AI and the Fed Will Be Big Factors for Markets in 2026

Jeffrey Buchbinder (00:00):

Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Jeffrey Roach. Thank you for joining Jeff to talk economy, even in the absence of economic data. How are you?

Jeffrey Roach (00:16):

Doing well, and of course it's all coming back. The return to office, you could say

Jeffrey Buchbinder (00:22):

It is coming back. Indeed. I'm kind of looking forward to it actually. It's kind of nice to know, get a full picture of what, what the economy is doing.

Jeffrey Roach (00:33):

It's been a great opportunity for those that provide private sector snapshots. Boy I've, I've noticed a number of firms have jumped at the opportunity. They're now in the limelight and it's been good for them as investors have not had the official government data, the switch to the private sector.

Jeffrey Buchbinder (00:56):

Well, good for them. We certainly appreciated having enough data to make a pretty good assessment of the economy, but maybe not quite as good as if we get the full data set. As you could probably tell already for regular listeners, I'm finding a little bit of a cold, but I, I think I'm going to be able to get through this. I've got glass of water here in case I need it. If you if you see, see me coughing, Jeff, you just keep talking.

Jeffrey Roach (01:25):

<Laugh>,

Jeffrey Buchbinder (01:26):

<Laugh>.

Jeffrey Roach (01:27):

I got you covered. Team effort.

Jeffrey Buchbinder (01:30):

It, I don't feel too bad, but definitely don't, don't, I think sound like a normally do. So, here's our agenda for today. Market recap. I titled the section Hard to believe the S&P Rose last week because it sure didn't feel like an up week. Now granted, it was barely up 0.1%, actually, you had to round it to get to 0.1%, but nonetheless, it was up last week. We are selling off just a little bit as we're recording this on Monday. It's November 17th, 2025, just shortly after lunch here in the East coast. The I mean, I guess the two biggest drivers of the weakness were AI skepticism for one, and then fed Hawkishness number two. So we're going to talk about both those a little bit. Next we will talk about the weekly market commentary, which you can get on lpl.com under research that is early keys for the markets in 2026.

Jeffrey Buchbinder (02:31):

Certainly AI and the Fed top the list. And then finally preview the week ahead, which really isn't that data heavy at least not in terms of significant data because the job report will be stale. We're getting the September job report about five weeks late. Beyond that, there's not a ton of interesting data, but Jeff, you'll tell us what to watch. And then we get Nvidia earnings plus a bunch of retailers reporting. So frankly, I'll be very interested in those particular earnings reports as earning season wraps up. So let's do the mark recap here. You can see this is the S&P 500 up for the last five days, 0.1%. Really, again, hard to believe with, with the volatility. As we all know, we got a little bit more volatility last week than we've been seeing in recent months. But given the market, Jeff has worried more about the Fed and about whether AI spending will actually come through. Maybe it's not too surprising that we had more volatility last week. Your thoughts?

Jeffrey Roach (03:41):

Well, I think we got used to very low volatility the previous few weeks. Of course, after say, maybe, maybe end the summer, you know, doldrums. So maybe it's just getting back to what we expect as we go to a fed meeting in December when there's still a lot of debate. What's more important? Is it a weak job market or is it hot inflation? And what are they going to focus on? And it does seem like it's moving back and forth. The pendulum is swinging both sides, hence the volatility. I think one of the things that's, that's worth highlighting though, is you think about year to date numbers for S&P relative to year to date numbers for Europe. I don't want to get too ahead of where you want to go with sectors, but despite a little bit more choppiness because of that uncertainty on, on fed policy in the near term, it's not a, it's not a bad year to complain with. You know, 2025 is so far is looks like it might be a pretty a decent year when we, when we reset the clock here for 2026.

Jeffrey Buchbinder (04:47):

Yeah, it's going to be hard to do much better in 2026, assuming these gains for this year hold up through the rest of the year. So, no doubt pretty, pretty solid year. Well, it's been a solid year for communication services and tech. Certainly, if you want to talk year to date, both those sectors up 20%. Plus, we still like communication services getting a nice rally in alphabet shares today on news of a Berkshire stake in the company. That always helps. So you know, getting that sector off to a good start today. The I think the big story last week though was healthcare up almost 4%. It was some of the big names. Lilly was up over 10% last week. Strong week for Merck. It's a really big pharma, actually Amgen in the biotech space. So a big week for, for healthcare led by the big names.

