Kunal Kapoor: Good morning, everybody, and welcome to the latest in our Investors First series. I’m excited to have you here to talk about 2026. I know, hard to believe, but we’re just about a month away from 2026. So as you’re setting the table here in the U.S. for Thanksgiving, or if you’re watching from elsewhere in the world, 2026 has to be on your mind. And I’ve got three of our best strategists here with me today. So Preston Caldwell, who’s been on here before, is our Chief US Economist; Michael Field, who’s our market strategist in Europe for Equity Research Group; and then Kai Wang, who is our Asia Equity Research strategist, as well, joining us today. So thanks, gentlemen for joining for what should be a fun session.
I’m going to start out, though, by admitting that I have bad mouthed many a forecast. I’ve called them useless and unpredictable, and generally hard to follow up on. So, Kai, let me start with you. Why do we have an edge in doing forecasts? Let’s just get that out there.
Kai Wang: Yeah, I think, so for us at Morningstar, we don’t really go with the herd mentality. I think in Asia especially more so, you’ll see a lot of different opinions that kind of will just go along with the market. So if we see like a meme stock that has no moat, and it’s just going very, very fast, very high, I think for us, our research will say we’ll take a step back, and we’ll take a 10-year look at this. And we usually kind of assume the growth rates out. And a lot of times, obviously, these things grow up so fast that the growth rates that are assumed in are unsustainable. So, for us, I think we take a step back and take more of an independent view of these high-flying stocks sometimes.
Kapoor: So Kai, what I’m hearing you say is that a single year is part of a puzzle in a multiyear investment plan, and that’s how we try to look at it. And so when I look at 2026, and we’ll get to 2026 in a moment, I have to start by asking each of you a question about 2025, which is, Preston, maybe I start with you. Are there any pieces of the puzzle for 2025 that surprised you? And as you look at 2026 and think about what we’re forecasting, what are the potential areas for being surprised?
Preston Caldwell: Well, for 2025, I think tariffs are the obvious answer. But going beyond that, I was surprised by the market’s willingness to bankroll this massive bet on artificial intelligence with the spending plans that have been announced this year and the accompanying rise in stock prices of companies in the AI value chain. But I think next year and beyond, what I’ll more so be looking for is AI to start having more an impact on the rest of the economy. Because if these spending plans are going to be justified in terms of return on investment and these stock valuations justified, there’s going to have to start being a massive impact on the real economy. I mean, we’re not just talking about automating call center labor. There’s going to be transformation and also winners and losers that are massive in impact and unexpected.
Kapoor: Michael, what about you?
Michael Field: I think, similar to Preston, what probably surprised me the most about 2025 was market resilience, just how willing the market was to ride the upward wave. Even after we had all these huge shocks like tariffs back in April this year, we’ve come so far that you barely remember that at this stage. And then to 2026, what could surprise us again is whether the market’s going to maintain that resilience, that positivity, that kind of buy-the-dip mentality, or if the next shock that we get to the markets is going to be the one that sends us down.
Kapoor: It’s interesting that both of you pointed to AI, and kind of what’s happening to the stocks that sort of touch that sector. I mean, interestingly, if we look at third-quarter results here in the US, some of our biggest fair value changes have been for companies like Alphabet and Nvidia, where analysts have taken up fair value because of results. And so, Kai, in talking to you earlier, I sense some skepticism about how AI stocks in general are being valued, particularly in Asians. How do you maybe reconcile what you’re seeing with a small group of stocks versus the broader markets?
Wang: Yeah, I think with Nvidia NVDA and Alphabet GOOGL, these are legit companies that have earnings, that have cash flows, that have revenues. Some of the things that we’re kind of pointing out is that very low revenue companies trading at a very, very extremely high multiple, negative earnings, negative cash flow. And yet, these are just kind of conceptual, these are more of Idea that became an LLC and that became a public company that are valued and has a very high valuation in general. So I think those are the companies that we’re more skeptical of. And there are some Asian stocks out there that continue to burn money, negative cash, despite the fact that they have revenue. I think it’s important to recognize whether or not these cash flows are improving or not. And some of these companies were just not seeing improvements.
Kapoor: So, Preston, if you look at most investors’ portfolios, our data is showing that the exposure to AI-related stocks is pretty significant, largely because they’ve become such a big part of the indexes. Now, if you look in particular at the so-called Magnificent Seven, I think what you’re hearing Kai say and what our analysts are saying is, maybe those seven stocks in particular are OK. And so how do you reconcile kind of a view that there’s some risk in sort of the overall markets with the reality that the concentration that most investors seem to have is in those seven names in particular?
