2025 AI surprises, why investors may be 'underestimating' the strength of the economy next year

Key Concepts

• Santa Claus Rally: Market gains during the last five trading days of December and the first two of January.
• AI Trade: Investment focused on companies involved in Artificial Intelligence, categorized into “cost centers” (hyperscalers, chipmakers) and “beneficiaries” (companies implementing AI).
• Magnificent Seven: The seven largest US tech companies (likely referring to Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta).
• Unmagnificent 493: The remaining 493 companies in the S&P 500, contrasted with the Magnificent Seven.
• CapEx: Capital Expenditure – funds used by a company to acquire, upgrade, and maintain physical assets.
• Midcaps/Smallcaps: Companies with medium and small market capitalization, respectively.
• QE Light: A reference to the Federal Reserve purchasing Treasury bills, effectively adding liquidity to the market.
• Productivity Gains: Increases in efficiency and output without a corresponding increase in input (like labor).

Market Overview & Commodity Trends (December 24th, 2025)

The market exhibited a mixed performance on Christmas Eve, characterized by thin trading volume. Despite this, several key trends were observed:

• Santa Claus Rally in Effect: Investors are monitoring for the Santa Claus rally, defined as gains in the last five trading days of December and the first two of January.
• Commodity Rally: Gold reached a record high of $4,500 per ounce, with copper and platinum also hitting all-time highs. Oil is on track for its longest winning streak since March due to supply disruption fears. This suggests a strong demand for commodities.
• Nike Boost: Nike’s stock rose following a disclosure that Apple CEO Tim Cook purchased nearly $3 million worth of shares, now owning over 100,000 shares. Cook has been on Nike’s board since 2005.

The AI Investment Landscape: Shifting Dynamics

The discussion centered on the evolving dynamics of the AI investment landscape, with surprising performance data from 2025 and projections for 2026.

• Intel’s Outperformance: Contrary to expectations, Intel was the top-performing AI stock of 2025, with an 81.4% year-to-date increase, surpassing Nvidia’s 36% gain. This was attributed to the critical role Intel plays in advanced chip development and the US government’s support for domestic semiconductor production to reduce reliance on Taiwan. AMD followed with a 77% increase.
• Valuation Correction: Tech sector valuations are currently lower than at the start of the year, as earnings growth has outpaced price increases, challenging the “AI bubble” narrative.
• Shift to AI Beneficiaries: The focus is predicted to shift from AI “cost centers” (hyperscalers and chipmakers) to AI “beneficiaries” – companies successfully implementing AI to improve productivity and margins. This is expected to be the dominant theme in 2026.
• Earnings Growth Divergence: A key prediction is that the earnings growth rate of the “Magnificent Seven” will converge with, or be surpassed by, the earnings growth of the “Unmagnificent 493” by the third quarter of 2026. This suggests a broadening of market participation and potentially more subdued returns from the largest tech companies.
• Capex Concerns: Hyperscalers are allocating over 60% of their operating cash flow to capital expenditure (CapEx), contributing to slower growth rates.

Macroeconomic Outlook for 2026

The conversation extended to the broader macroeconomic outlook for 2026, highlighting potential drivers of growth and investment opportunities.

• Consumer Spending Resilience: Despite high tariff-related price increases, consumer spending remained strong in the third quarter (3.5% growth) driven by higher-income households. Household balance sheets are robust, with cash levels at their highest since 1950.
• Productivity Gains: Productivity gains are a key factor supporting economic growth, potentially driven by accelerated technological adoption, including AI.
• Fed Policy & Liquidity: The Federal Reserve’s easing cycle (potential rate cuts) combined with “QE light” (Treasury bill purchases) is expected to inject significant liquidity into the market. Further, potential changes to tariffs could provide additional fiscal stimulus.
• Rotation to Value & Dividends: A rotation out of high-growth tech stocks is anticipated, with increased interest in dividend-paying stocks, particularly in defensive sectors like healthcare and consumer staples. Dividend payers are currently at their lowest relative valuation in 25 years.
• Midcap & International Opportunities: Midcap stocks and international markets (including emerging markets) are identified as potential areas for growth.

Investment Recommendations & Surprises

Several specific investment recommendations and surprising observations were made:

• Healthcare as a Key Play: Healthcare is highlighted as a generational buying opportunity due to low valuations, high dividend yields, and its potential as an AI beneficiary. Historically, healthcare outperforms during midterm election years.
• Equal-Weight Indices: Equal-weight indices are suggested as a potential outperformer compared to cap-weighted indices, offering broader market exposure.
• Small Cap Potential: Small cap stocks are seen as undervalued and poised for growth in 2026.
• Surprise: Intel’s Performance: The outperformance of Intel over Nvidia in the AI space was a significant surprise.
• Surprise: Tech Sector Valuations: The fact that tech sector valuations are lower than at the start of the year, despite earnings growth, was also unexpected.

Notable Quotes

• Thomas Hayes (Grey Hill Capital): “Intel was the number one chip and hyperscaler…less than half of the returns of Nvidia.” – Highlighting Intel’s unexpected dominance in the AI stock performance.
• Angelo Koffus (Edward Jones): “Earnings have been growing faster than prices…that pushes back against all that AI bubble narrative.” – Emphasizing the importance of fundamentals in the tech sector.
• Thomas Hayes (Grey Hill Capital): “The theme for 2026 and the biggest surprise is going to be AI beneficiaries.” – Predicting a shift in focus from AI enablers to AI implementers.
• Angelo Koffus (Edward Jones): “Never underestimate the US consumer.” – Underscoring the resilience of consumer spending.

Synthesis & Conclusion

The Morning Brief presented a nuanced outlook for 2026, moving beyond the initial hype surrounding AI. While AI remains a crucial theme, the focus is shifting towards companies that can effectively implement the technology to drive productivity and earnings growth. A broader market rotation is anticipated, with opportunities emerging in undervalued sectors like healthcare, midcap and small cap stocks, and international markets. Strong consumer spending, supported by robust balance sheets and potential fiscal/monetary stimulus, is expected to contribute to continued economic growth, though productivity gains will be a key factor in managing inflation. Investors are advised to diversify their portfolios and consider strategies beyond the traditional “Magnificent Seven” to capitalize on these evolving dynamics.