Daybreak Holiday: Market Expectations, The 12 Days of Christmas Cost

0:01Merry Christmas and Happy Holidays everyone. I'm Nathan Hager welcoming you to a special edition of Bloomberg Daybreak. Markets are closed for the Christmas Day holiday, but we've got a lot coming up for you this hour, including holiday cheer at a premium. Don't know if you noticed, but this year, the 12 days of Christmas got just a bit more expensive. We're going to break it down with Amanda Agati, Chief Investment Officer at PNC. But first, we want to take a look at the stock market because by some estimations, that got a little bit expensive as well. with 2025 certainly turning profits for the bulls, but not without a little bit of pain along the way.

0:39So for more on what to expect in 2026, we're very pleased to bring you a special holiday roundtable on equities. Cameron Dawson is with us on this holiday program, Chief Investment Officer at New Edge Wealth. And joining us as well is Brian Levitt, Global Market Strategist at Invesco. Really appreciate both of you taking the time out of your holiday to join us. But before we look ahead to stocks for 26, let's just quickly assess the year gone by. What did you make of the downs and ups of 2025, Cameron? Does it feel like that April low off the back of the tariff announcement is way back in the rearview mirror now?

1:16Well, Merry Christmas, Nathan. Certainly it does seem that way. And I think one of the most important things about that April low is just how bearish most investors got during that Liberation Day period. We saw in positioning indicators that we got all the way down to the first percentile, meaning only 1 % of the time in the last 15 years have investors been more underweight the market than they were in early April. So that created an incredible wall of money that could be pulled into this market over the course of the last eight months. That just meant that all dips got bought rather quickly.

1:53We saw very little volatility, and that allowed us to levitate, as you mentioned, at these very high valuations. But it's important to note, we started the year at high valuations, we're ending the year at high valuations, but the real source of returns all came from earnings growth. You had a really solid 10%, 11 % earnings growth for 2025. And it's also important to note that consensus expects that to continue with 13 % earnings growth for 2026. So it certainly seems that investors are expecting the good times to keep on rolling. Let's turn to you now, Brian. What did you make of the market moves this year?

2:31And where do you see things going into 26? The markets were volatile around periods of policy uncertainty, and that's almost always the case. So I often get asked when it's too good to be true or people think it's too good to be true. When does volatility come? When do market drawdowns come? Well, they almost always come during periods of policy uncertainty. And as we got towards that peak policy uncertainty, historically in this time as well, you tend to do markets tend to perform well in the aftermath of that. Again, this time was no different. So as we came through that, it was important that the administration start to provide greater clarity on where the tariff rights were going.

3:15And as inflation expectations stay contained, we started to get better clarity on where the Federal Reserve might be going. And so that created the recipe for a bottom and an improving advance. Now, the reality is this was the year where the markets did broaden out, not to the extent that we may have hoped for at the beginning of the year. And I think tariffs and policy uncertainty had something to do with that. But nonetheless, a year in which most parts of the market did well. expectation as we head into 2026 is lower interest rates from the Fed, an emergence out of this global mid-cycle slowdown could help to continue to support other parts of the market, which may not be as disconcerting from a valuation perspective as some people fear.

4:08And to Brian's point, Cameron, we are starting to see a little bit of that rotation happening out of big tech as we head into 2026. But thinking about the idea of policy certainty now, is there still a risk of policy uncertainty around what the tariff regime could be after the Supreme Court rules sometime next year? Oh, this is very important as we think about not just in the context of what it means for American businesses with certainty about how trade will be treated, but really how the bond market digests this. Because what we've seen is that the collection of tariffs have eased some pressure on Treasury to issue more debt to fund these big, huge deficits that we know that we have.

4:55And so the question would be is that if there is pushback by the Supreme Court where it looks as if those tariffs cannot be collected going forward, you start to have bigger holes in the budget that will need to be filled by more Treasury issuance. So it could be one of the reasons why we're seeing a little bit of perkiness in the long end of the yield curve. Tenures are still very well contained, but the 30-year bond has been able to break above resistance, potentially starting to price in some of these fears about fiscal dominance and the need for more treasury supply. But I would note that this is much more of a global phenomenon.

