Fundamental Signals

Editor's Notes:

• Electricity for AI: Datacenter consuming 6% US power in 2026 and 18% in 2030 would require "Manhattan project of natural gas-fired power plant construction", as a gap measure before nuclear. This may be an interesting 2026 thematic play to continue (shifting from GEV / nuclear plays to others).

• Labor market "re-wiring" in the US: "cart before the horse", "low hire, low fire", and "3/4 GDP from productivity gain" will likely have downstream structural consequences for consumption, entertainment, and many other other aspects for years go come.

• S&P 500 target at 10%+ returns for 2026: I personally view most of these predictions as good as fortune-telling... but a reference for the current sentiment and what's priced in. This 10%+ return is assumed to come from 13% earnings growth - expect corporates to cut more cost.

• Cyclical industries and small cap are getting attention ... again...: Pfizer at 8x P/E 7% dividend yield. Cooper Standard could be interesting too for auto play. Ideas are concentrated around turnarounds (VF Corp, UPS, Disney, Lululemon), metals (RIO, etc.), and mass market consumers (Papa Johns, Amazon, MELI)

This comprehensive market roundup for Holiday 2025 and outlook for 2026 reveals key investment themes, inflection points, and contrarian stock ideas from recent podcasts. Key insights highlight a prolonged private market freeze with potential capital shift to public markets, the dual nature of AI as both a boom and a bubble with significant power infrastructure challenges, and a nuanced macro outlook for 2026 featuring productivity-driven GDP growth, potential disinflation, and consumer resilience under pressure. The analysis also identifies a rotation from Big Tech to cyclicals, opportunities in small-cap and value stocks, and specific contrarian picks like Intel, Pfizer, Novo Nordisk, and defense stocks.

The Private Market Freeze & a Public Market Thaw?

In 2025, the private markets have been marked by a significant lack of liquidity, described as "an issue for several years," with a "bit-ask spread" freezing transactions. General Partners (GPs) are reluctant to sell at lower returns, while Limited Partners (LPs), often overallocated (e.g., 35-40% vs. a 30% target), are reducing new commitments. This logjam is anticipated to persist for "several years" – potentially 2-4 more.

Contrarian Take: When private market liquidity eventually unlocks, the initial influx of institutional capital is expected to flow back into public markets, rather than being reinvested in new private deals. Private GPs, according to one veteran, are "not at all" aware of this impending shift, suggesting a potential tailwind for public equities once the private market dam breaks.

The Middle Market Squeeze

The evolving structure of the private equity industry is increasingly benefiting the largest firms, driven by sovereign wealth and private wealth channels. This trend suggests that many "middle market" PE players may face growing difficulties in raising new funds, with some potentially having already secured their final fund.

AI: Boom or Bubble? The $5 Trillion Question

AI remains a central and highly debated theme, influencing significant market dynamics.

• The AI Spending Spree: The scale of investment is immense. US cloud service providers alone are projected to spend $600 billion in CAPEX in 2026 – a figure comparable to the entire handset ecosystem built over decades. Globally, data centers for AI could necessitate over $5 trillion in CAPEX by 2030. This substantial demand, particularly for NVIDIA chips, is widely seen as a powerful "boom" driving market resilience.

• Beneficiaries vs. Cost Centers: A key contrarian viewpoint suggests that in 2026, AI beneficiaries (businesses leveraging AI to cut costs and boost productivity) will outperform AI cost centers (hyperscalers and chip companies with massive CAPEX spending). Hyperscalers' CAPEX as a percentage of operating cash flow now exceeds 60%, akin to "big oil," raising concerns about Return on Investment (ROI).

• The Power Problem: A significant bottleneck, and potential "black swan event," for the AI boom is the critical lack of electricity supply and the strain on power infrastructure. Data centers currently consume 6% of US electricity, projected to triple to 18% by 2030. Utilities are struggling to keep pace, leading to rising electricity bills and NIMBYism from communities. Solutions include utilities charging higher rates to data centers or data centers developing their own on-site power solutions (e.g., gas turbines, fuel cells, Solaris Energy, Blue Energy).

• US vs. China in the AI Race: This competition is framed as an "existential race for survival," comparable to the Cold War.

  • US Weakness: Reliant on long-term nuclear plant construction (10+ years, expensive), which does not offer a short-term solution for power demands.