Caldwell: Well, I mean, look, if we look at the most optimistic scenarios, not even the most optimistic, but a reasonably optimistic scenario for AI is that it unlocks some trillions of dollars, tens of trillions of dollars in present value in terms of future GDP growth uplifted. And so if these Mag Seven stocks, the top AI-related stocks, capture even 20% of that value created, then their valuations are entirely justified. And that’s, again, not even to mention a scenario of artificial general intelligence, where the lid’s blown off in terms of economic growth. But then, on the flip side, there is obviously a downside scenario where that value isn’t captured. But I think just looking at the full range of outcomes, I certainly can’t rule out the valuations that we see right now from an economic fundamental standpoint.
Kapoor: Yeah. So what’s an investor to do, though? If you’re an investor, Preston, and let’s say you own a bunch of index funds, And you have this exposure. how should you be thinking about 2026 and beyond? And what’s our forecast telling an investor to do in that situation?
Caldwell: Yeah. So, I mean, right now, we’re looking at a lot of developments on the headline in terms of the headlines coming in the next year. I mean, let’s look at tariffs. Tariffs are trending down for right now, but that could change tomorrow and they could start going up again. The market’s expecting Fed rate cuts, and we are, too. But if we get more pass-through of tariffs into consumer prices, then inflation could be stickier. And those Fed rate cuts could be out the window. So, there’s a lot of factors that could create volatility into next year. But we urge investors not to overreact going forward. And I would say the same thing for AI as well. I think investors need to stay the course of their targeted long-term asset allocations. And what we will do at Morningstar is to carefully factor in the impact of any further developments with care and patience. So that we’re not overreacting to the headlines, but we’re understanding what the true impact on the intrinsic fair value is.
Kapoor: Right. So, Michael, but what is an investor supposed to do heading into 2026 from your perspective? What adjustments if any should we be recommending that investors think about?
Field: I think the first thing they should be doing is being aware of the risks. And, you touched upon it just now, the risks of their portfolio—in terms of market concentration, Nvidia’s almost 6% of Morningstar US Index and, or 8% rather, Morningstar US Index and almost 6% of Morningstar World Index. So it’s being aware of this and not going out and piling into more Nvidia in a single-stock basis. and trying to run that AI theme even harder. So I think that’s the first thing to be aware of, but also to know exactly where we are in terms of valuation as well. Preston touched on it, but in the US, we’re about 5% below where we think the market is worth, and indeed about 3% in Europe. So despite those rallies that we’ve had year to date, there’s still some upside, and I think it’s good to bear that in mind. And if indeed we have a dip at some point, to know that things are still offering very good value, that there is some upside.
Kapoor: And what about, in particular, in Europe? How should investors be thinking about it?
Field: So I think Europe’s a different case than the US in many ways. The macro seems to be trending upward off a low base. So that’s a positive thing. Inflation’s under control, seemingly. Interest rates are already very low and could be trending even further downward over the next six months or so. So we’ve got some good positive macro tailwinds for Europe. Equities are still offering some upside as well. But you still have risks there, consumers, whether they’re actually going to start spending money again next year, whether defense stocks, whether that’s still going to feed in, if indeed, we have an end to the Ukraine war. So a different set of risks, I think, ahead of European investors, but then a different set of opportunities at the same time.
Kapoor: Right. And we’re starting to get a couple of questions, which I’ll just get to in a few minutes. Feel free to send in your questions, and I’ll start to take them. But what’s interesting, and the contrast I’m hearing so far is, Preston, you’re talking about a US market that has high expectations built into it in many ways. And Michael’s talking about a European market that has perhaps low expectations built into it. And so part of what we’re recommending in our outlook is that investors pay attention to the non-US component of their portfolios as a result. And so Kai, what’s your view on that theme in general, and what does it mean from an Asian perspective at a second level?
Wang: Yeah, I think it’s a little mixed in Asia. I think China has a lot of tech and also has a lot of old world, old mature industries as well. And so I think the expectations that Preston laid out, the high expectations are there for stocks like Alibaba BABA, for stocks like Tencent TCEHY, your internet conglomerates are starting to become hyperscalers and starting to make their own chips as well, especially with Alibaba. But then, on the flip side, you have a, you have upcoming policies in China that are designed to kind of reduce overcapacity. And these policies are going to end up benefiting the industry leaders of those said industries, right? So, the old, the steel, cement, EVs, batteries. The expectations have not been priced in there yet. So, I think it’s a mixed bag in Asia so far.
Kapoor: But overall, Preston, sounds like a theme we believe is that diversification outside the U.S. is a good idea, and people should be looking at that part of their exposure.
Caldwell: Well, I think so. One thing that I would add to that as part of our outlook that we brought forth this year is we do think the US dollar is slightly overvalued based off of narrowing growth. Economic growth differentials and interest rate differentials. So we think there’s a bit further room for correction in the US dollar ahead, and so that adds further to the argument for international diversification.
