Model portfolios

BRIAN HESS: This seems like it's neither. It can work alongside AI. Or if AI stumbles, it might also work. But it's not negatively correlated or positively correlated to it.

JACK JANASIEWICZ: I'm Jack Janasiewicz.

BRIAN HESS: I'm Brian Hess. And this is Tactical Take. Hi, Jack. Well, the holiday season is upon us, but we have time for one more Tactical Take this year. Last week, we put out a note titled we wouldn't be surprised, our version of a 2026 outlook. It was kind of a fun note. And so today, I thought we could leapfrog from there, run through some of the highlights from that note, and see what we're thinking for next year.

All right. So let's start with non-surprise number one, which is that growth might re-accelerate in the first half of 2026. Now, this is a bit of a consensus view. And you're in agreement, but you're also kind of tempering the enthusiasm. So let's walk through your points here.

JACK JANASIEWICZ: Yeah. And a lot of this comes from my chance of actually reading through a lot of the commentary that we're hearing from our competitors. And it does seem like it's a consensus call that we'll see a resurgence in growth during the first half of the year and then things will settle back down in the second half. And a lot of people are pointing to the idea that we get a resurgence in growth coming from a lot of the benefits from the tax filing season coming into effect.

And so with regards to the One Big Beautiful Bill, there were certainly a number of tax credits that would be coming forward that would help push forward with the consumer. The one thing that I think we're a little bit hesitant on, though, when we start to go through the numbers-- first of all, you have about 100 million filers that are potentially going to benefit from some of this. And so the estimates that we've been seeing are coming in anywhere from $700 to $1,000 per filer getting a benefit next year. So do the math on that. It's about $100 billion in benefits.

But I think the trick here is, if we actually look at what the spending assumptions are going to be with regard to that, that's where we get a little bit less optimistic. Because if you go back, for example, and look what happened during COVID-- and there's a couple of different surveys that we paid attention to when looking at this-- roughly 40% of the money that was distributed during COVID was actually spent. The balance was either used to pay down debt or saved.

And if you do the numbers and work backwards here, if you have $100 billion benefit, 40% of that is spent, that means you're going to have roughly $40 billion in spending. We spend roughly $21 trillion a year. Do the math on that.

BRIAN HESS: Not a huge amount relative—

JACK JANASIEWICZ: That's 25 basis points—

BRIAN HESS: --to the economy.

JACK JANASIEWICZ: --give or take. So, again, we're a little bit skeptical that that is enough to reinvigorate the economy in excess of trend growth here. The other thing to think about, too-- and I don't think this is getting a lot of uptake-- is simply that when we start to think about what's coming-- these kickbacks are coming in the form of deductions, not in terms of credits.

And that tends to benefit the upper incomes because they're the ones who actually take those sort of deductions. And the upper-income families tend to actually either invest that or save it as opposed to spend it. So that marginal propensity to consume coming from the higher echelons not quite as strong. So maybe this is more of a boost to financial assets as opposed to the real economy.

But we're not quite as overly aggressive in terms of our assumptions that that One Big Beautiful Bill kickback from the tax filings next year are going to be a huge stimulus in the first half of 2026.

BRIAN HESS: So consumption's holding up OK.

JACK JANASIEWICZ: Exactly.

BRIAN HESS: But this One Big Beautiful Bill stimulus is probably not going to really boost it all that much more than we've seen this year.

JACK JANASIEWICZ: Exactly.

BRIAN HESS: OK. And then there was another aspect to it on the CapEx front. So we have the tax issue for consumers but also the CapEx benefit.

JACK JANASIEWICZ: I think when we start to think about CapEx, it's the idea of "you can lead a horse to water, but you can't force it to drink" sort of thing. And we certainly have seen a number of the benefits coming through potentially, at least, in the written form. But to actually execute on taking advantage of these benefits at the corporate level, I think you have to appreciate the thought process from a CEO's perspective.

You're going to be undertaking hundreds of billions of dollars in spending over the next 10 years, let's say. So that's a pretty big step to push forward with some of these outlays on-- when we look at a lot of the CEO surveys right now, the sentiment to actually in embark on these huge CapEx plans is not quite as aggressive as we would think.

And there's two surveys we point to, the first one being the CEO roundtable survey, where they ask about CapEx intentions. And those are basically at cycle lows. The other one, a lot of the regional bank manufacturing PMI surveys that go out, they do ask what are the intentions over the next six months for CapEx. And those are not really hovering strong either.

