Fundamentals are pretty strong, experts reveal

Key Concepts

• January Effect: The tendency for stock prices to rise in January, potentially due to tax-loss harvesting and investor optimism.
• Momentum Trading: A strategy based on the idea that assets that have performed well recently will continue to do so.
• Mag7: The seven largest technology companies in the S&P 500 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta).
• Cyclical Stocks: Stocks whose performance is closely tied to the economic cycle.
• Yield Curve: A graph showing the yields of bonds with different maturities. An upward-sloping yield curve is generally seen as a sign of economic growth.
• Core PCE: Personal Consumption Expenditures Price Index, a key measure of inflation tracked by the Federal Reserve.
• Catch-Up Trade: A market rotation where underperforming sectors or asset classes begin to outperform.
• Dual Mandate (Federal Reserve): The Fed's goal of maintaining price stability (controlling inflation) and maximizing employment.

Market Outlook for 2026: A Discussion on Momentum, Fundamentals, and Risks

Introduction

This discussion features David Royal, CFO of Thrivent, and Gina Martin Adams, Chief Market Strategist at HB Wealth, analyzing the market outlook for 2026. The conversation centers on the interplay between technical momentum, fundamental economic factors, and potential risks to the current market rally.

I. Technicals vs. Fundamentals & January Momentum

Gina Martin Adams believes a combination of technicals and fundamentals is crucial for assessing the market. While skeptical of relying solely on the “January effect,” she acknowledges that strong momentum tends to perpetuate itself. Currently, the market exhibits strong momentum, making technical indicators supportive. She emphasizes that a positive environment exists as long as earnings momentum improves and valuations remain reasonable, allowing for pockets of optimism. She stated, “I like an environment in which technicals and fundamentals are supportive and as long as earnings momentum is improving and valuations haven't gotten so excessive for the entire market that you can't find pockets of optimism, from fundamentals are generally pretty supportive at this time as well.”

David Royal agrees that fundamentals remain strong, noting upcoming Federal Reserve meetings in the first half of the year will be key. He observes the “January effect” appearing earlier each year.

II. Rotation Beyond the “Mag7” & Emerging Opportunities

A significant portion of the discussion focuses on a potential rotation away from the “Mag7” stocks, which have dominated market performance. Gina Martin Adams suggests a “catch-up trade” is emerging, with tech losing momentum at the end of 2025 and questions arising about the sustainability of the AI trade and high valuations (27x earnings) for tech stocks.

She identifies potential opportunities in:

• Down-Cap Stocks (within the S&P 500): Smaller companies within the S&P 500.
• Cyclical Stocks: Sectors that benefit from economic growth.
• Mid-Cap Stocks: Companies with market capitalizations between small-cap and large-cap, which haven’t received much attention recently but could experience momentum.

David Royal echoes this sentiment, stating, “Mid-caps are the next large-caps.” He also notes that small-cap stocks are behaving more sensitively to interest rate changes than in recent years, suggesting they could benefit from Fed rate cuts.

III. The Interest Rate Dilemma & Economic Slowdown

The conversation delves into the complex relationship between interest rates, economic growth, and stock market performance. David Bahnsen (mentioned by Taylor) raised a critical point: lower rates often signal a slowing economy, while higher rates are associated with stronger growth.

David Royal believes stocks prefer lower rates, citing weakening employment data (a rolling three-month average of 20,000 jobs) as a sign of potential economic slowdown. He suggests that avoiding a recession while seeing rates come down could be beneficial for small and mid-cap stocks.

Gina Martin Adams adds nuance, stating stocks favor lower short-term rates as long as long-term rates are rising at a manageable pace and not due to inflation concerns. She describes the ideal scenario as an upward-sloping yield curve, which was observed in 2025, with easing from the Fed and stable or slightly rising long-term rates. “Stocks love lower rates on the short end as long as the long end is going higher and not higher too quickly,” she explained.

IV. Key Risks & Black Swan Events

Both analysts identify expectations as the biggest risk to the market. Gina Martin Adams argues the market is “priced for perfection,” expecting both Fed easing and economic growth. This creates vulnerability, as any deviation from this scenario could trigger a correction. She highlighted the need for tech companies to grow into their high multiples and for a genuine cyclical recovery to emerge. She noted the unusual nature of the recovery since 2020, which has lacked broad-based economic lift.

David Royal points to the risks inherent in the Federal Reserve’s dual mandate – balancing employment and inflation. He notes that weakening employment alongside persistent inflation (Core PCE at 2.9%) creates uncertainty around future Fed policy decisions.

V. Data & Statistics Mentioned

• Employment Growth: Rolling three-month average of 20,000 jobs.
• Core PCE Inflation: Currently at 2.9%.
• Mag7 Dominance: The Mag7 stocks represent approximately 40% of the S&P 500.
• Tech Valuations: Tech stocks in the S&P 500 were trading at 27 times earnings.

Conclusion

The discussion paints a picture of a market at a potential inflection point. While fundamentals remain supportive, the dominance of the “Mag7” is likely to wane, creating opportunities in mid- and small-cap stocks and cyclical sectors. The key to continued market success hinges on a delicate balance between interest rates, economic growth, and managing expectations. The biggest risk lies in the market being overly optimistic and unprepared for any deviation from the anticipated “perfect” scenario.