Market Commentary

• There are several key trends in place that we believe will help drive the economy forward next year and contribute to gross-domestic-product (GDP) growth.
• Our 40,000-foot view of the economy calls for moderate growth and easing price pressures.

Our regular readers know we are looking for improving GDP growth in 2026 compared to this year. They are also aware that we look for inflation, as measured by the Consumer Price Index, or CPI, to ease somewhat next year compared to 2025. Let’s generalize and say that next year we are projecting moderate growth with moderating inflation for the U.S. economy. That means, in our view, the “big picture” for the coming 12 months or so is one where risk assets should do well, particularly equities but also some other asset classes.

There are several key trends in place that we believe will help drive the economy forward next year and contribute to GDP growth. These include infrastructure spending related to artificial intelligence (AI), meaningful deregulation affecting multiple segments of the economy, and large tax refunds expected to be received by U.S. taxpayers (aka, consumers) in the spring of next year. Our analysis suggests these trends will lead to improved consumer spending, broader earnings participation within the S&P 500 Index, and overall earnings growth for the index that is slightly more than 11% in 2026.

We believe the S&P 500 Index will put in another positive performance next year. But there will likely continue to be questions about the valuations of AI-related technology stocks as well as moderate inflation that is still above the Federal Reserve’s (Fed’s) longer-term average target (2%). Our view is that now is not the time to put portfolios on autopilot. Earlier in the year we took the Communication Services sector down to a neutral rating and more recently also took the Information Technology sector down to neutral. These two sectors currently represent approximately 46% of the total market capitalization of the S&P 500 Index. We feel these sectors offer more upside in the coming year but wanted to trim our overweight exposure and continue to suggest that investors move funds to other sectors that can potentially benefit from the economic environment we see ahead as well as continued AI-infrastructure spend.

Those sectors include our most favored Financials sector as well as the favored Industrials and Utilities sectors. As far as the Financials sector is concerned, Fed rate cuts, a more active mergers and acquisitions (M&A) environment, attractive capital expenditures (capex) incentives included in the One Big Beautiful Bill Act, and improved economic growth should lead to better revenues and earnings opportunities. Industrials and Utilities sector opportunities are largely tied to AI capex spending. Companies in the Industrials sector will be building data centers and doing the work to upgrade the electrical grid. The Utilities sectors should benefit from what we see as a minimum 25% surge in electrical demand over the next decade. Much of that demand increase is tied to the need to power the AI revolution.

Our 40,000-foot view of the economy calls for moderate growth and easing price pressures. We believe the sectors we favor should benefit from this growth and from a furthering of the AI capex trend.

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the U.S. stock market.

An index is unmanaged and not available for direct investment.

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The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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