ARK Invest founder Cathie Wood ("Wood Sister") released a macro outlook in her latest New Year's letter to investors for 2026, likening the next three years to "Reaganomics on steroids." She pointed out that with the convergence of deregulation, tax cuts, sound monetary policy, and innovative technologies, the U.S. stock market is poised for another "golden age," while an impending surge in the U.S. dollar could potentially halt the upward momentum of gold prices.
Specifically, Cathie Wood believes that despite three consecutive years of real GDP growth, the underlying U.S. economy has actually experienced a rolling recession and is currently in a "coiled spring" state, poised for a strong rebound in the coming years. She particularly emphasized that with David Sacks appointed as the first AI and Crypto Czar to lead deregulation, and the effective corporate tax rate moving towards 10%, U.S. economic growth will receive a substantial policy dividend.
On the macro level, Wood predicts that inflation will be further controlled, potentially even turning negative, driven by a productivity boom. She expects the U.S. nominal GDP growth rate to remain in the 6% to 8% range in the coming years, primarily driven by productivity gains rather than inflation.
Regarding market impact, Wood forecasts that the relative advantage of U.S. investment returns will push the dollar exchange rate significantly higher, replaying the scenario from the 1980s when the dollar nearly doubled. She warned that although gold prices have risen substantially in recent years, a strengthening dollar will suppress gold prices, while Bitcoin, due to its supply mechanism and low asset correlation, will exhibit a different trajectory from gold.
Addressing investor concerns about market valuations, Wood does not believe an AI bubble has formed. She noted that while price-to-earnings ratios are at historically high levels, explosive productivity growth driven by technologies like AI and robotics will fuel corporate earnings growth, thereby absorbing high valuations. The market could achieve positive returns even as P/E ratios compress, similar to the bull market path seen in the mid-to-late 1990s.
The following is the original text from the letter to investors:
Wishing a Happy New Year to ARK's investors and other supporters! We are very grateful for your support. As I elaborate in this letter, we truly believe there are many reasons for investors to be optimistic! I hope you enjoy our discussion. From the perspective of economic history, we are at a significant moment.
Coiled Spring Although U.S. real Gross Domestic Product (GDP) has grown continuously over the past three years, the underlying structure of the U.S. economy has experienced a rolling recession, gradually transforming into a spring compressed to its extreme, potentially ready to rebound strongly in the coming years. In response to COVID-19 related supply shocks, the Federal Reserve raised the federal funds rate from 0.25% in March 2022 to 5.5% by July 2023—a record 22-fold increase over 16 months. This rate-hiking cycle pushed housing, manufacturing, non-AI related capital expenditures, and the low-to-middle income groups in the U.S. into a recession, as illustrated below. Measured by existing home sales, the housing market declined 40% from an annualized rate of 5.9 million units in January 2021 to 3.5 million units in October 2023. This level was last seen in November 2010, and sales have fluctuated around this level for the past two years. This indicates how tightly the spring is compressed: the current level of existing home sales is comparable to the early 1980s, when the U.S. population was about 35% smaller.
Measured by the U.S. Purchasing Managers' Index (PMI), the manufacturing sector has been in contraction for about three consecutive years. According to this diffusion index, 50 is the threshold between expansion and contraction, as shown below.
Meanwhile, capital expenditure measured by non-defense capital goods (excluding aircraft) peaked in mid-2022, and spending levels have since retreated to that level, regardless of technological influence. In fact, this capital expenditure indicator struggled for over 20 years to break through levels seen since the tech and telecom bubble burst, until 2021, when COVID-19 related supply shocks forced an acceleration in both digital and physical investment. The previous spending cap seems to have transformed into a spending floor, as artificial intelligence, robotics, energy storage, blockchain technology, and multi-omics sequencing platforms are poised for their golden era. Following the tech and telecom bubble of the 1990s, a peak spending level of about $70 billion persisted for 20 years; now, as the chart below shows, this could be the strongest capital expenditure cycle in history. We believe an AI bubble is far from imminent!
