Excess Returns Podcast Summary

Episode: "We Read 22 2026 Market Forecasts So You Don't Have To | What You Need to Know"

Date: December 31, 2025
Hosts: Jack Forehand & Matt Russell

Episode Overview

In this episode, hosts Jack Forehand and Matt Russell sift through and synthesize 22 prominent 2026 market forecasts from major financial institutions, strategists, and respected voices. Their aim: identify common economic themes, sources of optimism and skepticism, key risks, and the narratives likely to shape investment thinking in 2026. The conversation ranges from the impact of AI and fiscal policy, to profit margins, inflation, Fed policy expectations, and the ongoing tension between market concentration (Mag 7) and the rest of the S&P 500. Throughout, the hosts recognize the limits and biases of forecasts but emphasize their value in surfacing mainstream assumptions and possible surprises.

Key Discussion Points & Insights

1. The Value (and Limits) of Year-End Forecasts

• Forecasting Skepticism and Learning Value:

  • Most market forecasts cluster around "safe" projections (low-teens returns, 8-12% range), avoiding outlier negative or positive calls to preserve professional reputations.
  • “Nobody has any idea what the S&P is going to close at. … Even the people making these forecasts know those numbers really don’t mean that much.” — Jack Forehand [03:01]
  • However, forecasts aggregate the consensus, highlight areas of disagreement, and can be a tool to identify the “vanilla ice cream” of mainstream market thinking, exposing blind spots and possible areas for surprise.
  • Forecasts are inevitably shaped by inherent biases and business interests of their sources.

• Approach to Analysis:

  • The hosts recommend using compiled forecasts to gauge the consensus, find points of differentiation, and understand mainstream narratives and their risks.

2. Macroeconomic Themes & Drivers

Artificial Intelligence (AI) as Dominant Economic Force

• AI’s Ripple Effect:

  • AI dominates forecasters’ thinking about economic growth, market expansion, and profit margin prospects.
  • “If this is true late cycle strain, it’s probably a result of the amount of spending going in to AI. And that’s going to determine whether this economy … slows down, gets hollowed out, [or] crashes into a wall.” — Matt Russell [08:23]
  • Some expect AI benefits to begin diffusing from the ‘Mag 7’ leaders to the broader S&P 493, possibly leading to profit margin expansion and market rally broadening.

• Broadening Optimism & Skepticism:

  • Russell Investments and others are optimistic about a broadening of earnings, but many forecasters remain skeptical on small caps and broader market diffusion.
  • “Small caps are cheap relative to expensive [large caps], but they’re not that cheap relative to themselves … unless you’re going to see top-line and bottom-line growth or margin expansion with small caps, what’s going to get them started?” — Matt Russell [11:52]

• Conflicting Data and Uncertainty:

  • Some (e.g., Goldman Sachs) think AI has not fueled much real-world GDP growth yet, though that could change soon.
  • “GDP growth at least specifically has really not been that impacted so far by AI.” — Jack Forehand [13:33]

Other Macro Variables

• Stagflation/Recession Risk:

  • Apollo’s Torsten Slok forecasts a possible brief stagflation early in 2026, but most see little risk of outright recession. Man Group suggests a mild recession is conceivable, but consensus leans positive.

• K-Shaped Recovery:

  • The ongoing ‘K-shaped’ economic dynamic: some sectors/households thrive, others struggle, leading to divergent spending power and persistent mixed sentiment.
  • “It’s not unthinkable that we could have all this AI investment … and, because of this K-shaped experience, … have really violent rotation in markets and … recessions that exist in pockets under the survey, under the surface.” — Matt Russell [15:43]

• Consumption, Sentiment, and Policy:

  • U.S. consumption remains a key economic driver, but negative consumer sentiment and uneven benefit from stimulus could create pockets of weakness.

3. Inflation, Fed, and Fiscal Policy Trajectories

• Inflation Consensus and Risks:

  • Most forecasts center on ~3% inflation for 2026, with only moderate concern about big near-term surprises.
  • Some, like Warren Pies, warn that inflation could flare up again later in the year if fiscal/AI investment surges.
  • "If this Project Genesis stuff gets off the ground, ... we're going to get some inflation." — Matt Russell [24:03]
  • Long-term effects of AI on inflation (deflationary vs. inflationary) remain energetically debated.

• Fed Cuts and Policy:

  • Forecasts generally anticipate fewer rate cuts than originally expected, with a consensus of 2-3 possible cuts.
  • Divisions among Fed members and possible changes in Fed leadership/appointees (post-election) could inject volatility.
  • “We’re probably going to get more dissent this year than we’ve seen in a while.” — Jack Forehand [27:18]

• Fiscal Stimulus and Deficit Concerns:

  • Ongoing government stimulus (e.g., “Big Beautiful Bill,” Project Genesis) is widely seen as a support for growth; however, longer-term deficit issues remain unpredictable.
  • “Post-GFC, post-Covid, fiscal is the new monetary … stimulus makes things go up. … [But] eventually gets us into trouble ... bubble concerns and bubble territories.” — Matt Russell [29:01]

4. AI Buildout—Capex, Energy, and Business Model Talk

• Energy Constraints & Capex:

  • The sheer scale of AI- and data-center-related energy consumption is putting new strains on US power infrastructure.
  • “We are going to see massive price increases in these places. And if we don't see direct investment into bringing new power sources online, those price increases are coming as fast as they build these data centers out.” — Matt Russell [31:30]
  • The feasibility of energy investment, physical limitations, and even futuristic ideas (e.g., data centers in space) get debated as foundational AI themes.

