Download the PDF Here: Accelerating Disruption is Defining Investment Opportunities
In This Outlook
- The U.S. economy is being shaped by accelerating disruption—driven by AI, unconventional U.S. policy, and China’s export-driven deflation—but remains resilient and a major destination for global capital.
- Despite political and economic uncertainty, a mix of strong foreign investment, productivity advantages, and deep financial markets continue to reinforce U.S. economic leadership heading into 2026.
- AI is still early in its adoption curve, creating opportunities beyond the Magnificent 7, particularly as earnings growth and second-derivative effects drive market dispersion.
- Four major investment themes are emerging: infrastructure, electrification, healthcare, and financials, each benefiting from structural spending needs and AI-enabled productivity gains.
As the United States approaches its 250th anniversary next year, the economy is being defined by accelerating disruption, political divisiveness, and economic resilience. The three major sources causing the disruption are the development of AI, President Trump’s unconventional policy approach and China using its manufacturing overcapacity to export low-cost products which reinforces the deflationary pressures on global economy. Heading into 2026, the biggest theme that the market has been trying to discount is the increasing amounts of capital that continue to be invested in the United States and the reality of reshoring and other required spend to materially increase productivity. The development of artificial intelligence (AI) and changing terms of trade through the imposition of tariffs have appropriately been the primary focus of investors this year. However, market participants will be best served to identify the businesses which complement the Mag 7 stocks as well as those likely to benefit from the broader adoption of AI. That is not to understate the importance of the leading tech companies on investment strategy, but more to emphasize the significant opportunities presenting themselves, many of which are the direct and indirect beneficiaries of AI.
In a global economy that is experiencing intense political and economic uncertainty, investors have become hyper-reactive to headlines with the swings in individual daily stock price changes up or down the most exaggerated in any time in memory. With equity markets around the world at or near new all-time highs, it would be reasonable to anticipate a period of consolidation at these levels or even a pullback in the markets given a possible Supreme Court ruling against the President’s use of emergency powers for across-the-board tariffs, and concerns about the higher cost of living weakening consumer confidence. While acknowledging these concerns, investors should also focus on the underlying strengths, adaptability, and resilience of the U.S. economy. There are opportunities for investors to build significant capital now and in the coming period. It is our view that any pullback would likely be short-lived and present an opportunity for investors.
Accelerating Disruption and U.S. Resilience
Chart 1. The United States Remains One of the World’s Most Productive Economies
Since 2000, the U.S. economy has dealt with a series of shocks including the dot-com bubble, 9/11 attacks, the Great Financial Crisis, multiple wars, and a pandemic. The U.S. economy has grown to $30 trillion and rising as opposed to $10.3 trillion back in 2000. There are several forces – including technological advances, changing demographics, resource constraints, and changing terms of trade – reshaping industries and creating new investment opportunities. Chart 1 highlights the productivity advantage of the United States over the Euro area and Emerging market economies since the pandemic. Despite its many challenges, the U.S. remains the largest, most mature, and resilient financial markets in the world which is one of the greatest assets that any nation can possess. Though the dollar’s reserve currency status has come into question this year, we would caution investors to recognize that there is no viable replacement for the U.S. dollar as a reserve currency. China is working to reduce U.S. dollar dominance, but it is not reasonable for any autocratic nation to have one of the world’s reserve currencies.
The United States is again experiencing strong foreign direct investment (FDI) as it has for the past few years as shown in Chart 2. The United States has experienced strong inflows for several reasons, including its unmatched equity and bond markets, stronger U.S. industrial policy, innovation, and an entrepreneurial culture with a willingness to take risks. While the United States position as the world’s leading economy and reserve currency is not guaranteed, the nation needs to preserve its standing by upholding its key strengths, including adherence to the rule of law. The Supreme Court will play a crucial role in preserving American Exceptionalism with its upcoming rulings on tariffs and the Federal Reserve’s independence.