Simultaneously, data from the University of Michigan shows that confidence among middle- and low-income groups has fallen to its lowest level since the early 1980s. At that time, double-digit inflation and high interest rates severely eroded purchasing power and pushed the U.S. economy into consecutive recessions. Furthermore, as shown below, confidence among high-income groups has also declined in recent months. In our view, consumer confidence is currently one of the most compressed "springs" with significant rebound potential.
Deregulation, Coupled with Lower Taxes, Inflation, and Interest Rates Thanks to the combined effects of deregulation, lower taxes (including tariffs), inflation, and interest rates, the rolling recession experienced by the U.S. in recent years could reverse rapidly and sharply within the next year and beyond. Deregulation is unleashing innovative vitality across various sectors, notably in artificial intelligence and digital assets, led by the first "AI and Crypto Czar," David Sacks. Meanwhile, reductions in tip, overtime, and social security taxes will provide U.S. consumers with substantial tax refunds this quarter, potentially boosting the annualized growth rate of real disposable income from about 2% in the second half of 2025 to approximately 8.3% this quarter. Additionally, with accelerated depreciation for manufacturing facilities, equipment, software, and domestic R&D expenditures, the effective corporate tax rate will be pushed down to near 10% (as shown below), corporate tax refunds are expected to rise significantly, and 10% is among the lowest global tax rates. For example, any company commencing construction on a manufacturing plant in the U.S. before the end of 2028 can fully depreciate the building in its first year of use, instead of over 30 to 40 years as in the past. Equipment, software, and domestic R&D expenditures can also be 100% depreciated in the first year. This cash flow incentive was made permanent in last year's budget and applies retroactively to January 1, 2025.
Over the past few years, inflation measured by the Consumer Price Index (CPI) has stubbornly hovered between 2% and 3%. However, for several reasons illustrated below, the inflation rate is likely to fall to a surprisingly low level—potentially even negative—in the coming years. First, West Texas Intermediate (WTI) crude oil prices have fallen approximately 53% since the post-COVID peak of around $124 per barrel on March 8, 2022, and are currently down about 22% year-over-year.
Since peaking in October 2022, the sales prices of new single-family homes have decreased by about 15%; concurrently, the inflation rate for existing single-family home prices—based on a three-month moving average—has dropped from a post-COVID peak of about 24% year-over-year in June 2021 to approximately 1.3%, as shown below.
In the fourth quarter, to digest the inventory of nearly 500,000 new single-family homes (the highest level since October 2007, just before the global financial crisis, as shown below), three major homebuilders significantly reduced prices, with year-over-year declines of: Lennar -10%, KB Homes -7%, and DR Horton -3%. The impact of these price decreases will lag and be reflected in the CPI over the next few years.
Finally, non-farm productivity, one of the most powerful forces curbing inflation, grew against the trend of a continuing recession, increasing 1.9% year-over-year in the third quarter. Contrasted with a 3.2% increase in compensation per hour worked, productivity gains have reduced unit labor cost inflation to 1.2%, as shown below. This figure shows no sign of the cost-push inflation seen in the 1970s!
This improvement is also validated: the inflation rate measured by Truflation has recently fallen year-over-year to 1.7%, as shown below, nearly 100 basis points (bps) lower than the Bureau of Labor Statistics (BLS) CPI-based inflation rate.
