Q1 Outlook for Traders: Five Big Questions and Three Grey Swans.

Chart: A basket of US AI stocks. Shortly after Oracle’s earnings announcement in September, we put together a basket of 24 stocks in the US heavily associated with the rise of the AI focus in the US market this year, including all of the Mag7 save for Apple. Q4 saw the AI momentum stumbling as a broad phenomenon, although some sectors in hardware (especially memory chips) continued to power forward.

Q4 of 2025 saw momentum for AI stocks in aggregate hitting a wall, even if there was considerable rotation within the AI space, depending on whether you were seen as spending too much (looking at you Oracle and Meta) or too slow to show profit or whether you were enjoying the frenzy of spending (that good old “picks and shovels” gold rush metaphor). Here we’re thinking of the memory semiconductor makers like Micron and SK Hynix and the hard disk makers Seagate and Western Digital.

These signs of rotation have us looking for parallels in the cycles that played out in the dot-com, tech and telecom boom and bust cycle of the late nineties and into the year 2000. At some point, given the current bubbly valuations and speculative frenzy, we’re likely to see whatever an AI version of this looks like: AI developments and implementation will continue marching strongly forward even as the lack of profit momentum relative to the spending excesses in the early stages of this incredible new technology mean that AI- and the US megacaps could hit a speed-bump or worse in the new year. If so, the negative wealth effect could feed into the economy, frustrating and initially possibly overwhelming the Trump administration efforts to pump the economy with bank deregulation and its aggressive re-industrialization policies, which may only begin to boost the economy more broadly in the second half of next year.

Bottom line: Our working base case is to remain defensive on US market indices in the first quarter as the conditions are in place for a meaningful market correction to develop.

Europe: Finally set for economic outperformance to justify strong stock market?

Chart: European vs. US stocks in USD terms. The chart shows the performance of the STOXX Eurostoxx 600 index versus the US S&P 500 index in US dollars through mid-December of 2025, with the two indices indexed to 100 as of the last trading day of 2024. It shows that despite the fuss about American stocks and the AI phenomenon this year, Europe handily outperformed the US and we expect that it could do so again in 2026.

At the very center of Europe we have the two key economies in a bit of a funk – debt-addled and political gridlock-addled France and the real “sick man” of Europe, Germany. Ahead of the turn of the calendar year to 2026, Germany’s December Manufacturing PMI survey posted its 30^th consecutive month of contraction. Indeed, Germany is Europe’s largest economic engine and has been sputtering since the finding its outdated, industrially-focused economic model badly disrupted by the end of cheap Russian gas imports and in 2025 by US tariffs of 15% as well as by increasingly direct competition from China. Consider Germany’s auto giants and their single- digit P/E’s that suggest miserable sentiment on their prospects.

Germany and Europe are likely to erect higher barriers to Chinese imports for strategically important industries, as the continent responds to China’s “predatory mercantilism”. This will not only be for cars, but also for supply chains critical to national economic security, echoing the wake-up moment the Trump administration has triggered. And for Germany and the Eurozone more broadly, rebuilding hard defensive industries is an urgent priority, as well as measures like raising incomes for military personnel to retain and attract competencies across not just boots on the ground, but building comprehensive physical and cybersecurity infrastructure.

Bottom line: We prefer Europe to the US on a headline basis, with compelling opportunities in key sectors linked to Europe’s new strategic priorities to shore up defense and its own strategic supply chains after the Trump administration made clear in its stunning new National Security Strategy that its security commitment to Europe is disappearing.

FX: USDJPY to finally come under control or a super-spike first?

I spent much of Q3 and Q4 of 2025 pushing back against the sharply weakening in the Japanese yen, arguing that, structurally speaking, with Japan having the world’s largest pool of private savings and the Japanese government having the longest maturity profile in its sovereign debt distribution, there was significant room for Japanese yen appreciation, given the yen’s historically cheap valuation in real purchasing-power terms. But, while Japan might have the most firepower, should it have the political will to use it and push back against currency weakness, it has thus far failed to mobilize that firepower.