5:32You're seeing a lot of movement higher in yields as we move, as we look at places like Japan and Germany and France, all just suggesting that even though there might be policy certainty about expectations for more Fed cuts, so we look globally, it's not necessarily that certain. What do you think, Brian, about the possibility of some policy uncertainty around tariffs in the new year? Is that something that investors need to keep in mind? Could there be something of a push-pull between the Treasury and the equity markets? No, I don't think investors need to be concerned about it. Regardless of what the Supreme Court rules, the Trump administration has steps that they can take to continue to impose tariffs, whether that's Section 122 of the Trade Act of 1974.

6:18They can use Section 232 of the Trade Expansion Act of 62, Section 301 of the Trade Act of 1974. So they're going to figure out a way to continue to collect tariff revenue, whether that's for better or for worse. So I wouldn't put that as the big policy uncertainty as we head into the year. I think that one of the risks you have is what will ultimately happen with the Fed in terms of Fed independence. To me, that would be a bigger tail risk. And I want to be clear, Nathan, I categorize it as a tail risk because I continue to believe that this is a Fed that is going to maintain its autonomy and independence.

7:03I do believe it's important to this FOMC. If you start to get whips of that changing, then you may have some challenges at the long end of the yield curve. And that would be a very different environment where if the U.S. Treasury bonds start to trade more like a credit, that's a very different outcome than we've dealt with for years. Short of that, I continue to expect U.S. Treasury bond to trade like a U.S. Treasury bond. And what I mean by that is not based on its corporate, its credit fundamentals, but more based on the growth and inflation potential of the U.S. And I expect it to be a pretty reasonable year from a growth and inflation perspective without substantial treasury rate volatility.

7:56We're speaking with Brian Leavitt. He's global market strategist at Invesco, along with New Edge Wealth chief investment officer Cameron Dawson. Cameron, I want to take the conversation more specifically to the stock market now, because looking ahead at 2026, a lot of the 12-month forward targets for the S &P 500 are pretty bullish. There seems like a lot of optimism baked into this market about where stocks are going to go in the new year. What do you think? Is this going to be the year we see something like an S &P 8 ,000 as we hover close to 7 ,000 right now? Yeah, there's certainly some estimates out there that we get to S &P 8000.

8:36I think what's interesting is that if you look at the collection of strategists, there's not one single strategist who is expecting a down year in 2026. And of course, that makes sense when you start thinking about some of the things that Brian mentioned earlier. You talk about a supportive Fed. You talk about supportive fiscal policy, continued earnings growth driven by things like the AI infrastructure build out. It is hard to be bearish. And so thus, there aren't any bearish estimates in those strategist forecasts. one of the things we'd note is that because you are starting the year at 22.5 times forward earnings on a valuation basis for the S &P 500 and 13 % earnings growth, that a lot of this bullishness is already well contemplated in the price.

9:22So we wouldn't expect a lot of further multiple expansion going into 2026, and likely that the returns that we get are closer to what we get as far as earnings growth. That would actually be very similar to what happened this year in 2025, where the majority of returns did come from earnings growth. So a lot of bullishness out there, very tough to find bears simply because the narrative doesn't support it. But that doesn't mean that we won't experience volatility along the way. Yeah. To Cameron's point, Brian, you look at the ANR function on the S &P 500, it is really tough to find anybody who's looking very bearish on this market.

9:59Given that, with so much bullishness baked in, could that be a bearish indicator? I don't think so. I think in most years, you tend to see most analyst expectations being positive. You don't last in this industry very long putting out bearish outlooks on the S &P 500 each year. I guess there's a couple of prominent perma bears, but for the most part, markets tend to go up far more often than they tend to go down. And that's because in most years, things get better rather than get worse. I mean, 2022, if you want to think about it, was a year in which things got worse relative to expectations. That's a down year.

10:41Inflation went higher. The Fed had to raise rates more. In most years, things get better. And when you look at 2026, the setup is for things to get better, as Cameron also mentioned. So by better, a lower discount rate, there's an opportunity for improving global growth. Investors should remember, we've been in a little bit of a soft patch here. That's what trade wars will do, or that's what trade conflict will do. So what you have now, European Central Bank has already lowered rates significantly. The Europeans are committed to fiscal investment. China needs to combat deflationary impulses. The U.S.