Productivity Boom Indeed, if our research on technology-driven disruptive innovation is correct, then in the coming years, influenced by both cyclical and secular factors, non-farm productivity growth should accelerate to 4-6% annually, further reducing unit labor cost inflation. The convergence of the major innovation platforms currently evolving—artificial intelligence, robotics, energy storage, public blockchain technology, and multi-omics—is expected not only to drive productivity growth to sustainably new highs but also to create enormous wealth. Rising productivity could also correct significant geo-economic imbalances in the global economy. Companies can channel the gains from productivity improvements into one or more of four strategic directions: expanding profit margins, increasing R&D and other investments, raising wages, and/or lowering prices. In China, increasing wages for more productive employees and/or raising profit margins could help the economy move away from its structural problem of overinvestment. Since joining the World Trade Organization (WTO) in 2001, China's investment as a percentage of GDP has averaged about 40%, nearly double that of the U.S., as shown below. Higher wages would push the Chinese economy towards a consumption-oriented model, moving away from a commoditized path.
However, in the short term, technology-driven productivity gains will likely continue to slow U.S. employment growth, causing the unemployment rate to rise from 4.4% to above 5.0% and prompting the Federal Reserve to continue cutting interest rates. Subsequently, deregulation and other fiscal stimuli should amplify the impact of lower rates and accelerate GDP growth in the second half of 2026. Meanwhile, inflation is likely to continue slowing, driven not only by falling oil prices, housing prices, and tariffs but also by technological advances that boost productivity and lower unit labor costs. Surprisingly, AI training costs are declining by 75% annually, while AI inference costs (the cost of running AI application models) are declining by up to 99% per year (according to some benchmarks). Unprecedented declines in the costs of various technologies should spur a surge in their unit growth. Consequently, we expect the U.S. nominal GDP growth rate to remain in the 6% to 8% range in the coming years, primarily driven by productivity growth of 5% to 7%, labor force growth of 1%, and an inflation rate between -2% and +1%. The disinflationary effects brought by AI and the other four major innovation platforms will accumulate, shaping an economic environment similar to the last major technological revolution period triggered by the internal combustion engine, electricity, and the telephone over the 50 years ending in 1929. During that period, short-term rates moved in sync with nominal GDP growth, while long-term rates reacted to the disinflationary undercurrents accompanying the tech boom, resulting in an inverted yield curve averaging about 100 basis points, as shown below.
Other New Year's Thoughts Gold Price Rise vs. Bitcoin Price Decline During 2025, the price of gold rose 65%, while the price of Bitcoin fell 6%. Many observers attribute the 166% surge in gold prices from $1,600 per ounce to $4,300 since the end of the U.S. stock market bear market in October 2022 to inflation risks. However, an alternative explanation is that global wealth growth (exemplified by the 93% rise in the MSCI World Equity Index) has outpaced the annualized growth rate of global gold supply, which is about 1.8%. In other words, incremental gold demand may have exceeded its supply growth. Interestingly, Bitcoin's price rose 360% over the same period, while its supply grew at an annualized rate of only about 1.3%. Notably, the reactions of gold and Bitcoin miners to these price signals could be markedly different: gold miners can respond by increasing gold production, whereas Bitcoin cannot. According to mathematical design, Bitcoin's supply will grow by about 0.82% annually for the next two years, after which its growth rate will slow to approximately 0.41% per year. A Long-Term Perspective on Gold Prices Measured by the ratio of market capitalization to the M2 money supply, the gold price has only been higher than current levels once in the past 125 years: during the early 1930s Great Depression. At that time, the gold price was fixed at $20.67 per ounce while the M2 money supply plummeted about 30% (as shown below). Recently, the gold-to-M2 ratio has surpassed the previous peak, which occurred in 1980 when inflation and interest rates soared into double digits. In other words, from a historical perspective, the gold price has reached an extremely high level. The chart below also shows that the long-term decline in this ratio correlates closely with robust stock market returns. According to research by Ibbotson and Sinquefield, stocks have delivered a compound annual return of approximately 10% since 1926. Following the two major long-term peaks in the ratio in 1934 and 1980, stock prices measured by the Dow Jones Industrial Average (DJIA) delivered returns of 670% over 35 years until 1969 and 1015% over 21 years until 2001, representing annualized returns of 6% and 12%, respectively. Notably, small-cap stocks delivered annualized returns of 12% and 13%, respectively.