Also, with the new fiscal expansion package under new LDP Prime Minister Takaichi, the government seemed almost to be purposefully neglecting the yen, perhaps hoping that some of the supply-side measures in the fiscal program and stronger import revenues from a higher USDJPY would boost the economy. On the one hand, it makes sense to devalue the currency as a route to devaluing the real value of Japan’s national debt. On the other hand, real wages have been falling in Japan and inflation is the strongest concern among Japanese voters, the key reason that the incumbent LDP ruling coalition suffered its worst outcome since 1955.

Chart: EURJPY. While we have focused on the USDJPY rate in this article, which is the most important for Japan, it is certainly worth noting that the EURJPY exchange rate has rocketed to its highest level in the history of the euro and even before that, versus the euro-equivalent stretching back deep into the 1990s. At some point, will this crop up on Europe’s radar as a factor in the competitiveness of EU exports? EURJPY above 180.00 almost amounts to a trade war. The weak JPY could also be a rearguard action to support Japan’s export industries relative to those of China.

The late 2025 JPY weakening did show that the Bank of Japan will respond to a weaker yen with policy tightening, but the immediate reaction to the BoJ’s December 19, 2025 rate hike, the first since January, was a sharply weaker JPY despite a sharp rise in Japanese government bond (JGB) yields. A weaker currency despite higher yields is an emerging market currency dynamic! Going into 2026, the situation looks spring loaded. Japan’s Ministry of Finance may put up a classic intervention fight again “excessive” JPY weakness and higher USDJPY levels, should the latter continue challenging the modern highs above 160.00. But if higher JGB yields don’t fade and/or don’t begin to inspire a widespread repatriation of Japanese savings, a more “permanent” solution to a rapid currency devaluation might require a far heavier hand and tougher medicine from Japanese officialdom and possibly even coordinated action with the US Fed in the form of a huge USD currency swap. That swap may be needed anyway if the US is ever to have a chance of seeing the inbound investment that Japan has promised to deliver as a part of the trade deal agreed with the Trump administration.

Bottom line: Stay tuned – USDJPY and other JPY pairs could see monumental volatility in Q1 – in both directions eventually, but the base case is for a resolution lower.

Crude oil: A strategic investment opportunity presenting itself in Q1?

It’s remarkable that amidst continued global inflation, one of the cornerstone inputs into the economy, oil prices, are trading near the low of the range of the last few years, and in inflation adjusted terms at the low end of the range of more than twenty years. This has rapidly warmed up our contrarian instincts for a possible major low in crude oil prices in 2026. Oil prices as low as USD 60 and lower reflect near-term oversupply concerns, but they also discourage investment at a time when global energy demand remains structurally strong.

High natural decline rates in all oil fields mean oil majors must invest heavily simply to maintain output, raising questions about whether today’s prices are sufficient to secure future supply. This imbalance could start to tighten the market leading to higher crude prices as early as the second half of 2026 but mostly into 2027 and beyond. Sure, in the first half of next year, spot prices can possibly go lower still due to the overhang of supply, but a major low may be established in this time frame as we have already reached prices that destroy forward supply. For the longer-term traders and investors, it is worth noting that forward prices for oil don’t even reflect the cost of interest. For example, as of mid-December year-forward prices for crude were virtually the same as for spot prices.

Bottom line: Against this backdrop, we see scope for oil to put in a major low in the months ahead and for oil majors and even some oil services companies to deliver better-than-expected shareholder returns in 2026 if the cycle turns up later in the year.

Metals: just getting started or too hot to handle?

We see no reason for a meaningful reversal in metals prices in the coming year as the drivers for higher precious metals and select related industrial metals appear structural. Gold continues to transition from a cyclical macro trade into a strategic asset, underpinned by persistent central bank demand, risks that the next central bank and fiscal policy options will represent various forms of financial repression (putting a heavy hand on bond markets to prevent excess yield pressures), and geopolitical fragmentation.

