Rebecca Patterson on Building Portfolios for 2026: Tempered Bullishness and Diversification

Market Outlook: Tempered Bullishness

• 💡 Rebecca Patterson describes herself as a tempered bull, acknowledging a consensus for 2% GDP growth and strong EPS growth next year.
• 🎯 This optimistic outlook is supported by anticipated Fed cuts, stimulus, tax refunds, and increased share buybacks, alongside deregulation efforts and AI capital expenditures.
• ⚠️ However, she cautions that this positive scenario is largely priced in, suggesting the need for portfolio diversification.

Portfolio Diversification Strategies

• 💰 Patterson advocates for diversification to hedge against the risk of good news being fully priced in.
• 📈 She highlights gold as a continued bull case for the third consecutive year, anticipating a weaker dollar.
• 🌍 Overseas diversification is recommended, focusing on sectors beyond tech that may not be as highly valued but have structural themes.
• 🏦 Sectors like banks and global defense are also seen as having continued potential for growth next year.

Fed Actions and Market Functioning

• 🧐 The Fed's recent actions, while officially termed tactical to ensure market functioning, are seen as affecting sentiment.
• 📊 If these actions, like $40 billion in front-end yield curve purchases, extend beyond April, they could fuel speculation about activist bond management.
• 🤝 The Treasury's debt issuance strategy at the front end of the curve, aimed at supporting the housing market, creates upward pressure that the Fed is helping to offset, potentially leading to discussions of a new Fed-Treasury accord.

International Markets and the Dollar

• 🌎 International markets have outperformed the US significantly, partly due to a tailwind from a weaker dollar.
• ⚖️ While the dollar may not fall as much next year, differential interest rate policies (Australia and Europe potentially raising rates, Japan expected to raise rates) are seen as a headwind for the dollar.
• 📉 A slow but steady diversification away from the US by other central banks is also expected to weigh on the dollar.

Risks in the AI Trade

• 💥 The AI capex trade is identified as a significant risk, especially given current high valuations and market concentration.
• 🧩 If AI expectations are not met, it could destabilize the market, as AI has driven wealth, consumption, earnings, and business investment.
• 🤔 The extent of a potential downturn is uncertain, ranging from a significant crash similar to the dot-com bubble to a more moderate deflation of the bubble.