Jeffrey Buchbinder (05:43):

It's really hard to know if that's, I mean, I, I know that GLP one is have had generated a lot of excitement among investors, but beyond that, it's really hard to know whether this is just a rotation because the market is looking for cheap areas that have lagged. Or if there's really some fundamental excitement in healthcare that's, that's pushing that sector higher. It's probably a little bit of both, but I would argue the rotation and the fact that the sector has lagged so long is probably the biggest reason why it has been working lately. Tech, despite all the scrutiny on AI and concerns about whether that spending's going to happen, was able to eke out a half a percent gain last week. Certainly Microsoft helped, that was up last week. And then Cisco had good earnings well received by markets that was a big winner last week. Moving on to the bond market, of course, here's your fed hawkishness again. We had the bond market selling off just a little bit. Rates ticking a bit higher. I mean, Jeff, maybe we'll save the comments on the Fed when we get to that key for 2026 slide. But anything here you want to highlight, either, you know, in terms of commodities, currencies or yeah, really commodities, currencies or fixed income, frankly, that we haven't hit on you. Yeah,

Jeffrey Roach (07:10):

I think it's, I think yen is still worth tracking. If you look at bottom right section there, the Japanese Yen in the 1 55 range, still having that potential for, who knows, maybe not as bad as what we've seen in the past with that unwinding of the carry trade. Remember that's all about borrowing in low interest rate or low cost areas to invest where the opportunity for, for triangular arbitrage is one way to think of it. But when you think about that weak yen, that's still worth tracking because of all the central banks out there globally, the Bank of Japan is the one, the only one of consequence that's tightening policy raising rates because of where the Japanese economy is. So that's worth, worth tracking, especially as you, you tie it into what Nik K's done this year. Quite a nice performing market. So that's it. That's it from this slide, I think for me.

Jeffrey Buchbinder (08:15):

Yeah, the oil markets haven't been particularly interesting. Energy stocks had a nice week last week, but actual crude oil at 60 bucks hasn't really moved much at all lately. We'll continue to watch it but for now, expect it to stay range bound. So in, in terms of what we're watching for 2026, this is kind of a technical take. We'll be watching the narrow leadership and the index concentration. So that's what this chart shows. You've got the, you know, the typical 50 day and 200 day moving averages that we always show with the S&P 500 here. But then you also have this shaded line, this kind of area line in the background that shows the percentage of stocks above the 200 day moving average within the S&P 500. And you see here, we've come down from, you know, where we were most of the last couple years, but not much.

Jeffrey Buchbinder (09:17):

We're still, you know, at the last tick around 60% that'll come down a little bit today, but that's a solid reading, you know, not table pounding, bullish, kind of a reading, but pretty solid. So for now, we're comfortable with the breadth and the index concentration and what we'll just have to continue to watch this. This'll be a, it's been a story for really the last three or four years, and it'll continue to be one in 2026. So that's the first chart from the week of market commentary. This week we'll get into the, what I would argue would be the biggest two keys to 2026 AI and the Fed. I hate to give the fed too much worth <laugh> in terms of how it's going to be important, but it's, but it is, it is going to be important because we're at this kind of inflection point where you've got hawks and doves trying to come together.

Jeffrey Buchbinder (10:14):

You have the leadership changes, Jeff, that I know you have some thoughts on. But before we get into that, let's talk about earnings. The first key for 2026 S&P of a hundred companies have to hit these earnings targets. Right now, consensus reflects 14% earnings growth, 2026 versus 2025. That is a big number. The average is more like eight, eight 9% on S&P 500 profit growth Stimulus is going to help and AI's going to help. But if we get disappointments of any kind, and we don't hit these numbers, that's going to make the S&P 500 a little bit tougher to generate the double digit returns that a lot of people expect even next year. So all of these keys to next year tie back to ai. And so you're going to continue to hear that from us as we go through these slides.

Jeffrey Buchbinder (11:12):

But number one, hitting these lofty earnings targets. By the way, Q3 earnings season, I've been very impressed. the margins X financials are up quarter over quarter. That is, despite the fact that tariffs paid in Q3 were higher than tariffs paid in Q2. So you had to absorb more tariffs and still were able to grow margins. That's, that's really impressive. And earnings are going to end up growing in the mid-teens when all the numbers are in. If you take out META'S tax charge, which is 2% of EPS for the s and p. So that's take key number one, Jeff, over to you, the start of, or the continuation of the AI discussion. Mm-Hmm <affirmative>. Another key is AI adoption, and then related to that is what it's going to do for the job market and productivity.

