Fundamental Signals

Editor's Notes

• Heading into 2026, the market presents a complex outlook, driven by robust retail-driven gains and persistent macro-level anxieties.

• Bullish price action vs. creeping macro anxiety. I’m struck by how split the market feels. On one side, you have very confident calls for the S&P to push toward ~7,700 on AI-driven EPS growth, helped along by aggressive retail positioning. On the other, real concerns keep piling up—$38T in U.S. debt, layoffs, geopolitics, and stretched valuations—pushing more cautious investors toward cash, gold, and EM. This disconnect between markets at highs and economic unease underneath is hard to ignore.

• Japan still looks like the cleaner relative play. The Nikkei’s resilience stands out, and the idea of capital rotating from a crowded U.S. market into Asia—especially Japan—continues to make sense to me. Semiconductors, defense (Mitsubishi Heavy), and green infrastructure (Kawasaki Heavy) feel like multi-year themes rather than trades.

• AI reality check, not AI collapse. The tone around AI is maturing. Layoffs at Salesforce and confusion around “AI investing tools” highlight that implementation is messy, not linear. At the same time, Nvidia’s strategic moves and Saudi Arabia’s AI ambitions show this is a global infrastructure race, not a fad. I see more dispersion ahead—real winners versus overhyped stories.

• Crypto and gold are behaving like macro assets now. Bitcoin and Ethereum increasingly trade like commodities tied to liquidity and inflation expectations, while gold and silver hitting fresh highs feels less speculative and more like portfolio insurance. This is no longer fringe positioning—it’s becoming part of the core macro conversation.

Overall, this feels like a market that still rewards conviction—but increasingly punishes sloppy narratives. Selectivity matters more than bravado here.

Overall Themes, Market Sentiment & Debates

US Market: Disconnect and Divergent Outlooks

Sentiment remains bifurcated. On one hand, the S&P 500 is projected for another strong year in 2026, with some forecasting a rally to 7,724 (at 25x P/E) driven by an estimated 17.3% EPS growth and anticipated AI-driven efficiency gains. This bullishness is partly fueled by retail investors, with r/wallstreetbets' collective stock picks reportedly outperforming the S&P 500 significantly in 2025. This raises a pertinent debate on concentrated, speculative approaches versus broad diversification, with arguments that broad ETFs may not deliver "rich" returns compared to selected holdings.

Conversely, a palpable fear of a market crash and recession persists, attributed to the escalating US national debt ($38T), geopolitical instability, elevated valuations, increasing layoffs, and rising costs. This has led some institutional and sophisticated retail investors to de-risk by holding cash or diversifying into gold and emerging markets. The perceived disconnect between an all-time high market and deteriorating economic indicators like layoffs and rising costs is a key point of contention.

Japan Market: Resilience and Strategic Reallocation

The Nikkei 225 continues to lead global indices, demonstrating resilience even after sharp, albeit short-lived, drops. A significant theme is the potential rotation of investment flows from lagging U.S. markets towards Asian assets, with Japan positioned to benefit from robust semiconductor demand and supportive industrial policies. This suggests that long-term strategic investments in sectors like defense (Mitsubishi Heavy Industries) and green energy infrastructure (Kawasaki Heavy Industries' liquid hydrogen terminal) could see sustained momentum.

Artificial Intelligence (AI): A Double-Edged Sword in Practice

The practical application and investment implications of AI remain a critical debate. Salesforce's significant layoffs due to AI automation, juxtaposed with executive admission of being "less confident about LLMs a year ago," highlight the ongoing learning curve and potential for disruptive shifts in employment. In trading, the complexity and lack of clarity in "AI investing tools" are causing frustration, underscoring the gap between theoretical AI promise and actionable investment strategies. Geopolitically, Saudi Arabia's ambitious push to become a major AI data center hub signals a global arms race for AI infrastructure and talent. Meanwhile, Nvidia's strategic acquisition-hire and non-exclusive licensing deal for Groq's AI inference technology illustrate a sophisticated approach to consolidate market dominance while navigating potential antitrust scrutiny.

Cryptocurrency: Maturing as a Macro Asset

Bitcoin and Ethereum are increasingly exhibiting characteristics of commodities, demonstrating correlation with M2 money supply and acting as inflation hedges since 2021 due to expanding mainstream and institutional adoption. The "physical cost" of Bitcoin's security, underpinned by energy transformation, is being framed as its fundamental value. Ethereum's growth, in particular, is anticipated to be boosted by tokenization as a short-term catalyst.

Notable Big Stock Moves, Earnings and Development

Interesting Comments, Facts & Ideas

Japan Specific Insights

• Defense & Infrastructure: Mitsubishi Heavy Industries is advancing its Maya-class Aegis destroyer with enhanced Ballistic Missile Defense capabilities. Kawasaki Heavy Industries broke ground on Japan's first large-scale liquid hydrogen terminal, aiming to be the world's largest import facility by 2030, a significant play on future energy.

• Pharma: Shionogi & Co., Ltd. completed patient enrollment for its global Phase 2b clinical trial of Redasemtide for acute ischemic stroke, a key pipeline milestone.

• Under-the-Radar Plays: MCJ (6670.JP) is highlighted as a short-term rebound candidate, positioned for hardware demand recovery. Fujita Kanko (9722.JP) is seen for rebound potential driven by inbound tourism recovery. Kakaku.com (2371.JP) is flagged as undervalued with significant upside in consumer tech.