• AI Revenue vs. Depreciation:

  • Current AI/data center investments carry a risk: depreciation expenses are running at rates significantly above revenue. Without a step-function increase in adoption and revenue, sustainability is questionable.
  • “There’s some point in this future where the rubber meets the road ... we've either depreciated everything to zero ... or we've reversed course.” — Matt Russell [32:50]

5. Stock Market Outlooks & S&P 500 Structure

Price Targets and Market Structure

• Target Range:

  • Forecasts for end-2026 S&P 500 targets range from 7100 (Bank of America’s Savita Subramanian, more conservative) up to just under 8000 (Warren Pies, bullish), with Tom Lee (as usual) on the high side as well.
  • Most forecasts simply project market growth in line with earnings growth (low-teens), assuming no significant change to valuation multiples or profit margins.

• Profit Margins & Valuation:

  • Many models expect profit margin expansion to continue (driven by AI and efficiencies), despite already-high levels and mean-reversion tendencies.
  • “To say that we're going to do the same thing again ... there's only so many times you can expand those margins and preserve that multiple.” — Matt Russell [45:41]
  • The risk is a “double whammy” of both margin and multiple contraction—seen as a major concern for the next several years.

• Mag 7 vs. S&P 493:

  • Key disagreement: will the rest of the S&P (S&P 493) finally catch up in earnings growth and stock gains, or will mega-caps continue to dominate?
  • “These [MAG7] types of margins are not replicable at scale across the other 493 companies ... if we are going to see more earnings growth picked up by other sectors ... it has to definitionally be at a much lower margin.” — Matt Russell [50:43]
  • Depending on which case plays out, overall index performance could shift meaningfully.

• Value, Quality, and Momentum Factors:

  • 2025 was a rough year for factor investors, with quality and value notably underperforming in the US, but value strong internationally.
  • Momentum was the only major US factor to perform well.
  • “This year, owning anything with quality tied to it … sucked to be a quality investor this year.” — Matt Russell [56:57]

International Equities

• Renewed Optimism, Cautious Allocation:
  • International stocks had a strong bounce-back year, but long-term outperformance remains a “math-based” argument while investors’ patience is limited.
  • US dollar weakness was a key driver of international returns in 2025.

6. Notable Quotes & Memorable Moments

“These things get a bad rap, which is deserved to some degree ... but there’s so much interesting data ... these are some of the most thoughtful market strategists in the world ... it can be a good learning exercise.”
— Jack Forehand [02:58]

"Risk means more things can happen than will happen."
— Matt Russell quoting Elroy Dimson [05:08]

“If inflation rears its head and we get a policy that goes against AI data centers, it’s going to hit earnings. ... The risk to blow this up is buried somewhere in here.”
— Matt Russell [59:06]

“We don’t have like bubble level stocks driving the index. We have good quality companies.”
— Jack Forehand [61:00]

“It’s the hope that kills you, right? Like I’m just gonna keep … that’s embedded in my head … If everybody’s all excited, I’m gonna be the skeptical little person who’s like, ‘Yeah, but what if?’”
— Matt Russell [62:30]

Timestamps for Major Segments

| Segment | Timestamp (MM:SS) | |-----------------------------------------------------|-------------------------------| | Why Analyze Market Forecasts? | 02:00 – 04:30 | | Macroeconomic Themes (AI, K-Shaped Recovery, etc.) | 07:10 – 16:30 | | Inflation & Fed Policy | 22:07 – 27:38 | | Fiscal Policy & Government Deficit | 28:12 – 30:09 | | AI/Capex/Energy & Revenue/Depreciation Debate | 30:09 – 34:00 | | Will AI's Benefits Broaden? | 36:28 – 39:44 | | S&P 500 Price Targets & Margins Discussion | 41:25 – 48:18 | | Mag 7 versus the Market; Broadening Debate | 49:44 – 54:46 | | International Markets Perspective | 54:46 – 56:38 | | Factor Investing Review (Value, Quality, Momentum) | 56:38 – 58:06 | | Risks for 2026 | 58:06 – 61:37 | | Closing Thoughts/Philosophical Wrap-Up | 62:05 – End |

Key Takeaways

• AI Dominates the Narrative: Most economic and market optimism (and risk) relates to the assumptions around how much and how quickly AI’s benefits/risks will spread.
• Profit Margin Expansion is Built In: Most forecasts are “baking in” another year of expanding S&P 500 profit margins, despite the historical tendency for mean reversion.
• Low Probability is Assigned to a 2026 Recession: Consensus is for continued (though possibly decelerating) growth; pockets of weakness may exist under the surface.
• Inflation is a Wildcard for the Back Half: Most forecasters expect ~3% inflation for now, with growing caution about AI-fueled energy/price shocks in late 2026 or later.
• Skepticism on Small Cap and International: Strong arguments for longer-term international exposure, but nobody is pounding the table for a major rotation just yet.
• Risks Are Both Visible and Hidden: From AI business model sustainability to energy constraints, government/growth policy, and possible geopolitical shocks, surprises may come from consensus blind spots—especially the optimistic assumptions about AI.

This summary provides an in-depth look at the consensus, divergence, and underlying logic across the most influential 2026 forecasts—giving investors a clear sense of market expectations, possible risks, and the narratives likely to be top of mind as the year unfolds.