Jeffrey Roach (12:05):

Yeah. And, and I think this is a great segue, really from your comment about the fact that you businesses were paying tariffs like they, you know, higher than they were the previous quarter. And at the same time you saw this rise in margins. I think what, what the AI story tells you about the next few quarters is that you actually have an opportunity to continue to, to manage those costs on the, on the corporate side, because adoption rates are still very low in several sectors. So I'm just showing you a chart here. Adoption rates for major industries at the bottom part of the chart information technology, no surprise there over 70% adoption rate. You'd be nervous if it were anything lower, right? <Laugh> you want, but what's interesting is we, is you read up that chart combination of food services, think restaurants, hotels you think public administration, think, you know, services, industries healthcare.

Jeffrey Roach (13:11):

Some of those are, you know, in the, in the 25 to 35% adoption rate, that's pretty low, meaning that there's plenty of room to have that utilization rate increase. And hence, at least the hope is a greater adoption rate would allow firms to manage those costs even better. So, to put in perspective on that previous chart, Jeff, as you're, you're showing 20, 25 numbers, and then 2026 numbers, you think, wow, how in the world can this keep going like this? It's possible that AI will provide that long run productivity bump to manage the cost. So keep your eye on, on accommodation, food services, keep an eye on some of the highly labor intensive service sectors and, and see where they're going in terms of AI adoption rates. That's certainly going to be really important to track as we head into the new year.

Jeffrey Buchbinder (14:10):

Yeah, I'm not surprised that our industry, Jeff, finance and insurance is, is high. You know, we're, we're certainly using it here, not, not just in the research department for LPL, but also LPL advisors. Mm-Hmm <affirmative>. Have some AI tools. So it's become really pervasive in in, in our industry which is reflected here with this high bar, I guess you could say 60%. All right, so let's go to the Fed. Now, we mentioned a couple times already, the this is the implied fed cuts from the Fed funds market. So Jeff I know that the odds of a rate cut in December have plummeted. Now they're, I think they're even under 40% now. They ended last week around 40%. Do you think that's right? What do you think of the, this sort of rate cut profile priced into the bond market?

Jeffrey Roach (15:11):

Yeah, I think what this chart tells me, and I think this is the right way to, to expect things to play out, is throughout the new year at least, and even when you add in December, we're in a trajectory where rates are going to be lower and lowered consistently throughout the next, say, you know, 18 months. So when you go to, you know, mid late 2026, early 2027 you're going to see the Fed continue this rate cutting campaign that's consistency of cutting rates, maybe if they hit one meeting and there, and there's a pause. But in terms of just the overall trajectory, that's going to flow into, you know, downward pressure on some of the retail rates, especially if we get our fiscal house in order. And, and the 10 year stays well anchored where it is. You know, I'm looking at my screens here.

Jeffrey Roach (16:09):

We're, you know, we're, we're looking the four 10 ish range on the 10 year that's important by the way, when you think about retail rates, when I say retail, I'm, I'm talking about your, your bank rates for your CDs, your auto loans, mortgages, all those retail rates track probably a little tighter with the 10 year. But it's all related ultimately to how Fed policy is. I think to the, to the very near term question, Jeff, that you're asking about. I think the fact that there has been a little bit of limited visibility on the inflation outlook, especially as government agencies were closed for a little bit over 40 days. I think that's just made investors just a little bit more nervous that inflation has been running hotter than how the Fed wants it to run. And hence pushing the probabilities a little bit lower on what they do in December.

Jeffrey Roach (17:08):

I think we are in a position where inflation's running hot, but it's, but by the time we get November data now depending on how, you know, fed looks at it, maybe they're not going to have that data quite yet. December 10th is their next meeting. I, I think that, you know, it's going to be a close call for December, but on net, I think we do see inflation easing up. This is not, this is not the kind of environment that it 20, it was like 2022 where, you know, there we were, we were going in the other direction with inflation. So complicated chart here, but when you think about it, it, it makes sense throughout 20 26 6, I think what's a little bit interesting, and of course, you know, it's a little bit of a wild card when you start thinking about 2027 <laugh>, and you, you see that blue line there with the overnight rate, the implied fed funds rate, actually going back up a little bit, that's basically just saying, Hey, we expect no recession. We expect the economy to actually have some tailwinds. So by the time we roll into 2027 and 2028 the Fed can actually tighten up again as the economy is humming. But boy that there's a lot of things that could happen and the confidence intervals are pretty wide when you think about <laugh> that far out in history.

Jeffrey Buchbinder (18:32):

Yeah. So it is a little bit of a complicated chart, but it's, it, it, this is just the number of cuts on the right, 25 basis point cuts. So this is saying you're, the most cuts you're going to get in the next couple years is three, and then you're going to head or a little more than three, and then you're going to head back up. That's probably, or at least to me, it says that maybe the fed over cutts now the makeup of the Fed is going to change Jeff, as, as you know, that probably makes it more likely that we're going to get those three and potentially more cuts, wouldn't you say?

