up 66 % and bitcoin was down 6 %, even though both are viewed as hedges against central bank profligacy.
The underlying U. S. economy strengthened in the second half of 2025, but outsized productivity advances limited job creation. Business activity is expected to be buoyant in the first half of 2026, as Americans will enjoy sizable tax refunds and President Trump is contemplating $ 2,000“ tariff refunds” as concerns about the cost of living persist.
As Apollo Global Investments chief economist Torsten Slok recently wrote, the near-term capital spending boom already underway is getting another boost as corporations benefit from the favorable expensing provisions of the tax law passed in 2025. Those who foresee a Goldilocks scenario think the business cycle won’ t overheat, partly because of weak consumer confidence that can be traced to affordability issues and AI-driven job security fears.
After three years of annualized S & P 500 returns of 23.4 %( as of early January), many investors feel they are“ underallocated to bonds” as“ an anchor in a storm,” J. P. Morgan Asset Management fixed-income chief Bob Michele said on a January webcast. With a new Fed chair almost certain to lower rates later in the year, it would normally set bonds up for a continued rally. The current fed funds rate stands at around 3.64 %, and market participants expect at least two 25 basis point cuts this year.
But to what degree can the Fed actually control longer-term interest rates, which influence mortgages, auto loans and other key interest rates? Some skeptics— including Vanguard global asset allocation chief Joe Davis and Jim Bianco, who runs Bianco Research and manages an ETF with WisdomTree— have warned that the Treasury department could lose sway over the market for 10- to 30-year bonds in the face of massive federal budget deficits. Such a development could send those rates to the 6 % or 7 % area, they have argued. Others, like DoubleLine CEO Jeffrey Gundlach and Loomis Sayles vice chairman Dan Fuss have also urged investors to avoid long-term Treasury bonds, which could suffer serious declines. Michele considers that scenario unlikely. The Treasury, he told webcast attendees, has ways to“ bring down rates” at the long end of the yield curve by issuing very few of these securities. Last year, 20- and 30-year bonds accounted for less than 5 % of total Treasury issuance and the department could reduce that further.
Michele may well be correct for 2026, but investors have every right to be concerned. Jamie Dimon, the CEO of JPMorgan Chase, parent of Michele’ s asset management company, recently said what everyone knows— that at some point the $ 38 trillion in debt is“ going to bite.”
The AI Game Is Changing
Most observers view AI as a bigger game changer than the internet, and white-collar jobs already are disappearing in advanced industries like software and finance. Concern about the massive scale of the data center build-out spilled
from the stock market into the bond market in late 2024, hurting both the shares and debt of some leading tech giants.
Still, the impact of artificial intelligence on the consumer economy remains to be seen. One strategist with a contrarian call on the economy is Kristina Hooper, chief market strategist at the Man Group, the alternative investment giant. Her base case is for a mild U. S. recession, though she acknowledges in her 2026 outlook that there are“ a wide range of possible outcomes.”
The prospect of a“ substantial rise in secular unemployment due to AI adoption” looms over the economy, Hooper writes in her 2026 outlook. Despite good GDP figures and the booming stock market, consumer sentiment is at“ very low levels.”
The so-called K-shaped economy, described by Moody’ s Analytics as a case in which 10 % of consumers account for 49 % of consumption, remains fragile, in Hooper’ s view.“ It seems likely that the upper leg of the‘ K’ could thin out as we see more white-collar jobs eliminated by AI,” she says.
Already, this technology is inflicting job losses on industries like software and finance as well as on entry-level jobs. A sustained stock market correction, Hooper observes, could affect spending among affluent Americans and spill over into the rest of the economy. For financial advisors, most of whom focus on clients in this demographic, the ramifications could be far-reaching.
One reason given for the frozen, immobilized housing market is that the usual buyers, young families in their 30s or early 40s, lack the confidence to take on a big mortgage amid AI-fueled job uncertainty. Historically, housing has been the key
2025 was a stellar year for both stocks and bonds, and in normal times the anticipation of a dovish Fed would draw cheers from the bond market. But with artificial intelligence disrupting many industries and geopolitics showing more signs of instability in the year ahead, these times are anything but normal.
driver of wealth creation for middle-class America, but younger buyers have often found themselves outbid by older ones with all-cash or mostly cash offers.
The Great Rotation
In the U. S. equity market, high valuations are among investors’ top fears, especially as signs of AI fatigue are showing. Most notably, market leadership has shifted: Not only did U. S. stocks trail most foreign markets in 2025 but within the overconcentrated American stock universe, only two stocks in the high-flying Magnificent 7— Nvidia and Google— managed to beat the S & P 500. The AI boom that has propelled American stocks since late 2022 was rattled last year
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