11:23is probably a little bit too restrictive on policy. So all of that creates a backdrop of what should be an improving economic activity. And on top of all of that, it should start to be a year where more of the gains and efficiencies of artificial intelligence start to accrue to other parts of the market. And so that all creates a reasonably good backdrop. If you're expecting a bad year for markets, what you really would have to assume is that something's going to happen to cause the U.S. economy to roll over meaningfully, or the Chinese economy for that matter, or the Fed to have to reverse course.

12:10And it's difficult right now to see what that could be. We're going to continue this special conversation on the stock market looking ahead to 2026. the backdrop for equities in the new year, along with the central bank policy possibilities as we continue this special market roundtable with Invesco's Brian Levitt and Cameron Dawson of New Edge Wealth on this special edition of Bloomberg Daybreak for Christmas. I'm Nathan Hager, and this is Bloomberg.

12:51As markets move and headlines break, what matters most is context. A Bloomberg subscription gives you unmatched reporting, sharp analysis, and powerful tools that help you connect the dots. Visit Bloomberg.com slash podcast offer to learn more. Thanks for being here on this special festive edition of Bloomberg Daybreak. Markets are closed for the Christmas holiday. I'm Nathan Hager. And we want to continue our special holiday roundtable on the stock market with Cameron Dawson, Chief Investment Officer at New Edge Wealth, and Brian Levitt, Global Market Strategist at Invesco. And I want to pick up on some points you both made at the beginning of this program, focused on the Fed, because investors, it's safe to say, are betting on at least a couple more rate cuts in the new year after Jay Powell and company ended 2025 with three in a row.

13:42So this is how Powell explained the latest cut just a couple weeks ago at the December meeting. Why did we move today? You know, I would say point to a couple things. First of all, gradual cooling in the labor market has continued. Unemployment is now up three-tenths from June through September. Payroll jobs averaging 40 ,000 per month since April. We think there's an overstatement in these numbers by about 60 ,000. So that would be negative 20 ,000 per month. So still clearly a lot of focus on vulnerabilities in the labor market. Cameron, I'll start with you. Does this make the case for cuts sooner maybe than the market might be expecting?

14:22We do think it does simply because if you look at what market expectations are baking in right now, it's about 2.4 cuts through the end of the year, which would get us just to neutral based on the Fed funds median dot in their dot plot for the long run neutral rate. So that just suggests that the market isn't expecting a lot of incremental weakness within labor market data. But as we saw in the recent payrolls print from November, that we now already have an employment rate at 4.6 percent. So we think that there is room for unemployment to move higher that could potentially pull those Fed cuts sooner.

15:00And that raises a really important question for risk assets like credit and equity markets, which is that the last 175 basis points of cuts that we got for the Fed came with a backdrop where forecasters were actually raising their estimates for both EPS and GDP growth, which just meant that even though we were getting Fed cuts, people were becoming more optimistic about the growth backdrop. That is a fantastic backdrop for risk assets to continue to rally. So if we continue to see weakness within the labor market, could it potentially challenge growth forecasts? Consensus has 2 % growth expected for 2026.

15:39And could that be an environment where instead of celebrating rate cuts as they have the last two years, we see markets take it as more of a negative sign that this economy needs Fed support. So it definitely will be a data dependent Fed and a data dependent market. Brian, let's turn to you. What's your view on where the Fed goes in the first half of 2026? Could we see those cuts sooner than later? And what could that mean for the equity market? I think we could. And the things I watch, just like the Fed chair is looking at payrolls. And yes, they've weakened substantially unemployment rate up a bit.

16:17The other thing that I've been so laser focused on is the inflation expectations in the bond market. And if you look at a three-year break even, it has really rolled over in the last days. So you're looking at a bond market that's expecting about two and a quarter inflation over the next three years. Now, a lot of people may look at that and say, what's wrong with that? That's right in the Fed's comfort zone. But it's starting to move down fairly rapidly. So I would watch it closely. From my perspective, we're sitting here or have been sitting here with a relatively flat yield curve. That feels too restrictive to me in an environment where the economy is just not going gangbusters from a jobs perspective.

