LIVE MARKETS-Despite recent smooth sailing, may be best if investors take warning

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DESPITE RECENT SMOOTH SAILING, MAY BE BEST IF INVESTORS TAKE WARNING

Risk assets entered 2026 with significant tailwinds including a good economic backdrop, accommodative monetary and fiscal policies, as well as robust corporate profits.

In theory, these tailwinds can help propel stocks, credit and other risk assets to another year of positive returns.

However, Bob Doll, chief investment officer at Crossmark Global Investments, believes there is a catch in that elevated optimism is already embedded in asset prices, with equity valuations rich, corporate bond spreads tight, and investors assuming tame inflation, further interest rate cuts, and a big and steady future economic payoff from AI.

"Despite the comparatively bright economic outlook, it will be tough for capital markets to match the strong and broad-based returns investors have enjoyed over the past few years," writes Doll in his latest "Deliberations."

He adds that "investors should not expect smooth sailing over the course of the next year, with higher bond yields likely to eventually weigh on equity valuations."

Doll expects above-target inflation in 2026, forcing the Fed to cut by less than forecast. With this, bond yields will move higher, underpinned by heavy government debt issuance and increased borrowing by tech companies funding the AI buildout.

Doll's bottom line is that equities can generate positive returns, but the hurdle for positive earnings surprises is high, and therefore, the market will remain vulnerable to "periodic setbacks during the year, especially if bond yields rise."

(Terence Gabriel)

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