Kapoor: Yeah, and that certainly paid off this year, for sure, if you look at where returns are settling. Preston, the question from one of our viewers is, you’ve described the economy is surprisingly resilient despite headwinds. What’s one indicator you’re watching, and any of you can answer this, what’s one indicator you’re watching that might signal a test for that resilience?
Caldwell: Well, I think there’s really two things I would say. I would say, as I mentioned first, with US tariffs, there’s been very little pass-through of tariff increases into consumer prices so far. And I think that’s been a big part of the story for why tariffs have not impacted the economy nearly as much as anyone expected back in April. And so if that starts to change, if we start to see that pass-through, that doesn’t just mean inflation is going up, but I think that could also mean that consumers start to recoil from increasing prices and we see a pullback in consumption. So it could set in motion a number of avenues of impact in the economy. That could both be increase inflation and slow growth. And it could mean that the worst of the tariff impact is still ahead. And then I think the second thing I would look for is if interest rates, because of that high interest, high inflation scenario, remain high, do we start to see an uptick in delinquency rates on further forms of consumer and business credit. We have seen credit card delinquency rates rise above prepandemic levels, but for the broad litany of forms of credit, signs of distress are still very low right now in general, but that could change, and we should be looking for that.
Kapoor: Michael, Kai, anything you’d like to add on that one?
Field: I would add to Preston’s comments as well. I think the consumer is going to be a big test, not just in the US, but in Europe over the next year or so. We’re already seeing unemployment tick up in many regions, albeit off a low base. But the expectation from markets is that consumers are going to come back strong next year and spend strongly. And that’s going to drive much of the growth across economies. And if indeed unemployment ticks up and consumers simply don’t have that cash in their pockets? And then that’s not going to work out well for us.
Wang: Yeah, I just want to add that, for Asia, it’s kind of siloed on its own, but it’s also dependent on some of the US policies. So, if the rate cut, we had the rate cut in December, obviously, that’s a boon for global markets, and that does well for China as well, despite the fact that the tariffs, and I guess US and China just, despite their arguments, they’re just not able to decouple or they don’t want to decouple. So, those rates still affect the Asia markets as well.
Kapoor: Yeah. So it sounds like, from your guys’ perspective, while resiliency is a good theme, there are certainly notable risks. And so, Michael, one of our users is asking, given that backdrop and given that concentration in portfolios is quite high, what tools or strategies should advisors be using to ensure that portfolios stay balanced in an environment like this?
Field: I think, to some degree, portfolio managers and advisors need to kind of stick to their knitting, And try to stay with trusted formulas and not try to deviate too much from that based on short-term effects. But indeed, we spoke about it earlier, if indeed market concentration is picking up hugely in the US or other areas of the market, then there needs to be counterbalances to that as well. And whether our portfolios need to adjust for that risk to compensate. Or indeed, change the return profiles as well, then those things need to be reassessed. But I think within that long-term context and within that long-term view.
Kapoor: Michael, possibly what you’re saying, if I have to kind of decode it a bit, is that there is a scenario where you think perhaps people should be trimming back from the Mag Seven, but doing so perhaps gradually, and putting it into other parts of the markets that kind of provide the same type of asset allocation, but maybe lower the potential risk profile of the portfolio today. I
Field: I think that’s fair. And I would just add as well, there’s obviously public/private markets are something we speak a lot about as well. And there’s opportunities in those markets that people are constantly asking advisors about, and we get a lot of questions about as well. So I think portfolios are naturally shifting to change around those requirements.
Kapoor: And Kai, here’s another question. that’s an interesting one. What’s one behavioral bias you see creeping into investors’ decisions today that could impact how they manage a portfolio through 2026?
Wang: Yeah, I think there’s a lot of FOMO involved. I think it’s not just with the Asian market. So one thing we’re seeing sometimes, and I don’t know if any of you have Labubus at home, but the Labubu craze is hitting Asia pretty hard here. And I think you’re seeing a lot of investors chase Popmart, which is the parent company behind Labubus. And so the valuation there has gone through extraordinary levels and obviously has come down recently in the last three weeks or so. But before that, I think people were getting FOMO and just chasing that.
Kapoor: Let’s talk about China for a second, too, Kai, while we’re going down this chain of thought. Obviously, a relatively strong year for returns in China. What’s your take on China’s position? We’ve been talking a lot about it through the lens of the US and Europe. A little less through the Chinese lens. What does it look like, and how should investors be thinking about China exposure?
Wang: Sure. Yeah, it’s a bit of a bifurcated situation right now. I think the tech still remains strong with your Alibabas and your Tencent, your Baidus. Those companies have wide moats, and they’re going to be pretty, they’re going to be pretty resilient in terms of given the long term. But China is still going through a real estate, a structural real estate headwind here, which is affecting the wealth effect. And the behavior of Chinese people is that they kind of spend on wealth, the wealth effect, and not cash flow necessarily. So that kind of seeps into the consumer discretionary stocks as well. And so you’re seeing that struggle along with the real estate. So I would say that just given the behavioral idiosyncrasies of the Chinese consumer, I think you still want to stick with the wide moats. You want to stick with the resilient, the bigger, safer bets right now in terms of the market here.
