Trump’s second term

As it relates to markets and the economy, Trump’s 2024 election campaign promised deregulation (including a regulatory framework for the crypto industry), tax cuts, tariffs, and fiscal discipline. Trump’s second term began aggressively, with the signing of multiple executive orders to advance this agenda. As with Trump’s first term, execution often came with uncertainty, creating volatility in financial markets.

This was most evident in the implementation of tariff policy. The announcement of “Liberation Day” in early April resulted in the largest two-day drop in the stock market since the “Black Monday” crash of 1987. Markets recovered after Trump paused tariffs and softened his rhetoric just one week later. As we enter 2026, while several formal tariff deals have been announced and the administration has claimed to have collected hundreds of billions of dollars from trading partners, a Supreme Court case determining the legal status of these tariffs continues to weigh on markets.

Similar to his first term, and despite statements to the contrary, the President appears highly focused on stock market levels as a gauge of performance and has tended to react swiftly whenever markets sell off in response to policy announcements.

With respect to fiscal discipline, an effort to get rid of fraud, waste, and abuse by appointing Elon Musk to lead the Department of Government Efficiency (DOGE) proved to be highly unpopular both politically and socially.  Elon Musk stepped down within a few months.  While the administration has taken credit for a slightly smaller fiscal deficit than in 2024, the government still ran a deficit of nearly 6% of GDP in the first year of Trump’s second term. This level of deficit spending is unsustainable over the long term, which brings us to the level of interest rates.

The poor fiscal situation is largely driven by spending.  Cutting spending is difficult because the majority is non-discretionary (Social Security, Medicare, etc.). One expense that has grown substantially in recent years is interest on the national debt. In 2025, interest expense totaled approximately $1 trillion, or about 15% of the federal budget. This reflects the Federal Reserve’s aggressive rate hikes to combat post-COVID inflation.

President Trump repeatedly criticized the Federal Reserve, led by Chair Jay Powell, for not lowering rates quickly enough, at times threatening to remove the Chair, rhetoric that markets generally disliked. While the Federal Reserve ultimately cut rates three times in 2025 for a total of 0.75%, lowering the policy range from 4.00%–4.25% to 3.50%–3.75%, longer-term rates did not follow suit. By year-end, the 10-year Treasury yield was down only 0.25% from the start of Trump’s term, while the 30-year yield was slightly higher.

This places the Treasury, led by Secretary Bessent, in a difficult position. If reducing interest expense is a priority, issuing short-term debt is the only effective lever, but doing so requires continual refinancing. Issuing long-term bonds at current rates does little to reduce interest costs.

2026 Outlook

• With midterm elections looming and several far-left-leaning candidates winning 2025 elections (NYC Mayor, NJ Governor, VA Governor), Trump is likely to focus on affordability, an issue central to many of these campaigns
• While official inflation measures such as CPI have moderated, most Americans’ lived experience is that the cost of living is 25% or more above pre-COVID levels
• The administration has floated several proposals to address this, including a dividend to citizens, banning institutional ownership of single-family homes, and requiring large technology companies to absorb higher electricity costs associated with data center expansion
• It remains unclear which, if any, of these proposals will be implemented, but we expect continued policy announcements along these lines
• Healthcare costs have also been a focus, with proposals such as Most Favored Nation (MFN) pricing for pharmaceuticals and efforts to reduce the role of pharmacy benefit managers (PBMs), which heavily influence drug pricing
• While the outcomes of these initiatives remain uncertain, they are likely to create sector-specific volatility, serving as both a source of risk and opportunity
• One thing that appears clear is that this administration intends to run the economy “hot”
• As cost-cutting efforts faltered in early 2025, the administration pivoted toward growth as the primary strategy for managing the debt burden
• Pro-growth policies are likely to remain a defining theme, resulting in higher nominal GDP growth alongside elevated inflation. Higher nominal GDP should support corporate revenues and earnings, which is generally constructive for equity markets

Artificial Intelligence

The evolution and adoption of artificial intelligence continued in 2025. While 2024 marked broader adoption of large language models (LLMs) as chatbots and search-engine replacements, 2025 became the year of “agentic AI.” This was particularly evident in software development. While engineers had already integrated AI into their workflows, model capabilities advanced significantly, enabling broader and more accurate code generation.

By the end of 2025, there were numerous anecdotes of individuals with no formal coding experience “vibe coding” software using agents from OpenAI, Anthropic, Gemini, and Grok. This shift created a new set of winners and losers within the technology sector.