  • China's Edge: Foresaw this demand decades ago, planned proactively, and is already building nuclear plants, possessing significant spare electric generation capacity. They are also adept at utilizing "lagging edge technology" (2 nodes behind TSMC) by linking chips via optical communications to compensate for speed.

  • Contrarian Policy Prediction: One economist predicts the US will require a "Manhattan project of natural gas-fired power plant construction" in the late 2020s/early 2030s as a temporary fix, given the extensive lead times for nuclear power.

• AI and Jobs: While AI primarily serves as "job augmenting" for experienced workers, there is growing concern about the displacement of entry-level white-collar jobs, particularly in software development. Companies are tempted by shortcuts of not hiring entry-level staff, which could create a "cart before the horse" problem for future experienced talent. Policy discussions around Universal Basic Income (UBI) are now considered potentially "essential" in 20 years if AI renders a large portion of the workforce irrelevant.

• Models as Commodities: The "LLM is a commodity" view is gaining traction. The true value is not in the foundational models themselves, but in proprietary data and application layers that address specific business problems. This shifts the competitive edge from foundational models to innovative applications and data strategies.

• Regulatory Scrutiny: State-level AI regulation is anticipated, with "thousands of bills" introduced in 2026, especially concerning permitting and zoning for data centers due to electricity cost concerns. While there is a push for federal oversight, states are likely to assert their 10th Amendment rights.

Macro Outlook for 2026: A Mixed Bag

• GDP & Productivity: US GDP grew strongly at 4.3% in Q3 2025. This creates an interesting scenario where the economy could expand at 2.5% or higher with flat or even slightly negative job growth for multiple years (2026-2028), with three-quarters of that growth attributed to productivity. This "low hire, low fire" economy is partly due to AI and post-pandemic labor market "rewiring" (e.g., remote work).

• Inflation/Disinflation Debate:

  • Contrarian Disinflation Call: David Rosenberg predicts a "pronounced disinflation" in 2026, with inflation "back to target and heading below target" by Q2. He argues the Fed should be "forecast dependent," not data dependent, as inflation is a lagging indicator and demand destruction from contracting real wages will take effect.

  • Sticky Inflation View: Others anticipate inflation remaining "sticky" in 2026, with oil prices stabilizing around $60 and food prices adjusting. Goods inflation might see a slight increase, but services inflation is expected to slow.

• Fed Policy & Independence: Following three rate cuts in 2025, the Fed is expected to implement further cuts in 2026, potentially reaching a "neutral rate" around 3%. However, its "data-dependent" stance is criticized as backward-looking. The independence of the Fed, particularly with a new chair in May, presents a "bigger tail risk" that could impact the long end of the yield curve.

• Consumer Resilience Under Pressure: Despite robust spending (especially from high-income households via the equity wealth effect), consumer confidence has declined for five consecutive months, reaching April lows. This "K-shaped" consumption means the top 10% are responsible for 50% of spending. Lower/middle-income households are "stretched" by stubbornly high prices (healthcare, auto insurance, electricity) and slowing wage growth. Tax refunds of up to $2,000 in Q1 2026 are expected to provide a "significant tailwind" to consumer spending.

• Tariffs & Trade: While 2025 saw tariffs introduce uncertainty, dealmakers "settled into this new norm under Trump." The administration retains tools to impose tariffs regardless of Supreme Court rulings. China's trade surplus reached $1 trillion by November, demonstrating its success in offsetting US export reductions by expanding to Southeast Asia, Africa, and Latin America.

Public Market Dynamics: Rotation, Value, and Unique Opportunities

• S&P 500 Outlook: Many strategists are bullish for 2026, with median targets around 7650 (10-11% higher). However, this bullishness is "well contemplated" at current valuations (22.5x forward earnings), so returns will primarily be driven by earnings growth (expected 13% for 2026).

• Rotation is Key: A significant shift is underway out of Big Tech (Mag 7) and into cyclical sectors like financials, industrials, healthcare, and basic materials. This broadening of the market is expected to continue.

• Small Cap & Value: Expected to outperform as interest rates decline and the market broadens. Small caps are viewed as a "generational opportunity" with 60% expected earnings growth for Russell 2000 in 2026 (though 2025 estimates of 50% only yielded 3% actual).

• Founder-Led Outperformance: Companies run by founders consistently outperform, demonstrating greater risk-taking, quicker decision-making, and strong alignment. This is a factor tilt worth considering.