So when you look at CapEx intentions from these surveys, they're somewhat muted. And so, sure, we can have all these potential benefits put forth from the One Big Beautiful Bill on the corporate side. But it doesn't seem like there's sentiment for these CEOs to actually take advantage of that. And as a result, maybe we don't quite see the pull through outside of the AI CapEx spend that we're seeing right now that maybe some market participants are hoping for for 2026.

BRIAN HESS: Yeah. And that meshes with the topic we hit on during our macro webinar, where you showed non-tech-related CapEx in the economy really not doing much of anything this year.

JACK JANASIEWICZ: It's a big one. And that's a big driver. Obviously, key risk is the AI CapEx spend slows next year. But seeing that broaden out, you might be getting a little bit too aggressive with that bounce.

BRIAN HESS: OK. So then where does that leave when you think about growth next year? Some estimates-- and you pointed to this in the note-- are all the way up in the high 2% range. You're below that, I think. So where does that leave you, given that the economy's in pretty good shape, but there's not a lot of incremental stimulus coming?

JACK JANASIEWICZ: Yeah. And I think the key here is to really appreciate the overall backdrop. And we're not necessarily negative. We're just saying, we're probably going to continue to bounce along trend, which is 2%, give or take maybe a quarter of a percent on top of that, so maybe 2.25 at the high end, 1.75 on the lower end. But that's still a pretty good backdrop, just coming along. And from that perspective, when we think about what earnings per share growth has looked like when GDP is roughly averaged about 2%, S&P 500 earnings have been roughly 10%.

BRIAN HESS: You're getting ahead of me here because we're going to move on to non-surprise number two.

JACK JANASIEWICZ: But I think the other thing to think about, though, is it also keeps the Fed in play. And that's, I think, the other thing that we're considering to be very important here. Because if the economy starts to run a little bit too hot, something closer to the 2.75 that we're hearing, that means maybe the Fed comes back into play. And the potential risk is that we actually don't see the Fed do anything.

BRIAN HESS: Yeah. They're not cutting rates if we go from 2% to 3% or no GDP growth.

JACK JANASIEWICZ: The market, I think, is really looking forward to having rate cuts for next year. So keeping growth at 2% keeps the Fed in play. That's not a bad backdrop.

BRIAN HESS: All right. Now you kind of hit on non-surprise number 2, which is that you wouldn't be surprised if equity markets had another good year for that reason you highlighted-- that Fed's still supportive, growth is good enough to foster strong earnings growth, and the multiple can hang in there because you're not getting tighter financial conditions.

JACK JANASIEWICZ: Exactly.

BRIAN HESS: That said, in the note, you did mention probably will get a typical 10% correction. So what maybe could be the catalyst for a correction next year?

JACK JANASIEWICZ: Yeah. And making a call that—

BRIAN HESS: It's really hard to do. I know.

JACK JANASIEWICZ: Yeah. But also making.

BRIAN HESS: But it's for fun.

JACK JANASIEWICZ: But a 10% correction for us, that doesn't sound like a big deal on a call. But we haven't really come out that often and said that sort of thing. So from that perspective, I think it's interesting. But the idea here is simply that you could easily see some sort of a hiccup in the AI trade over the next couple of quarters. So I think that's a legit possibility here. And then we could also start to see some inflation data or, on the other side of that, some jobs data that come in a little bit weaker than expected. And the market gets a little bit concerned that maybe the Fed is behind the curve. And as a result, we get the knee-jerk reaction to sell the market down.

So I think the odds are certainly rising, given where we are with regard to the sentiment in the marketplace where people are somewhat one foot in, one foot out. So any sort of potential hiccup, I think you're going to see that sort of quick trigger finger. And it wouldn't be shocking if we do get a 10% correction within the first half of the year.

BRIAN HESS: And there is a lot of good news in the price. And the market view is threading a needle to an extent, because we want the economy to stay cool enough that it doesn't foster inflation but not so cool that we have questions on the earnings front. So that is a needle to thread. And we'll see if we can get a smooth ride next year. Probably, one of those two variables could insert some uncertainty. And that is a great segue into the third non-surprise, which would be that-- and this is something you've talked about a lot this year. I think this has been a core call of yours, which has been right and a little bit non-consensus. And that's about inflation.

So you would not be surprised if inflation beat expectations to the downside, so came in lower than people are expecting. You've highlighted the labor market in the note, tariffs not really coming through. And shelter is probably the big one that can weigh on inflation. So anything else you want to flesh out there with respect to the inflation outlook?