Chart 2. Strong Capital Flows into the United States Underappreciated by the Markets
Risks in the System
While risk management is always a critical consideration in investing, it is even more so when equity markets from the U.S. to Europe to Asia are flirting with all-time highs despite the considerable economic headwinds many nations are facing today. Among the biggest risks facing investors are valuations, debt and deficits, central bank independence, and political divisiveness, which pushes politicians to address short-term challenges while kicking the can down the road in dealing with the structural problems.
- Stretched Valuations – while markets are expensive on a historical basis, historical comparisons are not as relevant as they were in past business cycles. Today’s technological achievements outrank many of those of the past as we are experiencing the fourth industrial revolution. Unlike the dot-com bubble, many of the businesses driving returns today are characterized by strong and rising profit margins, accelerating growth rates and record cash flows.
- While the inflation fight is not yet won, interest rates could be rising, and central banks may struggle to be as accommodating as in the past.
- Debt and deficits have limited the fiscal ability for governments to respond. They now need to plan to bring spending back to pre-pandemic levels while still investing in essential areas.
- If Central bank independence is lost, the risk is that inflation is stoked, lowering growth and increasing volatility.
The total value of U.S. stocks is about twice that of the GDP according to the Buffett ratio which suggests rich valuations. Only time will tell how this plays out but within the market are many businesses selling for reasonable valuations. For equity investors in the public and private markets, the biggest risk to valuations would be a rise in interest rates as there is a growing number of so-called “zombie companies” that do not generate enough profits to cover their debt servicing costs. These companies are defined by high debt levels and low growth rates with an inability to invest in future growth. Our focus has been on identifying companies with strong balance sheets and strong and rising free cash flows which allows them to invest in improving productivity.
AI and More – Finding Opportunities to Complement
Many consider generative artificial intelligence to be one of the most important technological advances in history, and it has moved to the forefront of the battle for global supremacy between the United States and China. The tech boom is in the initial stages of AI penetration and investing in what looks like expensive valuations can be difficult. There are three possibilities for equities: they continue to rise, go quiet for a time while their earnings catch up to valuations, or decline. Many company’s returns have been driven by high and rising growth rates, and the importance of the second derivative—mainly the change in the rate of growth — which comes into play here. If a company’s earnings growth exceeds expectations, it could lead to multiple expansion and higher stock prices for these companies, also reinforcing the narrative of broadening opportunities. Conversely, if the Magnificent 7 fail to sustain their elevated growth rates or fail to deliver returns on AI spending, their valuations would likely compress, leading to declining share prices. Similarly, if the remaining 493 companies fail to meet their growth expectations, their share prices could deteriorate, especially in the face of tighter financial conditions. However, many of the leading tech companies have high growth rates which, if sustained, means it should be only a matter of time before valuations become more reasonable.
Bear in mind, the current tech boom is a worldwide phenomenon and will be long-lasting, and that is before the introduction of quantum computing, which will create additional supply and demand characteristics yet to be felt. Gartner, a leading research group, projects AI-related spending to be $1.5 trillion this year and $2 trillion next. Market participants continue to question the amount of capital being invested in AI as fears of a repeat of the dot-com bubble rise. This is a view that ARS does not share. The Magnificent 7 businesses have balance sheets and cash flows that the dot-com companies simply did not have, if they were even generating profits. While investors need to maintain a portion of their current exposures to some of the leading AI names, we believe that now is the time that investors should be looking to the four additional areas of opportunity to reallocate capital: infrastructure, electrification, healthcare, and financials.
Infrastructure – In a recent report from McKinsey, it is projected that $106 trillion of global infrastructure investment is expected by 2040 (as shown in Chart 3). The chart provides a roadmap for investors seeking to benefit from the multi-year spending that is no longer postponable.
Chart 3. Global Infrastructure Spending
There is an unprecedented time sensitivity for replacement, expansion, and repair of the world’s infrastructure system that can no longer be delayed. The McKinsey report cited transportation/logistics and energy/power as attracting the largest shares. The key drivers for the spend include: the digital transformation, the energy transition, reshoring, population shifts, and rapid urbanization. The $106 trillion arguably does not include the costs of the eventual rebuilds in Ukraine, Gaza, and Syria, which are currently projected to cost over $1.3 trillion combined. This will also lead to increased demand for raw materials, which is an area of conflict causing the U.S. to move to be much more independent of foreign sources of supply, including the buildup of reserves for national security purposes. A report from the American Society of Civil Engineers (ASCE) suggested that the United States required over $9.1 trillion in spending between 2024-2033 with a funding gap of $3.7 trillion.
