Greater clarity on the main risks to the market

“Just tell me what could go wrong.” It’s a refrain we hear from clients all the time. We’re rarely asked the opposite question: “What could go more right than what we expect?” The result is that we now have a dedicated risk section in our outlooks. And frankly, it wasn’t difficult this year to identify the one or two primary risks that truly matter:

1. The Fed could lose its independence, raising inflation expectations, potentially forcing a spike in long‑term Treasury yields, and potentially pulling stock valuations lower.
2. The AI trade could turn out to be a bubble led by the highly concentrated mega‑caps at the top of the market.

With the first month of 2026 now behind us, markets largely reflect the macro environment we had expected, including sound global growth,¹ supportive policy settings worldwide,² and largely contained inflation,³ all of which continue to underpin stocks. So far, so good. And I’ve often heard good things about years that start with a positive January.⁴

Last week also offered some clarity on the two big risks.

1. Fed independence: Still intact

After months of speculation — and in a somewhat hawkish surprise — President Donald Trump nominated Kevin Warsh to serve as the next Fed Chair. Pending Senate confirmation, Warsh would succeed Jerome Powell when his term as chair ends in May 2026.

Ironically, Warsh emerged as one of the more hawkish voices during his prior time at the Fed, at times opposing rate cuts during the 2008 Global Financial Crisis out of concern that inflation risks were being underestimated. At first glance, his monetary policy track record would seem to conflict with President Trump’s desire for lower rates, although his tone has shifted in recent months. Warsh is currently in favor of greater policy easing in 2026, driven by a view that productivity gains could boost US economic growth without driving higher inflation, therefore allowing rates to come down.

Critically, Warsh’s policymaking background and prior Fed experience should lend support to central bank independence and financial system stability. This will likely contain inflation expectations, which have risen sharply in recent days.

2. AI: Not a bubble, but a sorting process

We’ve long argued that this isn’t an AI bubble, but a period when markets may grow more discerning between winners and losers.

This week’s earnings reinforced that view:

• Meta’s shares surged after its earnings call⁵, propelled by robust advertising revenue (apparently it’s not just my kids on Instagram all the time) and a credible path to using AI to deepen engagement and increase ad pricing power.⁶
• Microsoft’s shares plunged on the back of its results⁷, despite strong overall financial results. The market is looking for clearer evidence that heavy AI investment is translating into topline acceleration, and slower cloud growth overshadowed an otherwise solid quarter.⁸

This story is far from fully written. But the key point remains: AI isn’t a monolithic trade. We expect leadership to rotate as the market differentiates actual earnings leverage from hype.

Bottom line: Backdrop for stocks remains positive

Our views on 2026 are unchanged:

• We continue to favor broad US market exposure, beyond the megacap growth trade.
• We expect relative outperformance outside the US as global policy remains supportive.

And yes, there’ll always be risks to the outlook. But we continue to assign a low probability to either of the two headline concerns — a market-rattling loss of Fed independence or the bursting of an AI bubble.