Earnings Expectations: 14% growth seems a bit high. If I assume nominal GDP grows 6-8%, that assumes margins expand notably from already high levels. Lower taxes, some productivity improvement and a smaller regulatory burden suggest higher margins. But 14% earnings growth sounds a bit aggressive to me.
Labor: Excluding gains of over 600,000 in the education and health care sectors, employment headcount fell in 2025. Part was attrition from companies that stopped new hiring. Part related to deportations. Part was due to reduced Federal government headcount. I don’t see much changing as we go into 2026. Any benefits from reshoring or artificial intelligence will take years, not months. There has been a lot of discussion lately about the lack of impact of tariffs. One reason is that companies have offset the costs by reducing headcount. That trend isn’t over. It’s also worth noting the sharp rise in unemployment among blacks and the young, those between ages 16 and 19. These trends impact the anger level of our population as well as the capability to spend for middle and lower income families.
Inflation: It has remained rather steady overall. But the costs of necessities, like rent, utilities, car repair, insurance and medical services have all risen faster than overall inflation. Some of these increases, including rent and insurance should moderate next year. But the offset is that the growth in real wages has been in steady decline since the 2023 peak. Anyone who works his tail off and can’t make forward progress is likely to be an unhappy camper. The price deflator of more than 4% embedded in last week’s GDP report suggests reducing inflation further isn’t going to be easy. While the nominal rate of 3% or so is well below the post-pandemic peak of over 9%, the cumulative impact of inflation for the last five years has taken its toll. The average new car price is now over $50,000. The average monthly car loan payment today is over $760. Lengthening the average car loan (or mortgage as some have postulated) significantly add interest costs to the borrower over the life of a loan while making only nominal reductions in monthly payments. No wonder if you are paying $25K per year in rent, close to $9K in auto payments plus, insurance, healthcare premiums, and utilities, you have very little left over to spend on discretionary items if you are making less than $100K per year.
Trump and Chaos: That’s his style. By definition, chaos is unpredictable. He likes it that way. Most don’t. But, overall, you don’t see much impact on the overall economy from his chaotic moves to date. Reshoring hasn’t begun to any significant extent and probably won’t be very evident in 2026. He can influence short-term interest rates by his pick of a new Fed chair, but he can’t dictate long-term rates. Note that they have stayed in a very narrow range all year. No reason to expect much movement next year either.
Mid-term Elections: They will generate a lot of press but will matter little. Just as in Trump’s first term, once his tax bill passed, little else happened of economic note. The current Republican majority in the House is so slim that not much gets done and getting 60 votes in the Senate is a pipe dream for anything of substance. If Republicans are going to maintain control of the House, they better find a better answer to healthcare costs. Obamacare is expensive and in need of revising. But Republicans haven’t been able to coalesce around any solution for over a decade.
China: Right now the situation is akin to a cease fire. Trump waves the threat of tariffs so high that they will wreck the Chinese economy. China simply has to utter the phrase “rare earth embargo” and we cringe. What everyone realizes is that economic war would be disastrous. We may go to the brink and, if we do, Wall Street will shudder. But hopefully, it won’t come to that. China’s domestic economy is a mess while its strategic focus is on economic and military dominance. It has more STEM graduates than we do by a lot and a much better and higher capacity electric grid. The issue should never be about who wins. How can one judge that? The world doesn’t need a Chinese AI infrastructure and a mutually exclusive U.S. based infrastructure. Over time the two will inevitably merge. Maybe with embargos we can slow their progress and there are probably ways China can slow ours. What we can do and should do is ensure that all our critical needs can be addressed within our own borders. That means finding and refining rare earths here for instance. That’s just one item out of a long list. Hopefully, strategic decisions win out over impulsive responses.