Kapoor: Preston, there’s a question here about where key benchmarks will be at the end of ’26. I don’t think you need to guess and answer that question, but when you look at major asset classes, what’s your forecast for some of the bigger asset classes, like stocks and bonds? And what sort of return should investors be expecting in ’26?
Caldwell: Sure. I’ll speak more on the interest rate side. We are expecting further decreases in long-run interest rates, and so, for the US and that causing obviously positive returns for bonds. So, we think about interest rates, it’s really, the longer-term bond yields tend to evolve insofar as short-term interest rates do or don’t play out in line with current market expectations. So right now, the market is expecting a further three Fed rate cuts, roughly, but we’re expecting ultimately another six rate cuts. And so, if by—and that’s by the end of 2027—and so, if that expectation plays out, then we will see a further decrease in long-run bond yields. And so we’re expecting the 10-year Treasury yield to fall from currently about 4 or 4.1% to, ultimately, a long-run expectation of 3.25%. So we do think bonds have furthered the rise for the US
Kapoor: And I’m going to paraphrase a question that came in here as well. When it comes to interest rates, how do you think about the impact of AI on interest rates, particularly if AI does in fact reduce jobs, lowers tax revenues, and kind of forces the Fed’s hand in that situation?
Caldwell: Yeah, well, that’s a really good question. Because, as you mentioned, in the short run, it could actually help, in some sense, depress interest rates. In that scenario, where you see widespread labor market layoffs and that necessitating Fed action to offset that somewhat. Of course, that’s complicated because if there’s supply-side difficulties where we can’t redeploy those workers easily. Then the Fed may not have as much of a job to actually try to offset that unemployment shock by lowering interest rates. But, of course, what we’ve seen so far is that AI has not led to a large labor market impact yet, but it’s mainly boosted spending. And so that’s actually kept, that’s helped the Fed to actually keep interest rates perhaps higher than they would have been otherwise because of that impact on the demand side of the economy. But then, and of course, if that dynamic continues and we continue to have a higher rate of investment because of AI, not just by the AI companies, but even the rest of the economy as they invest to reap the benefits on productivity of AI, which is standard economic theory, that could continue to exert upward pressure on long-term interest rates in that scenario. But there’s a wide range of outcomes there, depending on how it impacts the labor market and to what extent it boosts investment on the other hand.
Kapoor: Good answer. Final question here, as we come to conclusion, but one about your personal portfolio. So be prepared, I’m springing this one on you. What’s one thing each of you is doing in your own portfolios as you prepare for 2026, which you think is a good takeaway for our viewers today? Michael, I’ll start with you.
Field: So I’ve run everything by compliance, so we’re all legit to give you the real answers here. I would say, I’m trying to put my money where my mouth is. And I’ve spoken a lot about the opportunities in markets, but also about the risks to market. And if I looked at my portfolio the last time, I didn’t have a whole lot of cash. So I think what I’m trying to do now is trim some of those positions that are reaching their fair value estimates, or even overvalued at this point. I’m trying to free up a little bit of cash for the inevitable dip that will come at some point.
Kapoor: Sounds good. Kai?
Wang: Yeah, I don’t have a lot of cash in my portfolio as well, either. So I’m looking to trim some of the fully valued positions as well. I think I’ll add one thing. I think one thing that I’m keeping an eye on, and, given the fact that the markets have been pretty volatile this year, is that I would take a look at bitcoin as a leading indicator of a risk-on asset and how people are feeling in terms of the sentiment. And obviously right now people are pretty, pretty bearish right now, or it’s a risk-off sentiment, given the decline of bitcoin the last two, three weeks. But that tends to be a leading indicator right now of how investors feel.
Kapoor: Preston, finally.
Caldwell: My answer is very boring, because, yeah, I don’t—My portfolio is boring. I’d stick to the standard allocations because I rarely invest on a gut feeling or whim. But I guess one thing I am thinking about now is, as a kind of white-collar professional, should you be overweight the top AI names in order to kind of hedge your long-term career risk in that regard? So that’s really the one thing that’s on my mind.
Kapoor: The human capital kind of factors that you’re thinking about here. Interesting. Well, thanks, guys. This has been great. It sounds like all of you are largely rebalancing but telling investors to stay the course, which is what we at Morningstar believe. There’s always a lot of good noise out there, and it’s interesting and fun to kind of try to parse it as we have today. But for most investors, we always say, stay the course, rebalance wisely, and you’ll be set over the long term. So thanks, everyone, for joining, and I look forward to seeing you on the next edition of our Investors First here on LinkedIn. Thanks, everyone. Bye.