Jeffrey Roach (19:08):

Well, it's, there's a real chance that the fit overall board of Governors moves a little bit more toward that dovish view. And, and dovish just means they're more inclined to ease up on rates than leaning toward increasing rates. That'd be your hawkish, hawkish view is, is nervous about inflation. Dovish view is nervous about a weak economy. So I believe the latest is that somewhere around Thanksgiving time, maybe a little bit after, we might hear who, you know, might be on the short list or who the actual name will be to replace Chair Powell when his term ends in 2026. It's possible, who knows? But it's possible that Chair Powell gives up the chairmanship a little bit early. Not necessarily I don't have a strong opinion on that, but I think what's interesting is you think about who's on the short list, it's possible that we'll have aa slight dovish tilt overall in the, in central banking by the time we say hit Q2 of 2026.

Jeffrey Buchbinder (20:16):

Yeah, that's going to be interesting, I guess what names you hear Hassett, you hear Waller, Rick Reer from BlackRock. I think those are, those may be the top four.

Jeffrey Roach (20:32):

Yeah, that's right.

Jeffrey Buchbinder (20:34):

Yeah. So it'll be interesting to see. But I mean, all of those candidates probably would be a little more dovish than, than Powell, I would say. the Fed, you know, I, I try not to pay too much attention to gaming each meeting as an equity guy, certainly. But the Fed really matters for equities because of how important rates are mm-hmm <affirmative>. For equity valuations and because of how important financial conditions are for the equity markets and liquidity. Right? And so if you get a really hawkish fed or, you know, stickier inflation, the market expects in the next few months that will create a headwind for equity markets. It's no doubt. So we'll have to watch the Fed. It absolutely is a key to 2026. It's key to most years, but I think it's going to be really interesting in 2026 because of the changing makeup of the Fed and the fact that stock valuations are high yields might end up staying in the range that they're in, the 10 year yield, for example.

Jeffrey Buchbinder (21:38):

We don't have a formal forecast yet. You will see that in the outlook for 2026 when we publish it, which is coming in just a few weeks, but certainly don't expect us to make any bold call on, on long-term rates one way or the other. So speaking of long-term rates, here's our next key deficit spending. Now, Jeff, here's where the tariff revenue's really important, right? Because we have a lot more deficit spending coming from the one big beautiful bill act, which would all else equal take the deficit as a percentage of GDP above six, right? Again, probably seven, but we've been able to offset that with tariff revenue. So this charge shows you the projected by the CBO projected deficit as a percent of GDP. It's pretty much flat for the next 10 years. Do you buy that, Jeff, your, your thoughts on this? Yeah,

Jeffrey Roach (22:40):

Well, I think, I think it's fair to say, you know, think about several years out, you know, you, you see the bars getting shorter you know, 20 26, 20 27, and then kind of, you know, getting back where we're seeing it in 24, 25. And I think the wild card here is, you know, I think hands down the revenue from tariffs going to be helpful for 2025, maybe early 20, 26. But over time, businesses will have the ability to shift production from high tariff countries to lower cost country tariff countries to domestic activity. Hence that substitution effect, I think will actually dampen what we might expect from tariff revenue, say, you know, two years from now where businesses have that time to respond and readjust here. So it, it makes sense. It's, I think a lot of this is baked in how, how we can grow despite a shrinking labor force. Can we still keep this robust clip of growth? The answer is yes, if we can harness the abilities from ai. So I think this flat line, we're not going to see a ton of improvement long term, but this flat line makes sense to me. I mean, if anything, say, you know, 3, 4, 4 years out this deficit will probably look a little bit worse than what we see here in this chart.

Jeffrey Buchbinder (24:15):

Yeah. And certainly given the Trump administration's focus on affordability, now they're talking more about exemptions on tariffs. So that means less tariff revenue and therefore higher deficits. So, so yeah, I, I have, I would buy that, Jeff, that, that maybe this picture gets a little worse than this over the next several years. But we'll, you know, we'll just have to see where, where the path of tariffs go. Hopefully we'll get more growth than the CBO expects, and you can kind of grow into this deficit. But I think it's been proven for quite some time, unfortunately, by Congress that they're not willing to cut spending in any meaningful way. Right. Spent some, some efforts.

Jeffrey Roach (25:02):

Well, I think we've also been, have been able to, to prove that the biggest bang for your buck is not necessarily cutting spending although I'm all for getting rid of wasteful spending. But what's most powerful and most impactful is, is solid growth, pro growth policies economy can grow out of a deficit problem a lot faster than Congress cutting spending as a way to solve the deficit problem.