JACK JANASIEWICZ: We've spoken quite a bit at length about the potential for further disinflation coming from the shelter side of the equation there. And again, the shelter component within the basket is large enough to basically offset any sort of tariff concerns. And I think we've well documented the lag from what we're seeing for some of the pricing that gets put into that inflation basket for the shelter component. So we can be pretty confident that we'll continue to see that pull through.

BRIAN HESS: And it's finally starting to happen, actually, too.

JACK JANASIEWICZ: Exactly.

BRIAN HESS: Because we've been looking at that disconnect for a while and saying, hmm, I wonder when shelter's going to catch down. But this past few inflation reports, it started to move.

JACK JANASIEWICZ: And I think that's something we've been harping on. But I think maybe putting a little bit more emphasis back on the labor side of the equation here, things are continuing to slow. And the risk obviously is if that slowing picks up and accelerates. But point being-- wages continue to come down. Job ads are slowing. And where's the impulse there to see a sudden spark in wage growth? And I think that's the key to think about when you start to talk about the demand side of the inflation equation. It's just not there. So all the ingredients I think are there for inflation to, at worst case, remain sticky. Best case continues to trend down towards the 2% target.

BRIAN HESS: And so the takeaway with this call is that you put a pretty tight range on the 10 year Treasury yield in the note. And said you think maybe plus or negative 30 bips from where we are today is what we'll see for the 10-year Treasury next year, which I'll just call that, like, 3.75 to 4 and 1/2 maybe, just putting round numbers on it. And so that's going to just be a quiet year in the bond market if it ends up playing out like this. But I guess it makes sense, given that inflation would be surprising to the downside. Maybe we get a couple more cuts from the Fed. But that's already in the price. Growth holds up, so there's no real catalyst for them to do anything differently. And you just get a range-bound Treasury market.

JACK JANASIEWICZ: Yeah. And maybe more of the action occurs in just the shape of the yield curve. So maybe it's more of a steepening. We've already seen quite a bit of a steepener going on. But when you start to look around the globe, the amount of issuance that we're continuing to see globally is certainly on the rise. And so just from that gravitational pull of what we might see coming out of JGBs or bonds that spills into the Treasury market maybe drags the long end a little bit higher.

So maybe more of the action necessarily comes in the shape of the yield curve for 2026 as opposed to the absolute level of 10's—

BRIAN HESS: Not necessarily a directional haul—

JACK JANASIEWICZ: Exactly.

BRIAN HESS: --more of a curve shape. And speaking of supply, that brings us to non-surprise number 4, which gets into corporate debt. And you're saying you really wouldn't be surprised if corporate credit spreads were to widen. Now, we just got done talking about how we're basically constructive on the economy. We're expecting another good year for the stock market. So why would credit spreads widen in that environment?

JACK JANASIEWICZ: Yeah. And let's be clear on this. It's not a fundamental driven widening in spreads that we're talking about here. It's really more technical. And just the amount of supply that's coming, maybe that sort of exhausts the buyers, and as a result, that just lets things drift higher. So a couple things to think about there. The first one-- we are coming into this at historically tight spread levels. So it's pretty easy to consider that from these levels, maybe we could drift higher. That doesn't seem so outrageous.

And then you put into the idea of the potential of some of the estimates we're seeing for at least high grade next year coming north of $2 trillion in terms of supply. And just think about what we've already seen thus far from the issuance, just because of what we're seeing for AI and the CapEx trade, so to speak, the financing of that. You're probably going to see plenty of that.

When we think about net supply, that's not quite as high, simply because you've got reinvestments from—

BRIAN HESS: Some maturities, yep.

JACK JANASIEWICZ: --maturities and coupon payments. But even still, you're talking anywhere from $800 billion to a trillion dollars in net supply, which is still a very big number. So again, go back to the potential for sovereigns to have to issue debt. Then you start talking about high-grade markets. Are there enough buyers to absorb all of this paper coming due?

And my guess is that at some point, maybe we do see just a backup, as buyers just simply can't absorb all this paper being issued on top of the potential of-- maybe we'll talk about this, but the IPO market, where you hear about OpenAI and SpaceX potentially coming. That just continues to suck capital out of places that potentially could be buyers of this debt going forward. And that, I think, is our biggest concern. So it's not really a fundamental issue. It's a technical one. There's a lot of supply going to hit the markets here.

BRIAN HESS: There's a lot of supply, and spreads are very tight—

JACK JANASIEWICZ: Exactly.

BRIAN HESS: --so not a lot of incentive to step up and buy that debt. I guess one takeaway from that non-surprise is that we favor equities over credit when thinking about risk taking. And that's reflected in our models where we're overweight stocks and underweight fixed income. So if we have a range-bound Treasury market, and then on top of that, you get a little bit of credit spread widening, it's really not the most exciting outlook for corporate credit next year.

