Jay Pelosky's Biggest Risks for the Market in 2026

Key Concepts

• Dollar Debasement: The decline in the value of the U.S. dollar, impacting commodity prices.
• Trade Deficit Impact: A shrinking U.S. trade deficit potentially reducing capital inflow for U.S. Treasury purchases.
• Digital vs. Physical: The increasing demand for physical commodities driven by the growth of digital technologies like AI.
• Emerging Market (EM) Outperformance: The expectation that emerging markets will outperform developed markets (DM) in equity returns.
• Fiscal Stimulus & Rate Cuts: Government spending and interest rate reductions supporting commodities and emerging markets.
• Tariff Restocking: The potential for inflation due to companies rebuilding inventories of goods previously subject to tariffs.

Market Outlook: Commodities, Dollar, and Global Equity Shift

The discussion centers on the current market dynamics, focusing on the interplay between the U.S. dollar, commodity prices, and a potential shift in global equity leadership. Jay Pelosky of DPW Advisory presents a constructive, yet cautious, outlook for 2025, highlighting key risks and opportunities.

The Dollar’s Influence on Commodities

A central argument is that the recent performance of commodities is more closely tied to the debasement of the U.S. dollar than to broad-based industrial demand. Pelosky notes that commodities have experienced their best returns since 2017, coinciding with a weakening dollar. He emphasizes that the idea that tariffs would have a significant market impact has been largely abandoned, but the potential for tariff-driven inflation through restocking of previously tariffed goods remains a risk.

He explains that a smaller U.S. trade deficit could lead to less foreign capital flowing into the U.S. to purchase U.S. Treasuries, potentially pushing long-term interest rates higher. This rise in long rates could, in turn, cap the upside potential for U.S. equities. “We think next year might be the year with the downside of a smaller U.S. trade deficit benefits and a weaker U.S. dollar. A weak dollar should support commodities,” Pelosky stated.

Digital Demand & Commodity Bullishness

Pelosky argues that commodities have a “valid reason” for their performance, driven by the increasing demand for physical resources to support digital advancements, particularly Artificial Intelligence (AI). He succinctly puts it as “digital eats the physical,” explaining that AI requires essential materials like silicon, water, and aluminum. This perspective leads to a bullish outlook on mining companies, particularly copper miners, and the energy sector, specifically oil, despite its unpopularity.

Commodities and Equity Rally Expectations

The discussion addresses how rising commodity prices, particularly oil, fit into the bullish forecast for equities. Pelosky clarifies that earnings are the primary driver of equity performance, and despite market uncertainties, earnings have been and are expected to remain strong. He points to significant fiscal spending – both in the U.S. (to combat deflation) and in Europe (to bolster defenses) – and a global rate-cutting environment as supportive factors for both commodities and equities.

The Shift in Global Equity Leadership

A key prediction is that 2025 will mark the beginning of a significant shift in global equity leadership, with emerging markets (EM) outperforming the U.S. market (S&P 500). Pelosky states that EM equities are already demonstrating this trend, having doubled the S&P’s performance and are up 32%. He highlights that, for the first time in his experience, EM possesses superior fundamentals compared to developed markets (DM), including better growth, lower inflation, and lower debt levels. He anticipates this outperformance to continue into 2026 and 2027.

Fixed Income Strategy

DPW Advisory maintains a deeply underweight position in fixed income, a strategy that has proven successful over the past 18 months and is expected to continue yielding positive results. Treasuries have had their best year since 2017, but are only up 6%, a figure Pelosky’s firm doesn’t prioritize.

Logical Connections & Synthesis

The conversation establishes a clear connection between macroeconomic factors (dollar strength, trade deficits, interest rates) and their impact on specific asset classes (commodities, equities, fixed income). The argument flows from the observation of dollar debasement to the resulting commodity price increases, then to the potential inflationary risks and the broader implications for global equity markets. The core thesis is that the confluence of these factors will drive a rotation from U.S. equities to emerging markets, supported by strong commodity performance.

The main takeaway is a cautiously optimistic outlook for 2025, characterized by continued commodity strength, a potential shift in global equity leadership towards emerging markets, and a continued underweighting of fixed income. The key risk identified is the potential for inflation driven by tariff restocking and rising long-term interest rates.