17:04So if it were me, if I were running the Fed, yeah, I would want to have the short rate down closer to 3%. That all else being equal gives you 100 to 125 basis points spread between short rates and the 10-year treasury. That's historical average. To me, that seems far more appropriate for the environment that we're in. In terms of what that means, typically that's a good backdrop for risk assets, particularly smaller capitalization stocks. But also as the yield curve steepens, more value-oriented parts of the market. And so for investors that may have some concerns about valuations in the top-heavy part of the market, Fed cuts and a pickup in activity from that could give you the backdrop where more value -oriented parts of the market perform well.

18:00And quite frankly, some of the biggest value markets were outside of the United States. And you saw some of that performance already this year. That does raise the question, Cam, about whether the market is possibly depending on rate cuts from the Federal Reserve to keep that rotation or broadening away from big tech going into small and medium cap stocks. Certainly. It is dependent, the rally in small and medium cap stocks, on the Fed remaining supportive because smaller cap stocks need two key things. They need a resilient economy in order to drive earnings growth, and they also need lower interest rates in order to ease some pressure on balance sheets.

18:44small cap stocks tend to have a lot more debt and a lot more floating rate debt. So if there's any cohort that celebrates Fed rate cuts more than others, it would be those small cap stocks. Now, it should be noted, though, is that if we look at consensus for the Russell 2000, there is a very industrious 60 % earnings growth that is forecasted for 2026. And that might look encouraging to investors because it's well higher than what we see in the large cap portion of the market, but it should be taken with a grain of salt. If we look at the beginning of 2025, there was an estimated 50 % earnings growth coming into this year, but the actual returns on earnings growth ended up being just 3%.

19:27So those estimates, just because they are expected by consensus, does not guarantee that they will be delivered, but certainly more rate cuts, a resilient economy, a cyclical uplift could help those smaller cap size stocks, but just note the bar is already pretty darn high. Yeah, it seems to be the case. And I'll turn back to you, Brian, thinking about your role as a global market strategist with the Fed, considering further rate cuts into 2026. We've got a European central bank that seems to be on pause, a Bank of Japan that's starting to hike interest rates for the first time in years. Talk to me a little bit more about the global central bank dynamics and what that could mean for equities more broadly.

20:11Yeah, the U.S. is expected to lower rates more than any other developed central bank. And I think that that is critical. Typically, as the Fed lowers rates and those rates converge towards the rest of the world, you tend not to see a very strong dollar environment. And investors aren't used to that. We haven't seen a gradual easing cycle in the U.S. in decades because we ran into crises and then the U.S. stimulated the economy better than the rest of the world did in 08 and 2020. So this is the first gradual rate easing cycle that most investors in the United States have seen, at least for a very long while.

20:54So what that usually means is you don't have a strong dollar, may even mean that the dollar goes sideways or moderates. And in that type of a backdrop, that's when capital can start to look to other parts of the world where valuations are more compelling. You saw a lot of that this year. If you look at the MSCI ACWI XUS total return, it significantly outperformed the S &P 500. So that's something that can continue, particularly when you think to the emerging markets. If you look at emerging economies, they tend to perform best when the dollar is either going sideways or weakening. And as the U.S.

21:40lowers rates, that gives some more flexibility to central banks in the emerging world. So that's a place that investors could look if they're trying to diversify out of the U.S., take advantage of better valuations and take advantage of what could be a better global macro backdrop. We're speaking with Brian Levitt, global market strategist at Invesco and New Edge Wealth chief investment officer Cameron Dawson. In the minutes we have left, let's talk about the U.S. markets more specifically in 2026. A lot of question about whether the tech trade can continue with the valuations it's at right now.

22:21Cameron, what sectors are you looking at that could provide a little bit more return in 2026? Well, one of the things that we're watching really closely is that over the last couple of months, you have seen a big rotation into some left-behind sectors over the last few years. If you look at places like healthcare, for example, going from being a laggard into now a leading sector in the market, which is really more of a valuation story and somewhat of an earnings recovery story because of depressed earnings over the course of the last couple of years. The other thing that we're watching closely is you're starting to see some signs that very cyclical sectors are turning up in addition to industrial commodities.

