. But that's versus fifty times back during the technology bubble. And again, today, the earnings picture is about stronger than what we saw in the late '90s. The other important factor to keep in mind is the Fed is easing policy today, not hiking aggressively as it did in the late '90s. In fact, one of the reasons why that technology bubble eventually popped is because the Fed pricked the bubble by raising rates aggressively. We're not seeing that today. And then lastly, investor sentiment enters twenty twenty six largely neutral after this choppy market action we've seen later in the year, that's a lot different than the euphoric sentiment that we saw in the late '90s into the technology bubble. Okay, so I've walked you through our big picture. We talked about the weighted average. Now let's bring this all together and talk about how we're positioning portfolios, where we see opportunities, how we're managing risk, and what that means for our investment strategy. So as we step into next year, we're leaning towards equities. I guess the question is why? Because of what we talked about, we expect an uptick in the economy and resilient earnings growth to continue. From a global portfolio perspective, we still maintain a US bias. So we're still team USA. And we still have a large cap and a growth bias. Now, we do know the US equities have underperformed in the last year. But that's after an extreme period of underperformance by international markets and a really move down in the dollar. But innovation and earning trends are still stronger in the US. That said, compared to several years ago, our analysis does support a larger allocation to international markets. Question is why? Well, valuations are attractive. We're still seeing stimulus in Europe and Japan. And if we get more dovish Fed members over the next year, that could actually put some more downward pressure on the US dollar later this year, even while we expect in the near term the dollar to be relatively stable. We do have emerging markets on upgrade watch. We are seeing some earnings there stabilized. There's also a lot of these companies are also in the technology side and are AI competitors to the US. So we're watching that area closely. I did mention already within the US, we're tilted towards US large caps and growth. We're overweighting areas like technology and communication services, which we've liked really for most of the last year. More recently, we've become more positive on health care as well. Now, when we've looked back at these different bull market cycles, what we find is the leadership of a bull market tends to endure through the cycle. Even though you have some periodic pullbacks or rotations. I often say every bull market has a key theme. The key theme of this bull market still is tech and AI. And we're also still showing the strongest earnings momentum in the technology sector. And then as we think about health care, it just went through one of its longest stretches of underperformance we've seen in history. So a lot of bad news is priced in. And on the margin, we're seeing some improvement in fundamentals and price trends. So a reason to also overweight that area into the new year. Another thing comes up is that there's still a lot of concentration risk in the market, especially technology. So while we still like technology, we're still leaning into this mega cap tech theme. Diversification still remains critical. So modest exposure to things like small caps and mid caps offer a way to hedge some of this concentration risk and position for these sharp rotations. And these areas of the market have underperformed by a lot. So if we get a little bit of good news and the economy upticks a little bit and the Fed lowers rates, we're likely to see somewhat better action from these areas of the market as well. So moving on to the fixed income side, we still remain focused on high quality bonds. We're waiting for a better opportunity to upgrade our view of credit. Yields though still remain attractive both on an absolute level, on an inflation adjusted level. We also think the Fed easing should support price appreciation and really helps with a solid foundation for fixed income. We're thinking about fixed income as that kind of consistent hitter over the next year. Keep in mind, there are always risk with investing. Investing in the bond market is subject to certain risks, including market, interest rate risk, or issuer, and inflation risk. Something else we've been asked a lot about recently is gold. We've been positive on gold for over the last year. It's really helped our portfolios. It's moved a long way, but we still see it as a good portfolio diversifier so far as modest allocations. We've looked at periods of the market when stocks and bonds were both down. Gold has held up relatively well. We still have a somewhat supportive backdrop with some of this fiscal imbalances and debt concerns. We're seeing some central buying of gold as well. So we think the structural uptrend remains intact. Keep in mind that investing in gold and other commodities is also speculative and involves a high degree of risk. It is not suitable for all investors. And then turning to alternative investments for qualified investors, we certainly think there's an opportunity to expand the playbook and capture opportunities beyond the traditional markets. Alternative strategies are also not suitable for all investors. Hedge funds can capitalize on these global cross currents. And what we think is going to be more asset class dispersion over the next year. Private markets should benefit from a pickup in M and A activity, hopefully some improved business sentiment and deregulation. And don't forget, many of these emerging AI players are concentrated in the private markets adding to their appeal. We also still see some opportunities in private credit, which offers attractive yields. But I will say manager selection is critical in this area where we've seen a lot of growth over the last couple of years. Okay, so we've just covered a lot of ground. So let me sum this up with some key takeaways. As we pause for this seventh inning stretch and look into twenty twenty six, the weight of the evidence suggests a modest uptick in the US economy. We anticipate the potential for a high single digit to low double digit equity gains, though we certainly expect some deeper pullbacks along the way, especially in the midterm election year. And we expect some more consistent performance from fixed income as well. But also remember, this outlook is a starting point. It's not a finish line. Markets will shift and flexibility will be essential. Our focus remains on staying aligned with that primary trend, identifying opportunities and risk as they emerge, and really adjusting as that data evolves. I think that will be really key to success in the year ahead. From all of us at Truist and Wealth, thank you so much for trusting us with your financial journey. We certainly look forward to working with you in twenty twenty six and beyond. I really wanna wish you and your family a wonderful holiday and a prosperous New Year.