Prior to 2025, chipmakers, most notably Nvidia, were the primary beneficiaries of the AI boom. In 2025, memory manufacturers emerged as major winners. Historically, LLMs lacked persistent memory even within a single context window. The integration of memory enabled more personalized interactions and powerful use cases such as coding agents. The key enabler has been High Bandwidth Memory (HBM), primarily produced by SK Hynix and Samsung in South Korea, and Micron Technology in the U.S. All three saw their stock prices more than triple in 2025.

Conversely, pure-play software companies struggled. For decades, Software-as-a-Service (SaaS) companies such as Adobe and Salesforce were market darlings, exhibiting high growth and margins that supported premium valuations. Both stocks declined more than 30% in 2025, while the broader software sector rose only 4.7%, far lagging the semiconductor sector’s 47.7% gain. This divergence accelerated into early 2026.

2026 Outlook

• AI adoption will remain a defining theme in business and finance for years
• While LLM use cases have already evolved rapidly, implementation remains in its early stages
• We expect 2026 to mark a broader phase of enterprise and consumer adoption, with companies of all sizes increasingly embedding LLMs into daily workflows
• As LLMs become more capable of writing software, we anticipate the rise of “personal software,” analogous to the personal computer revolution of the 1990s
• Historically, software creation was limited to skilled developers, giving rise to centralized SaaS platforms
• As software creation becomes more accessible, individuals and small businesses may increasingly build custom tools tailored to their own needs
• This does not imply the demise of SaaS, but it does suggest a shift in business models
• Companies that have successfully integrated AI into their core offerings should retain customers, while incumbents that fail to adapt may face increased competition, pricing pressure, and margin compression
• We expect continued valuation dispersion across the sector, along with a shift away from per-seat pricing toward outcome-based models
• In semiconductors, Nvidia remains the dominant player, but vulnerabilities are emerging, as evidenced by Google training its latest Gemini models on internally developed TPUs
• Memory demand, however, should remain robust, as all AI-focused chipmakers require vast amounts of memory to support modern LLM performance

The debasement trade

In the first half of 2025, the U.S. dollar declined more than 10% against other major currencies, a significant move for the world’s reserve currency. Currency values are ultimately driven by supply and demand, with relative interest rates being a key determinant. Typically, higher interest rates attract capital and strengthen the currency. What made this dollar decline notable was that U.S. rates remained relatively high compared to other developed markets, where central banks were actively cutting rates while the Federal Reserve paused.

Given the dollar’s reserve-currency status, the dynamics are more complex. The dollar underpins global trade, and countries with persistent trade surpluses, such as Japan and China, accumulate large dollar reserves. However, amid rising geopolitical tensions and a shift toward a more multipolar global system, countries like China have actively diversified away from the dollar. This has included selling or not reinvesting in U.S. Treasuries and increasing allocations to other currencies and gold. China’s Treasury holdings have fallen to levels not seen since 2008, while its gold reserves have increased for 15 consecutive months.

Against this backdrop, precious metals surged. In 2025, gold rose nearly 65%, silver more than 140%, and platinum over 175%, all reaching all-time highs. These moves are historically rare and may mark the early stages of a prolonged period of dollar debasement.

Non-U.S. equity markets also had their strongest relative performance versus the U.S. in over a decade. MSCI Europe rose approximately 35%, MSCI Emerging Markets gained 33%, and Japan’s Nikkei 225 advanced 26%.

Notably, crypto markets did not participate in the debasement trade. While prices surged following Trump’s election, gains faded over the course of 2025. Bitcoin ended the year down 7%, with smaller protocols faring worse. We believe the post-election rally reflected anticipation of ETF approvals, many of which had been delayed during the prior administration. In 2025, over 75 crypto ETFs launched, more than double the total issued previously, and major institutions such as Morgan Stanley and JPMorgan began allowing client access.

While progress was made on regulation, clarity remains incomplete. The GENIUS Act provided guidance on stablecoin issuance, but the CLARITY Act, which addresses broader crypto oversight, stalled in the Senate and remains under debate. We believe regulatory clarity is still essential for widespread adoption.

2026 Outlook

• In early 2026, the debasement trade has accelerated
• Gold and silver have continued to surge, and non-U.S. equities have outperformed U.S. markets
• These parabolic moves warrant caution, as they often reverse sharply
• Demand may broaden to other hard assets, with copper emerging as a key metal to watch
• In crypto, Bitcoin continues to dominate the decentralized store-of-value narrative
• In addition, privacy-focused coins gained attention toward the end of 2025
• Unlike Bitcoin’s fully transparent ledger, privacy coins offer varying degrees of confidentiality
• Ethereum, Solana, and other Layer-1 platforms should continue to benefit from the adoption of stablecoins and decentralized finance applications
• With further regulatory clarity, 2026 may represent the next major adoption phase for crypto technology

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