Looking past the noise of early 2026
Review the latest Weekly Headings by CIO Larry Adam.
Key takeaways
- Stay focused on the fundamentals, not just the headlines
- SCOTUS IEEPA ruling likely to change the process, not the result of tariffs
- Equities enter earnings season with the most elevated P/E in 20 years
2026 is coming out of the gate quickly. In just the first two weeks, we’ve seen a flurry of headlines – rapid-fire policy proposals, legal uncertainties, and fast-moving geopolitical developments – all with the potential to influence the economy and financial markets. But as attention-grabbing as these stories are, they don’t always give us the full picture.
In a 24/7 news cycle, separating signal from noise is harder than ever. Investors are bombarded with real-time updates, shifting sentiment and headline-driven narratives. Yet successful investing means looking past the noise and focusing on the fundamentals that truly drive markets and their potential impact.
So, this week, we’re stepping back from the whirlwind. We break down some of the biggest headlines dominating the financial news cycle and offer the context investors need to understand what’s really going on.
Headline: Trump orders defense stocks to halt dividends and buybacks, creating a headwind for the defense sector
Reality: Coming into the year, we were overweight industrials, expecting continued capital investment to drive earnings, led by defense contractors, where earnings-per-share (EPS) growth is projected to rise 52% year over year. While the call for a halt in defense dividends and buybacks introduced some near-term volatility, the reality is that the industry has not been a major dividend or buyback player. In fact, defense companies only had a 1.1% dividend yield in 2025 and repurchased only 0.7% of their market cap over the past year, both well below S&P 500 levels. Far more important is the president’s subsequent proposal for a $1.5 trillion fiscal 2027 defense budget (vs. $900 billion in fiscal 2026), which further supports the sector’s earnings trajectory. With earnings remaining solid, the backdrop continues to favor both the defense industry and Industrials more broadly.
Headline: Strong S&P 500 earnings will propel stocks higher in 2026
Reality: An acceleration in earnings should provide a solid tailwind for equities in 2026 and underpins our positive broad equity outlook this year. The challenge, however, is that much of this strength is already priced in, leaving a high bar for earnings to beat expectations. Take 4Q for example: Earnings estimates were revised up 0.7% in the 12-weeks leading into earnings season, the strongest upward revision since 2Q21. With valuations in the 95th percentile vs. history and the highest price-to-earnings (P/E) multiple heading into an earnings season over the last 20 years, this elevated bar raises the risk of near-term volatility. Case in point: With elevated valuations in the financials sector, the pedestrian results from the big banks led the sector to log its largest two-day (Tuesday and Wednesday) underperformance (~4%) vs. the S&P 500 in nine months.
Headline: President Trump calls for a one-year cap of 10% on credit card interest rates
Reality: Affordability concerns have emerged as a key midterm election theme. In response, President Trump, despite questions about whether he has the authority, proposed a one-year 10% cap on credit card interest rates that is far below today’s 20+% average rate. While lower rates would intuitively ease household burdens and support demand, a cap set this low would likely create unintended consequences. Banks would likely tighten lending standards for higher-risk borrowers, pushing vulnerable consumers toward costlier, less-regulated alternative forms of unsecured debt, like payday loans or buy-now-pay-later programs. As a result, reduced credit availability could restrain spending and growth, as weaker borrowers cut back, offsetting much of the intended relief from lower credit card interest rates.
Headline: SCOTUS ruling on tariffs is a game changer
Reality: While the betting markets expect the Supreme Court to rule that President Trump exceeded his authority by imposing country-level tariffs under the International Emergency Economic Powers Act (IEEPA), that outcome would not mean that tariffs are going away. In practice, the process may change, but the result will not: Tariffs are likely to remain a key policy initiative of this administration. President Trump has multiple other authorities – Sections 122, 301, and 338, among others – that can be rapidly deployed to reinstate similar measures. The more nuanced point, however, would be the timing. With the midterm elections approaching and affordability front and center, a ruling against the tariffs could give the administration some flexibility. For example, it could strategically slow walk the replacement process or choose to adopt a lighter-touch approach, potentially softening or rolling back some of the tariff levies to bolster consumer sentiment ahead of the midterm elections.
Headline: Economy is doing well, but confidence still depressed
Reality: The US economy continues to expand at a solid pace, with growth accelerating 4.3% in 3Q – the fastest pace since 4Q21. Although official data for 4Q remains limited, the Atlanta Fed GDPNow model points to even stronger 5.3% growth in 4Q. The economy’s resilience is notable given sluggish hiring and consumer sentiment near a record low. What’s driving it? First, as reflected in holiday spending and this week’s retail sales, the US consumer continues to spend despite depressed sentiment. Second, record levels of AI-related investments are beginning to pay off, with 3Q productivity rising at its fastest pace since 2Q20. These factors, along with another expected Fed rate cut, support our outlook for solid 2.2% growth in 2026.
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