• 60/40 Portfolio Evolving: With risk premiums compressed and AI potentially synchronizing stock/bond movements, the traditional 60/40 portfolio's expected returns are lower (6% next decade vs. 9% historically). Increasing equity allocation might be beneficial.

Contrarian & Surprising Stock Ideas

• Intel (INTC): The #1 performing AI stock in 2025, up 81% (outperforming NVIDIA's 36%). This contradicts the popular narrative and highlights its progress in advanced chip development and US government backing to reduce reliance on TSMC.

• Healthcare Sector: Poised for a strong rebound. After three years of underperformance (51% cumulative lag behind S&P), healthcare is "undervalued," at its "lowest relative valuation in 25 years," and consistently outperforms in midterm election years (avg 9% vs S&P's 2% since 1950). Seen as a "generational buying opportunity."

  • Pfizer (PFE): Trading at "life support valuations" (8x earnings), down 60% from COVID highs. Core business is stabilizing, has strong oncology (CGen acquisition) and obesity (Met Sarah acquisition, 2028 launch target for once-monthly pill) pipelines. Management is aggressively executing a $7.2B cost-savings program. Offers a nearly 7% dividend yield.

  • Novo Nordisk (NVO): Received FDA approval for its Wegovy pill, the first oral GLP-1 for obesity ($149/month starting, $25 with insurance). This offers a "huge advantage" in the competitive obesity market, despite questions about manufacturing scale and efficacy compared to Lilly's upcoming pill.

• NCR Atlose (NATL): An ATM company, trading at a 10-11% Free Cash Flow (FCF) yield and 7.5-8x EV/EBITDA. While ATMs represent a "sunset industry," the decline is slower than anticipated. The "ATM as a Service" model for regional banks offers high incremental margins (60-80%) due to scale logistics. Debt refinancing in Oct 2026 could boost FCF by $30-50M.

• Riotinto (RIO): An industrial metals play (copper, iron ore), also expanding into lithium. Up 38% YTD, but relatively cheap compared to other miners. Strong dividend, balance sheet, and copper growth prospects.

• Wheaton Precious Metals (WPM): A "streaming company" for precious metals. Strong cash flow, fixed costs. Offers exposure to a gold/silver boom without direct mining risk.

• UPS (UPS): Up 20% YTD, demonstrating "relative improvement in their core business" (US margins up despite volume declines).

• Papa John's: Expected to significantly benefit from "extra discretionary income" from tax refunds and military checks, targeting low/middle-income consumers.

• Cooper Standard: A "pick and shovel" auto parts play. Benefits from the leveling off of new vehicle prices and the growth of hybrid vehicles.

• Disney (DIS): Top media pick, expected to rebound from mid-80s entry. Catalysts include streaming, parks, and the cruise business. Avatar 3 topped the China box office.

• VF Corp (VFC): (Vans, Timberland, North Face). A turnaround play after selling assets to reduce debt, now in growth mode. Considered a "better bang for your buck" than Nike.

• ServiceNow (NOW): A top enterprise AI play, despite being down 18% in recent months. Seen as an "AI control tower" that helps companies integrate AI broadly. Acquiring cybersecurity startup Armis for $8 billion.

• Amazon (AMZN) & Mercado Libre: E-commerce businesses are "firing on all cylinders," margins expanding, AWS re-accelerating. Amazon stock has been "flatish year to date," seen as an opportunity. Mercado Libre is the "Amazon of Latin America."

• CrowdStrike (CRWD): Top cybersecurity pick with a "best AI footprint." Up 40% YTD, seen as being at the intersection of cyber and AI.

• Lululemon (LULU): Down 45% YTD, but showing signs of bounce back (e.g., China sales up 46%). One strategist recommends selling January 210 put options to acquire shares at a compelling 15x forward earnings.

• NATO/Europe Defense Stocks: With "rearming from a humanitarian point of view," this sector is expected to perform well for the next 3-5 years (e.g., Rheinmetall, Mitsubishi Heavy, Hanwha Aerospace).

The overarching message as we enter 2026 seems to be one of cautious optimism, coupled with an urgent need for adaptability and discerning stock picking. The broad market indices might offer more muted returns, but beneath the surface, profound shifts in technology, geopolitics, and monetary policy are creating fertile ground for those willing to do the deep work. Keep an eye on the macro, but don't lose sight of the micro. Good luck out there!

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.