Chart: The Gold-Silver ratio. Gold stole headlines in the first half of 2025 with the continuation of its historic advance, but it was silver catching fire in Q3 and Q4 after the wild run-up in gold into the April Trump "Liberation Day" tariff announcements that was the most eye-catching development in metals markets in second half of the year, with a further brutal acceleration starting in late November. The ratio is at its lowest level stretching back many years, now about at the middle of the range since the 1970’s, when it was often closer to 30. In ancient times and through the Middle Ages, it was often 10-15.

For gold, if economies run weak, the next round of policy excess will seek reflation at all costs. That’s traditionally gold positive just as it’s gold positive if the policy makers’ intent is to keep economies running hot at all costs to devalue the existing stock of debt via inflation. These forces support our view that gold can reach USD 5,000 as a base case. Far higher levels are possible if Japan and other central banks are forced quickly to move into new policy measures like yield-curve-control. As well, if equity markets come under significant pressure, recent history has shown that bond markets are no longer serving as a safe haven, and gold may increasingly serve this role.

Among the other metals, silver and platinum may outperform on a percentage basis, supported by structurally tight supply as well as their growing role in key technologies from solar energy and EVs to AI and data centres. In many cases, industrial demand for these metals in inelastic in the medium term as there are no alternatives.

Bottom line: Despite the incredible run-up in prices in 2025, we remain constructive on the outlook for metals, with considerably volatility to continue.

Geopolitical grey swans: A grab-bag of three grey swans that will circle over markets in 2026.

This is a catch-all section that merely acknowledges that we enter 2026 with some well known unknowns that are very much clouding the crystal ball on the geopolitical front. A dramatic pivot in any of these issues could prove decisive for market outcomes next year. Here are our top three.

Will major players balk at Trump’s terms of trade? The US and China seem committed to the “Busan Truce” agreement from November of 2025 that has a twelve-month horizon. China flexed its leverage on rare earth metals, likely a key element in lowering US tariffs on Chinese imports. The US may want things to stay as quiet as possible with China for now to keep markets and the economy as benign as possible into the mid-terms next November. But elsewhere, key flashpoints remain: will Europe insist on moving forward with its Digital Services Act enforcement and will the US retaliate, deepening the risk of a divide? Also, will South Korea and Japan remain fully committed to the trade deal agreed with the US and start to “show Trump the money” on agreed US-bound investment when their currencies are under huge pressure?

Ukraine-Russia – what shape peace, if any and what shape the transatlantic alliance/NATO, if any?
This question looms large, not just for Europe, but also for the transatlantic alliance. The US wants out and wants Europe to back away from is confrontational stance against Russia as well. The fear perhaps, is that no peace deal and the Eurozone pushing its case “too far” in support of Ukraine could see another NATO member attacked by Russia, triggering an appeal for support that the US won’t want to honor. In short, if there is no deal, NATO itself is at risk of crumbling and might be at risk even if there is one. With or without a peace deal, Europe’s new commitment to building a credible deterrent against all forms of warfare will remain.

How thoroughly will the Trump administration push the renewed “Monroe Doctrine”?
Note: This outlook was written before the dramatic events in Venezuela at the start of the year. The new US National Security Strategy made quite a splash as it spelled out a new doctrine on keeping even foreign economic interests specifically out of the Americas. Venezuela’s Maduro regime and its China- and Russian alignment is the first target in what may be an attempt to make the Gulf of Mexico and Caribbean into entirely US-dominated regions, including possibly Cuba. But also, what about Greenland and the Arctic? And in Canada, key talks are set for January that could prove pivotal – Carney is trying to reach out to other trade partners and lessen the Canadian economy’s reliance on the US, but will Trump resort to strong-arm tactics again there? What happens country by country in the region and how will China respond? It has enormous presence and deep trade relationships in the region.