'Winners from last year are not going to be the same winners of this year': Investment strategist

Key Concepts

• Productivity Gains: Increased efficiency in businesses leading to higher earnings.
• AI Underpinnings: The foundational role of Artificial Intelligence in driving productivity and growth.
• Fiscal Support: Government policies like tax cuts that stimulate economic activity.
• Dovish Monetary Policy: Central bank policies aimed at lowering interest rates and encouraging borrowing.
• Yield Curve Steepening: An increase in the difference between long-term and short-term interest rates, generally benefiting financials.
• Midterm Election Cycle: The typical market behavior observed during US midterm election years.
• Chinese Innovation: Rapid advancements in technology and robotics within China.

Market Drivers and Outlook for 2026

Yang Yuma identifies a “favorable setup” for US markets in 2026, driven primarily by productivity gains within companies. He believes these gains will directly translate into stronger earnings and overall profitability. This is underpinned by technology, specifically AI, which is boosting efficiency. Adding to this positive outlook are fiscal support measures, including existing tax cuts, and an anticipated shift towards a more dovish monetary policy – suggesting potential interest rate cuts. These combined factors create a supportive environment for market growth.

AI Valuations and Sector Rotation

While acknowledging that some AI valuations have become inflated, Yuma doesn’t foresee a collapse. He anticipates a shift in leadership within the AI space, moving away from purely infrastructure-focused companies towards those using the technology to improve their operations. He states, “the winners from last year aren’t going to be the exact same winners for this year…some of the users of the technology are going to be more of the winners.” He notes the infrastructure buildout will continue, but at a slower pace.

Financials and the Steepening Yield Curve

Yuma highlights the financials sector as poised for strong performance. This is attributed to several factors: potential cost reductions through AI implementation (“for example financials who are gaining in their back room by having to hire less and perhaps have AI pick up some of those jobs”), a possible reduction in reliance on expensive advisory firms (as announced that day), and the expectation of a steepening yield curve. A steepening yield curve, where the difference between long-term and short-term interest rates increases, typically benefits banks and financial institutions. He also points to “modest…neutral valuations” in the midcap financial space as attractive.

Broader Sector Opportunities: Airlines and Healthcare

Beyond financials, Yuma identifies opportunities in specific subsectors trading at reasonable valuations with good growth potential. Airlines are cited as an example, benefiting from consolidation, healthy demand, and a stable economy, particularly in premium seating. He also points to healthcare as a sector likely to benefit from potential “more populist policies” as the US approaches midterm elections.

Midterm Election Year Dynamics

Yuma describes the typical pattern in US midterm election years: relative stability in the first six months, followed by increased volatility and a potential pullback in the three months leading up to the election, and then a subsequent bounceback. However, he suggests this pattern might be disrupted in the current cycle due to President Trump’s focus on preventing projected Republican losses. He believes the President’s emphasis on affordability and support for the middle class will likely be stimulative, potentially mitigating the usual pre-election caution. He adds that even Democratic gains in the midterms could lead to increased spending. He states, “I’m not quite sure we’ll see that same degree of pullback or caution.”

Chinese Technology and Diversification

Yuma emphasizes the importance of recognizing Chinese innovation in technology, particularly in areas like robotics, electric vehicles (EVs), and AI. He advocates for diversified exposure to Chinese technology, viewing the US and China as the two primary centers of technological strength. He argues, “It doesn’t make a lot of sense to only be exposed to one of those two.” He stresses a broad-based approach rather than attempting to pick individual winners.

Conclusion

Yuma presents a cautiously optimistic outlook for US markets in 2026, driven by productivity gains, AI advancements, fiscal support, and a potential shift in monetary policy. He advises investors to look beyond the initial AI hype and consider sectors like financials, airlines, and healthcare, while also recognizing the growing importance of Chinese technological innovation and the need for diversified exposure. The upcoming midterm elections present a unique dynamic, potentially altering the typical market cycle due to the current political landscape.