'We estimate about 8k dollars more per person in tax returns this year': Kwon on US fiscal tailwinds

Key Concepts

• Secular Barbell Investing: A strategy focusing on both safe-haven assets (Gold) and high-growth potential assets (AI).
• Debasement Cycle: A period of currency devaluation driven by fiscal and monetary policies.
• M2 Money Supply: A measure of the total money supply in an economy, including cash, checking deposits, and savings accounts.
• Capex Cycle: Capital Expenditure cycle, referring to the investment in physical assets like property, plant, and equipment.
• Hyperscalers: Large-scale cloud computing providers (e.g., Amazon, Microsoft, Google).
• K-Shaped Economy: An economic recovery where different segments of the population experience vastly different outcomes.
• Moral Hazard: A situation where one party takes more risks because someone else bears the cost of those risks.
• Fed Put/Government Put: The belief that the Federal Reserve or the government will intervene to prevent a significant market downturn.

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Market Outlook: Gold, AI, and the 2026 Landscape – Osang Kuan (Wells Fargo)

I. The Gold Thesis: Navigating the Debasement Cycle

Osang Kuan advocates for increased investment in gold, anticipating further price appreciation in 2026. This recommendation stems from his analysis of “mega cycles” currently impacting the market, specifically a “debasement cycle” characterized by currency devaluation. Wells Fargo has developed a metric to track this cycle: M2 money supply divided by the gold price, representing the purchasing power of the money supply in terms of gold ounces.

Historical analysis, dating back to the 1800s, identifies the US as currently being in its fourth currency devaluation cycle, which began in 2022, coinciding with interest rate hikes and the Russia-Ukraine conflict. Kuan identifies three key drivers of this cycle: budget balance (fiscal deficit), debt-to-GDP ratio, and inflation. While disinflation may occur, he believes the debasement cycle will persist, historically leading to gold outperforming the S&P 500 during similar periods.

II. Artificial Intelligence: Beyond the Capex Concerns

Kuan remains bullish on AI, despite concerns surrounding the monetization of AI investments. He acknowledges investor demand for return on investment, but argues that fears of a peak in the AI capital expenditure (capex) cycle are “way overdone.” He believes hyperscalers will continue to increase capex to maintain competitiveness, describing it as an “arms race.”

He notes that the market consistently underestimates hyperscaler capex plans, a pattern observed previously in 2024. Kuan emphasizes that hyperscalers are unlikely to cut back on AI investment, anticipating positive price movement during the upcoming earnings season. He suggests focusing on companies that enable AI (semiconductors and capex takers) rather than the hyperscalers themselves (capex spenders). He characterizes the hyperscaler space as a “stock pickers market,” anticipating both significant winners and losers.

III. The K-Shaped Economy and Consumer Dynamics

Kuan addresses the ongoing K-shaped economic recovery, where economic benefits are unevenly distributed. This disparity is evident not only among consumers but also between companies, with the S&P 500 experiencing increased productivity while the Russell 2000 has seen a decline. He believes this trend will continue unless interest rates fall sufficiently to stimulate a new business cycle, a scenario he doesn’t foresee in 2026.

However, Kuan highlights a potential fiscal tailwind for lower-income consumers through increased tax returns, estimating an average of $800 more per person in 2026 compared to the previous year, which he expects to be stimulative to the overall economy.

IV. Political Considerations: The Midterm Election and Market Intervention

Kuan points to a significant “moral hazard” issue related to the upcoming midterm elections. He argues that both the Federal Reserve and the government have a strong incentive to prevent a downturn in the equity market.

He cites two key reasons: First, US equity portfolios now constitute a larger portion of US household net worth than real estate, creating a substantial wealth effect tied to market performance. A market decline could negatively impact consumption. Second, investment income tax (capital gains, dividends, and interest) accounts for approximately 25% of government revenue, making the S&P 500 performance directly linked to government finances.

This creates a “government put” alongside the traditional “Fed put,” suggesting potential intervention to support the market leading into the midterms. As Kuan states, “neither the Fed nor the government can afford a downturn in the equity market.”

V. Technical Terms & Definitions

• Fiscal Deficit: The difference between a government’s spending and its revenue.
• Debt-to-GDP Ratio: A ratio comparing a country’s public debt to its gross domestic product.
• Disinflation: A slowdown in the rate of inflation.
• Hyperscalers: Companies that operate large-scale, distributed computing infrastructure to deliver cloud services.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• Russell 2000: A stock market index representing approximately 2,000 small-cap companies in the United States.

Conclusion

Osang Kuan presents a nuanced outlook for 2026, advocating a “secular barbell” investment strategy centered on gold and AI. His analysis emphasizes the ongoing currency debasement cycle as a key driver for gold’s continued appreciation, while maintaining a positive view on AI despite monetization concerns. He also highlights the significant political and economic incentives to prevent a market downturn, particularly leading into the midterm elections, suggesting a supportive environment for equities. His perspective underscores the importance of understanding both macroeconomic trends and political dynamics when making investment decisions.