For asset allocators, another important consideration is Bitcoin's relatively low correlation with gold returns and with returns of other major asset classes since 2020, as shown in the table below. Notably, Bitcoin's correlation with gold is even lower than the correlation between the S&P 500 and bonds. In other words, for asset allocators seeking higher risk-adjusted returns in the coming years, Bitcoin should be a good diversification option.
Dollar Outlook A popular narrative in recent years has been the end of American exceptionalism, with the dollar recording its largest first-half decline since 1973 and its largest annual decline since 2017. Last year, measured by the trade-weighted dollar index (DXY), the dollar fell 11% in the first half and 9% for the full year. If our predictions regarding fiscal policy, monetary policy, deregulation, and U.S.-led technological breakthroughs are correct, then U.S. investment returns will improve relative to the rest of the world, pushing the dollar exchange rate higher. The Trump administration's policies mirror the situation during the Reaganomics era of the early 1980s, when the dollar exchange rate nearly doubled, as shown below.
AI Hype As shown below, the AI boom is driving capital expenditure to its highest level since the late 1990s. In 2025, investment in data center systems (including computing, networking, and storage equipment) grew 47% to nearly $500 billion, and is projected to grow another 20% in 2026 to approximately $600 billion, far exceeding the long-term trend of $150-$200 billion annually in the decade before ChatGPT's launch. Such massive investment inevitably raises the question: "What is the return on this investment? And where will it manifest?"
Beyond semiconductors and listed large cloud companies, unlisted AI-native companies are also benefiting from growth and investment returns. AI companies are among the fastest-growing enterprises in history. Our research indicates that consumer adoption of AI is occurring twice as fast as the adoption of the internet in the 1990s, as shown below.
Reportedly, by the end of 2025, annualized revenues at OpenAI and Anthropic will reach $20 billion and $9 billion respectively, representing increases of 12.5x and 90x from the previous year's $1.6 billion and $100 million! Rumors suggest both companies are considering initial public offerings (IPOs) within the next year or two to raise capital for the massive investments required to support their product models. As Fidji Simo, CEO of OpenAI's Applied division, stated: "The capabilities of AI models far exceed what most people experience daily, and 2026 is the year to bridge that gap. The leaders in AI will be those who can translate cutting-edge research into products that are genuinely useful for individuals, businesses, and developers." This year, we expect substantial progress in this area as user experiences become more human-centric, intuitive, and integrated. ChatGPT Health is an early example, a dedicated section within the ChatGPT platform aimed at helping users improve their health based on their personal health data. Within enterprises, many AI applications are still in early stages, hindered by bureaucracy, inertia, and/or prerequisites like restructuring and building data infrastructure, leading to slow progress. By 2026, organizations may realize they need to leverage their own data to train models and iterate quickly, or risk being left behind by more aggressive competitors. AI-powered applications should deliver immediate and superior customer service, faster product launch cycles, and help startups create more value with fewer resources.
Market Valuations Are High Many investors are concerned about high stock market valuations, which are currently at historical highs, as shown below. Our own valuation assumption is that the price-to-earnings (P/E) ratio will retreat to around 20x, the average of the past 35 years. Some of the most significant bull markets have occurred alongside P/E compression. For example, from mid-October 1993 to mid-November 1997, the S&P 500 delivered an annualized return of 21% while its P/E ratio fell from 36x to 10x. Similarly, from July 2002 to October 2007, the S&P 500 delivered an annualized return of 14% while its P/E ratio fell from 21x to 17x. Given our expectation that real GDP growth will be driven by productivity gains with slowing inflation, the same dynamics should recur in this market cycle, potentially even more pronounced.
As always, immense thanks to ARK's investors and other supporters, and also to Dan, Will, Katie, and Keith for helping me write this lengthy New Year's greeting! Cathie
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