JACK JANASIEWICZ: Maybe that just means we make our yield. You give a little bit back in spread and maybe clipping a 4%, 4 and 1/2% yield on investment grade. That's not terrible.

BRIAN HESS: It's still a positive real yield—

JACK JANASIEWICZ: Yeah, exactly.

BRIAN HESS: --given our inflation view.

JACK JANASIEWICZ: Exactly.

BRIAN HESS: All right. And so I mentioned the models and our positioning there. We did another model trade since the last time we chatted. So I thought maybe before we wrap, we could just run through that trade and update everyone on what we're thinking there. So this impacted our EM equity exposure. And basically, we moved some money out of core EM and we put it into two places. The first is an ETF EMXC, which is EM ex China. And the second is ILF, which is a Latin American equity ETF.

So let's take these one at a time. And I would say, first, why the move away from China?

JACK JANASIEWICZ: When we start to look at the potential for earnings per share growth, we're starting to see them maybe trade a little rangebound, if you will, where we continue to see earnings estimate upgrades for the rest of the market here. So China looks like it's maybe settling into a range, not necessarily seeing earnings growth expectations accelerating.

The second one, when we start to hear some of the comments that just came out of the most recent economic forum that they had, it seems like, again, more of the same. We're not seeing a massive push for fiscal stimulus. Some of the growth numbers are just there, not great. And so I think we're going to get more of the same where the Chinese economy just hums along. It's not re-accelerating. And they're trying to put a floor underneath growth to prevent it from decelerating too much. Is that necessarily a great backdrop for equities, Chinese equities anyway? Maybe not.

BRIAN HESS: So the policy catalyst just isn't there.

JACK JANASIEWICZ: Exactly.

BRIAN HESS: And plus, we're already seeing earnings stall out. The rally this year has been a lot of multiple rerating. So the valuations, they're not rich relative to where a lot of other things are trading, but they have moved higher.

JACK JANASIEWICZ: Correct.

BRIAN HESS: OK. So that's why moving away from China. And what that does is, it gets us more exposure to mostly South Korea and Taiwan, which are tied into the AI theme as well. So that's another tangential benefit of the trade. All right. And next, ILF. So what is it about Latin American equities that we're excited about as we turn the calendar?

JACK JANASIEWICZ: A few things-- we had a pretty good knee-jerk sell-off from some of the political concerns coming with the upcoming elections in Brazil. So it gives us a little bit of a better entry point to come into that trade. But I think the political risks as we move forward into the first quarter and second quarter next year probably starts to fade away, and you get a little bit more market-friendly candidates going forward.

And then I think, really, the two bigger points here-- one, we continue to see potential upsides in commodities. And Latin America is by far a significant commodity exporter. So they should stand to benefit from higher commodity prices. And then second one-- we've seen a little bit more of a shift in terms of the geopolitical backdrop between the US and our neighbors to the south, where we're starting to get a little bit more, I think, aligned going forward, trying to really develop that Western Hemisphere, if you will, alliance.

And so I think that starts to, I think, put Latin America a little bit more of a favorable light, where we continue to try to work together with them trying to combat what we're seeing coming out of China, for example. So those things put together I think offers a pretty constructive backdrop for Latin America for 2026.

BRIAN HESS: So a lot of political factors went into the ILF decision. One thing I like about that trade is that I think it's just uncorrelated to the AI theme as well, which is something that's been hard to get away from this year. It seems like either you're making a bet on the AI theme or you're buying something defensive that's the opposite of it. This seems like it's neither. It can work alongside AI. Or if AI stumbles, it might also work. But it's not negatively correlated or positively correlated to it. So that's some good diversification we're able to work in to the models.

All right. Well, thank you, Jack. This was a good way, I think, to talk about the outlook in a slightly unique manner. And I appreciate you running through all those details with us. As mentioned earlier, this is our last Tactical Take of 2025. It's been fun doing this this year. I look forward to keeping it going. We want to thank all our viewers, of course, for making this possible.

But also, I think at the end of the year, we want to thank our production team here at Natixis who have worked tirelessly to make sure the podcast looks and sounds great, that we look halfway decent, which is not easy to do. And so we really appreciate that. Thank you, team. You've done a great job this year, and we appreciate it. We'll be back next year, and we'll see everyone then. Thank you. 

JACK JANASIEWICZ: Happy holidays, everybody. Catch you in 2026.