The next 3 phases of the AI cycle for 2026, plus why Trump's Nvidia announcement didn't move markets

Key Concepts

• AI Capex Cycle: Investment in infrastructure and technology related to Artificial Intelligence.
• Monetary Stimulus: Actions by central banks to increase the money supply and lower interest rates to boost economic activity.
• Fiscal Stimulus: Government spending or tax cuts to stimulate the economy.
• ROIC (Return on Invested Capital): A profitability ratio that measures how well a company uses its invested capital to generate profits.
• TAM (Total Addressable Market): The total market demand for a product or service.
• Secular Calls: Long-term trends that are expected to persist over many years.
• Cyclical Stocks: Stocks that tend to perform well during economic expansions and poorly during recessions.
• K-Shaped Recovery: An economic recovery where different segments of the population or economy recover at vastly different rates.
• Trump Tariffs: Tariffs imposed by the Trump administration on goods imported into the US.
• ACA Subsidies: Financial assistance provided under the Affordable Care Act to help individuals afford health insurance.
• FOMC (Federal Open Market Committee): The monetary policymaking body of the Federal Reserve.
• Basis Points: A unit of measure used in finance to denote the percentage change in a financial instrument. One basis point is equal to 0.01% or 1/100th of a percent.

Market Outlook for 2026 and Economic Drivers

Bryant Vancronite of Allspring Global Investments expresses a bullish outlook for markets in 2026, driven by a confluence of economic tailwinds. He identifies three primary drivers:

1. Monetary Stimulus: The Federal Reserve is expected to become increasingly accommodative over the coming quarters, providing ongoing monetary stimulus.
2. Fiscal Stimulus: The "one big beautiful bill" continues to inject fiscal stimulus, which is anticipated to significantly boost the lower-income consumer, a factor Vancronite believes the market is currently underestimating.
3. AI Capex Cycle: The ongoing investment in Artificial Intelligence infrastructure is expected to continue. While not all spending may be efficient, it will stimulate further phases of AI development, leading to a long-awaited replacement cycle.

The Evolving Phases of AI

Vancronite outlines three distinct phases of the AI cycle that will define 2026:

• Expansion: This phase involves broadening participation beyond a few key players like Nvidia. Companies involved in semiconductor testing and packaging, such as Pterodine, are well-positioned to benefit as more complex semiconductors are developed.
• Implementation: This phase focuses on translating the "cognitive world of AI" into a "kinetic world" by driving demand for new devices. Companies like Ksite will play a role in R&D and simulations for edge products, leading to the replacement of existing hardware like laptops and phones.
• Realization: This final phase is about realizing the benefits of AI investments in both personal and corporate lives.

Small Cap Market Dynamics: A Shift Towards Quality

Vancronite observes that small-cap stocks have experienced a "low quality rally" in 2025, characterized by a focus on non-earning, unprofitable companies driven by thematic land grabs (e.g., nuclear module reactors). He argues this trend is ending and a shift towards quality is imminent.

• Definition of Quality: Vancronite defines quality in small caps as companies with high ROIC and consistent, profitable business models. These companies were overlooked in 2025.
• Market Reversion: The market is expected to become more discerning, moving away from indiscriminate buying towards identifying profitable, high-ROIC companies.
• Investment Opportunity: These higher-quality small-cap companies are currently available at attractive valuations.
• Example: Mueller Industries is highlighted as an example of a well-positioned industrial company benefiting from the buildout (providing copper and piping) and possessing strong pricing power, market share growth, and acquisition capabilities. Despite good stock performance, Vancronite believes it is undervalued.

Sector Preferences for 2026

Vancronite identifies several sectors he favors for 2026:

• Materials and Industrials: These are considered "offensive opportunities" with both cyclical and secular drivers. As the AI capex cycle and economic stimulus take hold, transportation and chemical stocks are expected to become more relevant, leading to revenue and margin expansion.
• Healthcare: Vancronite believes healthcare has passed its peak volatility, uncertainty, and regulatory oversight. This fading uncertainty creates opportunities for businesses to evolve, incorporating AI and benefiting from greater regulatory clarity.
  • Specific Focus: Providers and lab companies are favored. Lab Corp is mentioned as an example, benefiting from increased demand for diagnostics for drug development, personalized medicine, and rapid disease diagnosis. These companies are also consolidating a fragmented market, leading to volume and pricing growth.
• Consumer Discretionary over Staples: This is a contrarian position for Vancronite, who has historically favored staples. He anticipates a convergence of the "K-shaped" consumer, with the lower-income segment improving due to administration efforts focused on affordability and potential interest rate reductions. This should drive spending in areas like big box retailers and restaurants.
  • Example: Home Depot is considered attractive, with the market potentially underpricing its recovery potential as housing markets improve.

Nvidia's H200 Chips and China Demand Concerns

Dan Howie, Yahoo Finance Tech Editor, discusses the complexities surrounding President Trump's approval of Nvidia's H200 AI chips for sale to China.