An AI Bubble? – History says it’s inevitable. In the 1800’s railroads were the most significant disruptive invention. But by the last quarter of the century economic busts centered around too many railroads. Many went bankrupt. In the 1960s there was IBM and the BUNCH companies making mainframe computers. Where are Burroughs, Univac, NCR, Control Data and Honeywell today? Dozens of companies wanted to produce PCs in the early 1980s. Most disappeared before the end of the decade. And we all remember the Internet bubble when names like AOL, Yahoo, MySpace and Global Crossing were can’t miss investment ideas. In the AI world, early focus was on the processing power of the GPUs. That’s still key. But now the focus has shifted to data centers and the need for so much capacity necessary to fulfill the AI promise. The cost to build out the data centers is enormous. Funding is now being questioned as well as the availability of power to run them. The prime producers of gas turbines are sold out for years and regulators are cognizant of public outcry if they allow residential utility bills to rise faster than the overall rate of inflation. History shows again and again that power will be concentrated within a few winners. Many losers will fade away. In the large language space the early “Big Three” appear to be Gemini, ChatGPT and Anthropic although that could change. The providers of computing power will likely include Microsoft and AWS. And there will ultimately be many winners across sub-markets. When will the shakeout happen? It wouldn’t be a surprise if one or two high profile blowups happen in either 2026 or 2027.
Private Equity and Private Credit: I have discussed both recently and don’t want to dwell on them again today. But there are thousands of companies that have been sitting in private equity portfolios for as long as a decade or more waiting for an exit. They are overvalued and inevitably will have to be sold at a significant discount. Demand for private credit continues to be enormous although the pace of demand growth is slowing as the credit quality of the buyers is deteriorating. Tiered packages reminiscent of the period before the Great Recession are starting to appear. That’s concerning.
Prediction Markets and Sports Betting: The tailwind for equity prices is a steady long-term growth in earnings. Prediction markets and sports betting are zero sum games. For every winner there is a loser. The platform providers take a fee. It’s no different than the casinos. Net-net over time the winners are the casinos, not the betters. I am not diminishing the appeal of sports betting or prediction markets. But they are not investment vehicles; they are gambling. Obviously the allure for the platform providers is the fees to be received. I could also make a cogent argument that bitcoin today fits into the same bucket (but not stablecoins which serve a functional purpose). Mixing investments with gambling is almost certain to have a nasty ending.
What are the biggest Black Swan concerns? – China is certainly one. Both Trump and Xi have big egos that could lead to chaos. But Trump has proven time and again that he watches how markets react and will be quick to reverse direction if necessary. Witness Liberation Day and its aftermath. As for Xi, he oversees an economy that is a mess. Any steps that drastically reduce manufacturing, exports and consumer confidence would be destabilizing. So, hopefully, chaos can be avoided although it may be threatened at times. Another Black Swan relates to a worldwide struggle where the rich get richer and the poor are left behind. I don’t want to read too much into recent elections but the shift away from Trump and Republican support among blacks, Hispanics and the young were all economically related. It may not sound like a big deal when the unemployment rate goes up by a percentage point but that represents hundreds of thousand of jobs. Recent college graduates in particular are having a great deal of difficulty finding entry level jobs in their chosen fields. All the have-nots can express their anger at the polls but the real risk is if anger is express in other ways. Look around the globe at places from France, Germany and Spain, to Brazil, South Korea and Japan. The problems are all the same. Is the NYC election an outlier or a harbinger of what’s to come? So far, the dissatisfaction has been largely ignored. But if the fortunes of rich and poor continue to move in opposite directions, the problems won’t go away. The third concern is investor euphoria. We saw a hint of this in the early summer of 2025 when bitcoin rose to over $125,000 and a string of IPOs came public and soared 100-300% virtually overnight. By yearend, bitcoin was below $90K and most of the hot IPOs were down more than 50% from their summer highs although still above their IPO prices.
Are we in for an AI generated productivity boom that will allow growth to surge? -As I wrote last week, AI will improve productivity. Yet, there is little evidence that the productivity gains from AI will be far greater than those related to previous technological disruptions. But technology also drives down costs and improves efficiencies. That may help keep profit margins high.
I usually end my comments with birthdays. Not today. This will be my last regular weekly letter. As of the first of the year, I will be taking on the role of Chairman of the Board of Tower Bridge Advisors. Chris Gildea will succeed me as CEO. While I will continue to manage a number of client accounts, I will step back from day-to-day operations including authoring notes every Monday. Chris Gildea and Chris Crooks will continue the communications alternating writing comments every Wednesday as they have been doing on Thursdays this year. I have enjoyed writing my thoughts since Tower Bridge’s inception and may make a few guest appearances in the future. My goal has always been to speak in clear English, get to the chase, and try to think a little out of the box. I hope I have succeeded to some extent. This isn’t goodbye but rather “aloha”, a word Hawaiians use to say both hello and goodbye. It sounds a lot less final. Thanks for your ongoing support.
James M. Meyer, CFA 610-260-2220