I started working as a rookie broker at Smith Barney in 1984, where “we make money the old fashion way, we earn it.” Many readers and investors that we serve remember that famous tag line from John Hausman, and having spent time in that culture, it was a roll up the shirtsleeves atmosphere that demanded hard work and long hours.
Guess what? It still does. Nothing has changed about staying ahead of the “crowd sentiment” and trying to time when to step on the gas with investor capital or hit the brakes because few saw a correction as a forthcoming risk. As we enter 2026+, it seems as if everyone is all in for a fourth year of solidly bullish gains for stocks. And this consensus comes from the smartest and most respected chief market strategists at Wall Street’s premier firms — Goldman Sachs, JP Morgan, Morgan Stanley, etc.
All the catalysts seem to be in place. In 2026, many Americans will see lower taxes and higher refunds due to the One Big Beautiful Bill Act (OBBBA). This legislation, passed in July 2025, made many temporary tax cuts permanent, and introduced several new targeted deductions.
Onshoring gets a lot of attention. In 2026, the revenue impact of reshoring is a “push and pull” between the money coming in from new domestic activity and the tax breaks used to lure those companies back, but the government is essentially betting that the hundreds of billions earned from tariffs and new payroll taxes will eventually outweigh the trillions in tax cuts given to corporations to move their factories back to U.S. soil.
The world is awash in crude oil, and the United States is the largest producer of natural gas. That is the first source of supply to the expansion of the electric grid and to meet the insatiable demand for the AI data center operations. This electrical supply/demand equation runs the risk of being a boogie man if all these data centers are built and power is short on supply to run them. Currently, the market is a believer in the ability of those building out the grid to meet the demand. It is a tall order as a regulated business.
On the geopolitical front, let’s be honest, and this is a hard reality: Wall Street does not care about Russia, Ukraine, the potential breakdown of the EU, Venezuela, protests in Iran or anything else other than the potential takeover of Taiwan by China. The United States drives the global bus — accounting for 30% of total global GDP. As long as the U.S. economy is performing well, and it most certainly is, unfortunately, nothing much else matters when it comes to stock market gains because sales and earnings are rising.
I too am optimistic about another up year for equities for 2026. The S&P is trading at a top-heavy P/E ratio due to magnificent growth from the AI trade. And based on capex projections, there is more upside potential. The AI trade is moving from the $20-30 per month user Large Language Model (LLM) to the “Agentic AI” phase, where monumental corporate changeovers in productivity will be charged by the task. We are entering the next phase, or the fourth inning, of the AI disruptive transformational ball game. And this is where the gigantic capex investment is supposed to pay off. I believe it will.
So, with everyone on the same sheet of music, where is the potential trip wire for the market’s bullish inertia? Unfortunately, this is an easy one. The bull in the China shop is the long end of the yield curve — something the Fed has no control over unless they step in and buy 10-, 20- and 30-year bonds as if there is no tomorrow.
As 2026 gets under way, the long end of the yield curve (specifically the 10-year and 30-year Treasury yields) has become the ultimate “pain trade” because it is moving in the opposite direction of what the stock market needs to sustain its current high valuations. As we start the year, we are seeing a bearish steepening scenario where the Federal Reserve is cutting short-term rates to support the economy, but long-term rates are actually rising due to inflation and debt concerns.
The stock market is currently trading at an elevated forward P/E ratio (approx. 21.3x). To justify such high prices, investors need the discount rate to stay low. When the 10-year yield rises, the present value of future corporate earnings drops. In early 2026, the 10-year yield is hovering near 4.20%, with technical analysts warning that a break above this level could target 4.50% to 4.80%. If that happens, stock multiples almost certainly have to contract, leading to a “valuation reset,” even if earnings remain good.
For the housing market to reset to where most Americans can actually get in, both mortgage rates and prices have to come down from what are still post-COVID elevated levels. America needs way more low-priced housing supply, lower mortgage rates and more regulation of what percentage of neighborhoods corporations can own.
Corporate housing ownership within the suburbs destroys the sense of community when everyone is coming and going where there is no intention of assimilation. And it would help if the government capped how much private equity could buy up neighborhoods for cash that price newly formulated households out of the market. Just a thought.
To be fair, 30‑year fixed mortgage rates are not priced off the 30‑year Treasury. Instead, they are primarily benchmarked to the 10‑year U.S. Treasury yield, even though the mortgage itself is a 30‑year product. Because the average life of a 30‑year mortgage is 7-10 years due to refinancing, moving or selling. Lenders therefore hedge and price risk based on the 10‑year duration, not the full 30‑year.
But enough on the woes of America’s overpriced housing market. The pain trade is about managing the long end of the yield curve. To address the federal debt in 2026, President Trump and Treasury Secretary Scott Bessent are moving away from traditional austerity in favor of a strategy known as the “3-3-3 Rule.” This plan is modeled after the “Three Arrows” of Abenomics and relies on the idea that the United States can “grow its way out” of debt by boosting the denominator (GDP) while aggressively capturing new revenue through tariffs.
Secretary Bessent’s primary fiscal anchor is a specific set of targets to be achieved by the end of the term (2028):
3% GDP Growth: Achieving consistent 3% real economic growth through deregulation and the tax incentives in the One Big Beautiful Bill Act (OBBBA).
3% Budget Deficit: Reducing the annual deficit from its current levels (approx. 6% of GDP) down to 3% of GDP.
3 Million Barrels: Increasing U.S. energy production by an additional 3 million barrels of oil equivalent per day to lower energy costs and drive industrial revenue.
A cornerstone of the plan to slash the $38 trillion federal debt is the use of tariffs as a primary revenue generator rather than just a trade tool. The administration expects tariffs to generate $2 trillion to $3 trillion over the next decade. In the first two months of Fiscal Year 2026 alone, customs duties surged by 287% ($48 billion) due to the new universal baseline tariffs. This revenue is being used to offset the cost of the OBBBA tax cuts.
As a former hedge fund manager, Bessent is focused on the interest expense of the debt, which is now one of the largest items in the federal budget. Bessent has stated his job is to be the “nation’s top bond salesman.” By providing forward guidance on deficit reduction, he aims to keep the 10-year Treasury yield low. If the administration can lower the average interest rate the U.S. pays on its debt by even 0.5%, it saves hundreds of billions of dollars in annual outlays without cutting a single program.
The success of this plan hinges on whether the 3% growth and tariff revenue materialize fast enough to outpace the interest on the existing $38 trillion debt. Critics argue that the tax cuts may add to the debt in the short term, while the administration maintains that the “refund shock” of early 2026 will jumpstart the economy into self-sustaining surplus territory by 2030. For now, the market wants to believe the narrative.
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