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Markets delivered strong returns in 2025 despite elevated valuations, with the S&P 500 up 17.9% driven by AI-led technology earnings and international markets meaningfully outperforming for the first time in years. The core thesis centers on a transition where future returns will depend more on earnings durability and cash-flow generation rather than further multiple expansion, as the S&P 500 trades at 23x forward earnings well above its long-term average. Key return drivers include sustained capital investment in AI, infrastructure, and energy supported by demographic pressures and labor scarcity, along with continued low-double-digit earnings growth. Primary risks include elevated valuations increasing market sensitivity to disappointments, potential Fed policy uncertainty with Chair Powell's term ending, and compressed spreads across fixed income leaving less room for error. Current positioning emphasizes selectivity, diversification, and focusing on companies with durable earnings power and strong balance sheets. The outlook remains constructive for 2026 with GDP growth expected between 2-3%, though the environment requires flexibility over adherence to historical frameworks given demographic constraints and sustained capital investment patterns.
Markets delivered strong returns in 2025 despite elevated valuations, driven by AI-led technology earnings and international outperformance, but future returns will depend more on earnings durability than multiple expansion in an environment that requires selectivity and focus on companies with strong fundamentals.
Outlook remains constructive for 2026 with real GDP growth expected between 2.0% and 3.0%, supported by steady consumer spending and continued investment in infrastructure, energy, and productivity-enhancing technologies. The macro environment appears neither strong enough to force monetary tightening nor weak enough to meaningfully undermine corporate earnings. Flexibility, diversification, and focus on underlying fundamentals remain more valuable than adhering to historical rules of thumb.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jan 27 2026 | 2025 Q4 | - | AI, earnings, growth, international, rates, technology, Valuations | - | Artificial intelligence investment has been a major contributor to recent growth, driving strong corporate earnings in technology and communication services. AI-related capital investment supports long-term earnings growth, though the pace is expected to slow from exceptionally fast levels seen over the past two years. Equity valuations remain elevated with the S&P 500 trading near 23x forward earnings, well above its long-term average of 15.6x. High valuations may increase market sensitivity to earnings disappointments and tend to constrain longer-term returns, reinforcing the importance of selectivity. The Federal Reserve cut rates three times in 2025 and expects one more cut in 2026, with markets pricing in roughly two additional cuts. Higher bond yields have improved income potential, with the 10-year Treasury ending at 4.18%, though a return to near-zero rates is unlikely. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2025 Q4 |
AIAI has been integrated into RGA's research process through tools like NotebookLM, Gems in Gemini, and Claude Code. The firm views AI as a force multiplier for human judgment rather than a replacement, emphasizing the Kasparov Law principle. They believe the market narrative around AI displacement is swinging to unhelpful extremes, creating investment opportunities. |
Machine Learning Automation Software Productivity Innovation |
RatesFederal Reserve resumed rate-cutting cycle with first cut since December 2024, signaling resumption of easing. Expected three cuts of 25bps between now and first quarter 2026 as Fed responds to signs of weakness in US labor market. |
Fed Monetary Policy Labor Market Easing Liquidity | |
ValuationsEquity valuations remain elevated with the S&P 500 trading near 23x forward earnings, well above its long-term average of 15.6x. High valuations may increase market sensitivity to earnings disappointments and tend to constrain longer-term returns, reinforcing the importance of selectivity. |
Multiples Premium Earnings Risk Selectivity |
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