Jeffrey Buchbinder (25:30):

Good point. And it's going to grow out of this a little bit in Q3 because it looks like the Q3 GDP is going to be pretty good. Mm-Hmm <affirmative>. So amen to that. We want more growth. And here's where the AI ties in. You mentioned productivity, if we can get more productivity that can help us grow faster with less inflation. So I think we tied AI in every single key to 2026

Jeffrey Roach (25:55):

<Laugh>.

Jeffrey Buchbinder (25:56):

That's good. So you can find all that in the weekly commentary again on lpl.com. Team effort, you and you and me. Jeff was more than the Jeff and Jeff show. We also had Lawrence Gillum and Adam Turnquist chime in. Adam had a technical technical setup take and then Lawrence on, on bond market and, and deficits myself on earnings and the AI CapEx ramp. And Jeff, you on AI adoption. So good commentary check it out if you're interested. Let's end here with the week ahead. It's Nvidia earnings and a stale jobs report, <laugh>. So any thoughts on that? Yes. On that job report, Jeff.

Jeffrey Roach (26:38):

I would say,

Jeffrey Buchbinder (26:39):

What other data should people be watching?

Jeffrey Roach (26:41):

Yeah. I, I would say the way the setup here with Nvidia and stale job reports definitely doesn't make it very exciting. When you think about the day that might be released, I think, I think it's going to be interesting reading the latest minutes we get this week. The reason why is because these are the meeting minutes from the most recent decision that the Fed made when there was some conflicting dissenting. He had someone saying, Hey, we want, I want more aggressive of a cut. A few were saying, Hey, no, I don't want any action taken. Let's hold rates steady. So he had quite a diversity of views that will make the upcoming minutes to that meeting important. Worth watching, probably more than the stale jobs report. And, and the reason why we're saying stale is because it's for the month of September should have been released five weeks ago.

Jeffrey Roach (27:35):

But the government shut down before it was released. The government did not shut down before the data was collected. That's why we're getting this September jobs report. And looking ahead, we are going to have an October jobs report coming as, as we would expect. However, that's going to be a little bit unusual. We'll get data from the AST establishment survey. That's businesses we will not likely get any data from the household survey, meaning no one made those, those calls to households. The qualitative component of the jobs report that's going to be missing, things like the unemployment rate, the underemployment rate comes from the household survey. We will not get those for October.

Jeffrey Buchbinder (28:21):

Yeah. Now claims we're going to continue to get right, Jeff.

Jeffrey Roach (28:25):

So that'll be yes. That, that's a, that's a very, very helpful higher frequency data point when you think about those that are collecting initially or continuing, we call 'em continuing claims or initial Java claims, those that are applying for unemployment insurance benefits because they were let go. Hence that's a good proxy for, for what we won't get with an October unemployment rate we will get with October initial and continuing unemployment claims.

Jeffrey Buchbinder (28:59):

Yeah. So we'll certainly watch, watch for claims. Maybe I should have starred that one. Because it's collected at the state level, we actually have that data mm-hmm <affirmative>. So yeah, maybe it's a little more interesting week than, than I, I led you to believe here when I set this up. Now earnings are going to be very interesting, not just because NVIDIA's the biggest market cap name in the S&P 500, and they report Wednesday after the close, but you also get a bunch of retailers. And so we're going to get a feel for how the consumer's doing. Retail's also interesting because they report late. So I'm talking about Target and they got Walmart home Depot a bunch of others because they report late. We're going to get a more recent look at the consumer than we would've gotten from a, you know, a company that reported that's on a September quarter end in reports in mid-October.

Jeffrey Buchbinder (29:55):

So that is going to be important. it's only, I think, 13 companies reporting this week, but so many of them are retail that, that we'll get a look at the consumer. So I think that's really it. Those are the things to focus on. And then we'll have to continue to watch any AI headlines that can help us assess whether that spending is really going to come through. My guess is we don't get anything this, not just this week, but this month that tells us that spending won't come through. If we are going to get that, it's probably going to come in 2026. But that is a constant watch I think every week as we go forward to take the temperature of ai. Alright, so that's all we got. So thanks Jeff, for joining and, and walking through some of your keys for 2026 and helping us not only recap, but preview the week ahead. Thank you to all of you for listening to another LPL Market Signals. Apologies for the voice. I made it through. I played hurt and survive. Survive the game <laugh>. So we will be back with you next week for another episode. See you then and take care.