Electrification: One of the biggest challenges for the economy in 2026 will be how to fulfill our rapidly expanding power needs. The energy sector reflects a complex and dynamic landscape characterized by infrastructure and supply-chain constraints, persistent policy mistakes and uncertainty, accelerating electricity demand, and expanding renewable capacity—all of which are elevating the importance of energy storage. The American Society of Civil Engineers report estimates that the U.S. needs to spend $7.4 trillion on the power sector by 2033, with a funding gap of $2.9 trillion after the $73 billion of funding from the Bipartisan Infrastructure Law. The U.S. will need both fossil fuels and renewables to meet its needs. AI is straining the power grid in ways that are requiring some companies to source their own power needs to ensure reliability and availability.
Healthcare: While many sectors will benefit from the use of AI, the healthcare sector may be best positioned to gain the most immediate benefits. The system is rife with inefficiencies and AI can help speed the time for drug development and testing, support doctors with improving diagnoses and eventually allow for personalized care plans and predictive modeling for early detection. These are among the many opportunities to lower costs and improve outcomes which could benefit labor market availability. The benefits would be significant given the fact that healthcare costs in the U.S. are roughly double that of other nations as a percent of GDP. The sector has been under pressure this year as the administration is pressuring big pharma to lower drug prices.
Financials: There are several ways that AI will benefit financial companies including in the areas of fraud detection and prevention, customer service and personalization, and process automation. Investment managers will use AI to facilitate the research processes, trading, client service and more. In addition to the benefits of AI, financials are benefiting from the increase in consumer net worth and the fact that U.S. households have reduced debt as a percentage of disposable income an estimated 3.5% from the 2008 highs. While in aggregate household debt is down, there are some troubling signs in the area of student debt and auto loans.
Investors are also benefiting from ongoing dividend increases and share buybacks, potentially fueling further investment and economic activity. The markets are also seeing an increase in merger and acquisition activity after a slow period which should also bolster market sentiment. While ARS remains positive on the economic outlook and the opportunity to build capital in this environment, we acknowledge that the benefits will not be shared evenly, as strong balance sheets and access to capital will continue to be key differentiators. This means that the public and private sectors will need to adjust the social contract to help those negatively impacted by the AI revolution. Importantly, U.S. businesses are being supported by a more laissez-faire regulatory structure which can increase U.S. productivity. Done properly, deregulation can lead to increasing high technology absorption through increased capital spending in a time of dramatic technological change.Alongside AI, advances in robotics are poised to further lift productivity. Modern robotic systems can automate repetitive, dangerous, or precision-based tasks, allowing workers to shift toward higher-value activities and enabling companies to scale output without a proportional rise in labor costs. At the same time, those companies with low profit margins, weak balance sheets and high debt burdens may not be able to invest and spend to remain competitive.
One of the central characteristics of today’s market is that the companies who can continue to defray costs through greater technology absorption and who continue to have earnings and margin growth should continue to fetch premium valuations. Today the markets have something for every investor. For speculators, the high valuations and individual stock volatility are providing unprecedented trading opportunities. For investors, the massive spending on AI, infrastructure, power, and healthcare as well as the companies providing the financial means are creating signficant opportunities to build capital over the coming period. The remaking of the global order is resulting in significant capital flows into the U.S. This trend should continue well into the future, benefiting U.S. companies, our labor market and consumers over time. This combined with the anticipated increases in productivity should improve overall economic outcomes while also improving tax receipts at all levels of government.
Published by the ARS Investment Policy Committee:
Stephen Burke, Sean Lawless, Nitin Sacheti, Greg Kops, Andrew Schmeidler, Arnold Schmeidler,
P. Ross Taylor, Tom Winnick.
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