• Muted Market Response: The stock market's reaction has been subdued due to past experiences where planned chip shipments to China did not materialize or were later withdrawn.
• Uncertainty of Demand: Concerns remain about whether China will actually take delivery of the H200 chips, similar to the H20. There's speculation that China might be using the approval process to gain access to higher-end chips like the H200 or Blackwell.
• US Export Controls: Members of Congress have raised concerns about providing advanced chips to China, citing potential military applications and the risk of China supplanting the US in AI leadership.
• Nvidia's Argument: Nvidia contends that providing US-made chips to China is necessary to ensure global adoption of US technology, given the significant number of AI developers in China.
• Chip Performance: The H200 is a powerful chip, but it's two generations behind Nvidia's latest offerings. Chinese domestic players are developing their own chips, but the H200 is still significantly more powerful than what they currently offer. The H200 is also more powerful than the H20, which China reportedly rejected.
• Blackwell Chips: The most recent Nvidia chips, Blackwell (B300, Blackwell Ultra) and Z200, are even more advanced than the H200.

Oracle Earnings and AI Cloud Infrastructure

Laura Bratton, Yahoo Finance Tech and Markets Reporter, previews Oracle's upcoming earnings report.

• Analyst Expectations: Analysts anticipate Oracle's AI cloud business to be a significant growth driver.
  • Oracle Cloud Infrastructure (OCI) Revenue: Expected to climb 68% to over $4 billion.
  • Overall Revenue Growth: Expected to be 15%, reaching around $16.2 billion.
• Capital Expenditures (Capex): Investors are closely watching for commentary on Oracle's capex spending related to its AI data center buildout.
• Debt and Funding: Oracle has taken on significant debt to fund its AI ambitions, issuing nearly $26 billion in corporate bonds this year. Its bond rating is on the lower end of investment grade (BBB), compared to Alphabet (AA) and Amazon/Meta (AA-).
• Investor Skepticism: The substantial debt has led to investor skepticism about the AI trade and the current market cycle.
• Key Questions: Investors are seeking clarity on how Oracle will fund its AI ambitions, the expected return on investment, and the near-term impact on free cash flow.

Market-Moving DC Events for Investors

Henrietta Trees, Veta Partner and Director of Economic Policy, discusses key US government decisions impacting investors.

Supreme Court and Trump Tariffs

• Controversial Call: Trees assigns a 65% probability that the Supreme Court will strike down the Trump tariffs.
• Legal Reasoning: The core argument rests on Article 1, Section 8 of the Constitution, which mandates that Congress, not the President, has the authority to levy taxes. The CBO estimates these tariffs could generate $3 trillion over a decade.
• Lower Court Rulings: The Court of International Trade and the Federal Circuit Court of Appeals have already ruled that these tariffs are taxes and require Congressional approval.
• Presidential Authority: Trees argues the President does not have the unilateral authority to impose such tariffs.
• Controversial Aspect: The more controversial part of her call is the belief that the President will not be able to reinstate these tariffs through other means, avoiding a "Liberation Day 2.0" scenario that could destabilize markets and businesses.
• Economic Context: The current economic climate, with persistent inflation (3%) and rising unemployment, makes it less feasible for the President to reintroduce tariffs compared to a fresh mandate post-election.
• Timeline: The Supreme Court decision could come as early as "tomorrow" or within the next 10 days, making it a critical, "once-in-a-lifetime binary event."
• Market Reaction:
  • Bond Market: Likely to react negatively, as it has factored in the $3 trillion in revenue from these tariffs to offset the deficit.
  • Equity Markets: Differentiated. Companies like Nike, Under Armour, Walmart, Target, and Home Depot would benefit from the removal of tariffs.
• Nuance on Tariffs: Investors need to differentiate between tariffs on China and other countries like India, Japan, and the UK. While reciprocal tariffs might be removed, China has existing Section 301 authority that could be used to reinstate tariffs.

ACA Subsidies Extension

• Reduced Odds: Trees' odds of an ACA subsidies extension have fallen from 65% to 25%.
• Reasoning: Despite the affordability narrative and the significant impact on individuals (920 dollars per year, affecting 4 million people and 22 million in total), there has been a lack of bipartisan consensus from leadership.
• Election Year Impact: This lack of action increases the odds of a government shutdown, potentially starting February 1st, rising from 20% to 25%.

Trump's Affordability Strategy

• Legislative Challenges: Passing legislation is difficult for a President without Congressional control.
• Tariff Rebate as a Solution: Removing tariffs would provide an $1,800 per household benefit annually, offering an easy solution for the President to address affordability concerns.
• Executive Action: The President's strategy relies heavily on executive actions.
• Republican Conference Challenges: Passing another large partisan bill through Congress is unlikely, especially with approximately two dozen House Republicans retiring.
• Supreme Court as an "Out": The Supreme Court striking down tariffs would provide the President with a significant "out," immediately alleviating price pressures on consumers and farmers.

What to Watch: December 10th

• Federal Reserve FOMC Meeting: The December FOMC meeting is critical. Wall Street expects a 25 basis point interest rate cut. Investors will focus on Fed Chair Jerome Powell's commentary on future monetary policy during his press conference. Yahoo Finance will provide coverage starting Wednesday at 2 PM Eastern.
• Oracle and Adobe Earnings: Both companies are scheduled to release their second fiscal quarter results after the market close on Wednesday.
  • Oracle: Despite a recent stock decline (over 8%), analysts expect strong performance driven by AI cloud demand, with the cloud infrastructure business potentially growing around 70%. Strong near-term demand is anticipated even before the large OpenAI contract materializes.