Hong Kong Specific Insights

• Conglomerates & Property: Jardine Matheson (0005.HK) is viewed as having "run but higher" potential with a positive long-term outlook. CK Hutchison (0001.HK) is in an "early" stage with "much more" upside, favored for its diversified infrastructure holdings. Hysan Development (0014.HK) is believed to have "still room" for growth, reflecting optimism for a property sector recovery. Keck Seng (0244.HK) is identified as a laggard in the hotels segment with limited upside.

• EV Expansion: BYD Company Limited Class H is building a $490 million EV plant in Rayong, Thailand, as a strategic move to diversify supply chains.

Global & Cross-Sector Ideas

• AI Frontier:

  • Contrarian Bullish AI: Investors are bullish on names like DUOL, WIX, HUBS, FVRR, UBER, and NXDR, arguing they have been unfairly "crushed" by AI fears but will ultimately benefit. UBER specifically is expected to accelerate Free Cash Flow from autonomous vehicles.

  • RPA & LLMs: PATH (UiPath Inc.) is pitched as a leader in Robotic Process Automation, with its new Maestro orchestrating RPA tasks with LLMs, leveraging its extensive Fortune 500 customer base for agentic orchestration.

  • AI Infra Concerns: A bearish thesis on POET Technologies points to major red flags in manufacturing yields and outsourcing decisions, leading to a lack of process control.

• Defense & Industrials Turnaround:

  • Mercury Systems (MRCY): A ~$4 billion defense/space play, partnering with AI chip suppliers to "ruggedize" chips for extreme environments. With a record $1.4 billion backlog, it's a turnaround candidate from old fixed-price contracts.

  • Goodyear Tire & Rubber (GT): Pitched as a compelling industrial turnaround for 2026 (~50% upside), driven by Elliott Management's "Goodyear Forward plan," which includes asset sales, debt reduction, and a pivot to high-margin EV tires. Currently trading at a distressed 7.2x forward P/E vs. peers at 10x.

• Value & Special Situations:

  • Asbury Automotive Group (ABG): Identified as a "cheap" value play, trading under 10x P/E and P/FCF, potentially undervalued due to macro fears and poised to benefit from consumer auto recovery.

  • Criteo S.A. (CRTO): This French ad-tech company is a deep value opportunity (6.25x P/E, 5.2x P/FCF), with strong share buybacks and insider buying, with beliefs that Google cookie deprecation risks are overstated.

  • Bolt Metals Corp. / 26 Metals Corp. (BOLT / IRON): Highly bullish on this iron ore project in Brazil, targeting 1.5 Mtpa DSO production by H1 2027, with a tight capital structure post-rollback.

• Biotech & Pharma:

  • Johnson & Johnson (JNJ): Experienced a negative catalyst as its Duplex-AD drug for atopic dermatitis failed to meet primary efficacy goals in a Phase IIb clinical trial.

  • IOVA: Highly bullish sentiment, targeting $35, with predictions of an "explosive beginning" in 2026, supported by strong technicals, analyst reratings, and a high short interest (35% of float).

• EV & Energy Transition:

  • Hesai Technology (HSAI): Noted as the first publicly listed LiDAR company to turn a profit, reflecting strong fundamentals and a long-term industry view.

  • Venture Global LNG Inc. (VG): Optimistic outlook, citing 67 mtpa LNG capacity (projected 100 mtpa by 2030) and long-term SPAs, comparing favorably to Cheniere despite debt and legal risks.

  • Bloom Energy Corporation Class A: Characterized as a "catch-up trade" in renewable energy by JPMorgan, but also highlighted for its significantly higher valuation.

• Consumer & Retail:

  • Hims & Hers Health, Inc. (HIMS): Re-evaluated as undervalued (~20% upside to $42/share) due to strong subscriber growth, effective customer acquisition, and a diversified offering beyond GLP-1 medications.

  • Apple Inc. (AAPL): Bullish sentiment from a 128% jump in foreign phone shipments in China in November (primarily iPhone 17 series), suggesting strong demand and a potential boost to Q1 2026 results.

• Speculative Plays & Sentiment:

  • Trump Media & Technology Group Corp. (DJT): Speculative bullishness ahead of the TAE merger, with a perceived $10 floor and $30 roof, making its current $14.5 price a "bargain" for traders.

  • Palantir Technologies (PLTR): Continues to attract high retail interest, despite Wall Street often deeming it too expensive, highlighting a divergence in valuation perspectives.

  • Rolls-Royce Holdings PLC (RYCEY): Speculative "YOLO" sentiment targets $20 by the upcoming February 26th earnings report.

  • BMNR: Pitched as a clean, no-debt vehicle to play Ethereum's growth, with expectations for ETH to revisit $5,000+ in Q1 2026.

  • SLV (Silver ETF): Experiencing strong bullish sentiment in r/wallstreetbets, with users reporting significant gains from deep in-the-money leaps, aligning with broader precious metals strength.

• Middle East Capital Markets: IPOs in the Middle East saw a one-third decline, signaling a cooling off from the post-pandemic boom in the region's capital markets.

Happy Alpha Hunt! - Distilla

Disclaimer: This content is generated using AI, synthesizing public data (filings, reports, news) and social media (Reddit, X). It may contain errors, inaccuracies, or hallucinations. Nothing herein constitutes financial advice. This newsletter is for informational purposes only; please consult a qualified professional and conduct your own due diligence before making any investment decisions.