12 Month Market Outlook

01

Inflation Dynamics

September inflation readings remained above the Federal Reserve's 2% target. Energy and other input costs may continue to influence inflation readings, while tariff-related pressures and other factors remain uncertain. The risk is a prolonged inflation cycle rather than a short-term spike.

• September Headline PCE was up 0.5% month over month (up from 0.3% in August) and 3.6% year over year (up from 3.4% in August), remaining well above the Federal Reserve's 2% target.
• September Core PCE was up 0.3% month over month and rose to 3.1% year over year.
• September Headline CPI was up 0.6% month over month (seasonally adjusted) and 3.7% year over year (not seasonally adjusted).
• September Core CPI (less food and energy) was up 0.3% month over month and 2.6% year over year.
• Goods inflation easing, but uncertain impact from conflict as energy input prices skyrocket in at least the near-term.
• Tariff-related pressures could potentially resolve with the new government in January, which may ease some of the upward pressure on prices.
• PPI is continuing to print hot and is likely to pass through to the consumer in upcoming months. September final demand prices rose 1.3% from August, the largest monthly jump since March 2022.

02

Labor Market & Economic Growth

The labor market had been cooling without collapsing, but job growth recently has been stronger than expected. Risks of sizeable AI-related layoffs and early-retirement packages persist but aren't posing as big of a threat yet as originally expected. Moderating wage growth is an important metric to monitor as weaker consumption combined with higher rates could present a material headwind to real economic growth.

• Job creation slowed significantly, with several months of weak private-sector hiring, but during Q2-Q3 had materially improved. September unemployment was 4.2%, up 0.1 percentage point from August, reversing previous jobs gains.
• New college graduates and over-50 white collar workers have been particularly affected in the negative.
• Expect “backdrop” for labor to go sour before the actual unemployment number as early retirement packages and such are taken, which could directly flow through to spending and negatively impact economic growth.

03

Federal Reserve Policy, Leadership Transition & Rates

The Federal Reserve raised its policy rate by 25 basis points at its September 16 meeting. The September dot plot indicated at least one additional rate increase in 2026. The Fed then held rates at its October meeting. The policy path remains uncertain as the Fed weighs inflation, labor-market conditions, growth, and geopolitical developments.

• The Federal Reserve raised its policy rate by 25 basis points at the September 16, 2026 FOMC meeting.
• The September dot plot suggested at least one additional rate increase in 2026.
• The Fed held rates at its October meeting.
• The December meeting is where we will see whether we get another rate hike, which we view as extremely likely.
• Data uncertainty remains elevated: inflation, labor-market conditions, and energy-related costs may influence future policy decisions.
• Key risk: Restrictive policy could weigh on growth, while easing too quickly with inflation still elevated could add to price pressures. The path remains challenging to navigate.
• The September decision and projections underscore the Fed's continued focus on inflation alongside its employment mandate.

04

Technology Leadership & AI Disruption

Innovation remains a structural driver (AI, automation, digital assets), but accelerating AI adoption is creating disruption risk—particularly in software, where pricing pressure, margin compression, and competitive displacement are increasing. CAPEX has become increasingly important in driving returns, and a slowdown could be negative for the sector.

• AI remains early in its adoption curve, driving capex cycles and productivity investments. The election outcome could drive a slower capex cycle, especially given the unpopularity of data centers.
• Productivity appears to be increasing rapidly in specific sectors, especially coding-related jobs.
• Monitoring the development of AI agents in tandem with unemployment numbers will be paramount to positioning in the coming years.
• The market is broadening beyond the “Magnificent 7,” with mid-cap innovators gaining traction.
• In a slower growth environment, winners will be defined not just by innovation but by execution, margin discipline, and scalability.
• Innovation leadership remains essential — but with higher scrutiny on earnings quality.

05

Geopolitical Risk — Middle East War

Conflict between Iran and the United States/Allies has elevated geopolitical risk premia and increased energy market sensitivity, particularly around the Strait of Hormuz. Higher oil prices risk reintroducing inflation pressure, complicating Fed policy and adding near-term volatility across equities, credit, and commodities. The election outcome could drive a faster sue for peace, which would be positive for both equity and fixed income markets and for the inflation outlook.

• Iran: Open conflict threatens the most-important energy corridor in the world: The Strait of Hormuz. While the administration has taken an aggressive, hardline stance publicly—issuing and executing strong military threats—it is increasingly clear that a diplomatic resolution remains the best economic end state. The election outcome could drive a faster sue for peace, which would be positive for equities, fixed income, and inflation.
• Venezuela: Political instability and uncertainty around sanctions, oil production, and election outcomes create episodic energy-market and emerging-market risk. Oil shipments to the US have increased, a net positive for US energy independence in the Americas sphere of influence.
• Greenland: Rising geopolitical importance due to strategic location, Arctic shipping routes, and critical mineral resources adds long-term geopolitical and defense-related uncertainty.
• Portfolio implication: A higher risk premium is justified, and portfolios should reflect a balance of offense (innovation) and defense (quality, shorter duration, diversifiers).

06

Government Policy: Tariffs, Tax, Deficits & Liquidity

Fiscal policy continues to favor tax extensions and growth support. Increased tax refunds this spring provided a modest liquidity tailwind to consumers and markets. However, large deficits and ongoing trade frictions contribute to structural uncertainty.

• Blanket tariffs are unlikely to be an active geopolitical tool. While escalation is not the base case, tariff-related volatility can flare quickly. The Supreme Court's decision has effectively capped the “blanket” tariff rate at 15%, but specific sectors can still be targeted by the executive branch.
• Tax policy remains in gridlock: extensions of existing tax cuts are still expected, but broader tax reform is unlikely in the near term.
• Fiscal deficits remain historically large, keeping upward pressure on inflation expectations and limiting the government's ability to deploy stimulative fiscal policy without cost.
• K-Shaped economy continues to develop, potential for unrest should unemployment suddenly spike alongside an economic downturn.
• Policy implication: More episodic volatility and a higher structural inflation floor.