23:06So look at copper soaring. And all of this suggests that maybe the market is starting to bake in expectations of that cyclical uplift after we've had this mid-cycle slowdown. The question, of course, is that optimism warranted? Will we see some of that cyclicality actually deliver? It should be noted that November through May are typically really strong times for cyclicality and that those trades tend to fade as we get towards the middle of the year. So for now, it seems like a good time as we start to see some of that cyclicality come back into markets. Brian, you're looking at cyclicals. What kind of sectors are you considering into the new year?

23:45I couldn't agree more. And Cameron is spot on with this. When we look at our leading indicators of the economy, it's giving us a three to six month view of the global economy returning more to a trend like environment. It had been globally below trend. And so what that means is a more an environment that favors more cyclical assets. Now, that's generally a three to six month view. So we'll have to see the carry through from that. Do we go from a recovery to more of an expansion? I agree with Cameron's timing a lot. We will reassess monthly, certainly six months from now, see where we are with it.

24:27But when you're thinking about cyclical sectors, you have financials, industrial commodities, energy. Those tend to be materials. Those tend to be the outperformers. And what I also like what Cameron mentioned is this idea of perhaps even rotating within growthier parts of the market. And, you know, perhaps biotech is an example of that. In our last minute, Cameron, what are some potential risks that investors should keep in mind into the new year? The big wild card for us is oil prices. We should not underestimate or underappreciate just how powerful falling oil prices have been for the disinflation move of lower headline inflation, as well as helping consumers effectively acting as a tax cut.

25:15Oil prices are very low. Gasoline prices are very low. But a turn in that trend towards more of an uptrend could certainly be a shock. It's not our base case, but something we're watching closely as it is very important. Thanks to both of you for being with us on this Christmas holiday. That's Brian Levitt, Global Market Strategist at Invesco, and New Edge Wealth Chief Investment Officer Cameron Dawson. And up next, the 12 days of Christmas got a little pricier this year. We'll break it down with Amanda Agati of PNC. I'm Nathan Hager, and this is Bloomberg.

25:59On the first day of Christmas, my true love sent to me a partridge in a pear tree. Welcome back to this special edition of Bloomberg Daybreak. The markets are closed for the Christmas holiday. I'm Nathan Hager, but if you're tallying up the cost of Christmas, it might not be music to everybody's ears, especially if you go that full 12 days. So how much will a partridge in a pear tree and all those turtle doves and gold rings set you back this Christmas season? Joining us is someone who knows every year. PNC Chief Investment Officer Amanda Agati publishes PNC's Christmas Price Index, a festive indicator that turns the 12 days of Christmas into a holly jolly read on the U.S.

26:43economy. And Amanda is here with us to break it down. Amanda, so great to have you on this Christmas holiday. So let's get the top line number. What's the 12 days of Christmas cost in Christmas 2025? Well, Merry Christmas, Nathan. I'm so thrilled to be with you celebrating the holiday here. Believe it or not, True Love's Gifts wrap up at a tree topping$51 ,476. It's up about four and a half percent year over year. So the cost of Christmas continues to be on the rise. Outpacing the Fed's 2 % target, more than doubling. Should we go day by day? How do you Think about the cost of a partridge in a pear tree on the first day.

27:32Well, yeah, I mean, we could we could spend all day talking about, you know, how we're trying to tie the analysis to what's happening in the real world. I think the what's notable about the partridge in a pear tree is not so much the partridge. The cost of the partridge itself didn't move on a year over year basis. I can't imagine why true love doesn't want a partridge. But the pear tree is really the driver for that combo gift. And so we always tie the pear tree to sort of a proxy for housing costs, which continue to increase year after year. There's a lot of sort of interesting supply and demand dynamics as it relates to housing in this country.

28:18But I think what's interesting this year is even though mortgage rates have sort of fallen off the rooftop, as they say, by more than 100 basis points as the Fed's been lowering rates, it really hasn't made much of a difference in terms of affordability. So I don't know if the partridge needs to rent that pear tree or what, but it's going to cost true love a lot this holiday season. Wow. OK, so we're not thinking about the pears necessarily either looping in fruit prices maybe. But we do have a lot of birds in the next few days of the 12 days. Turtle doves, calling birds, French hens. Are we thinking about chicken and eggs here?