By Darrell L. Cronk
4 upbeat economic and market signals to lift you above the noise and confusion
Few would deny that we live in a noisy world. Every day, investors hear the clanging of change – pressure on the Federal Reserve, world alliances reordering, negotiating bluster confused for policy and artificial intelligence (AI) developments swinging markets.
Yet when I force myself to rise above the noise and look across a longer-term horizon, I see four bright secular trends that have the potential to extend this bull market through 2026 and beyond.
Two extremely different presidential administrations have made large investments that should continue to benefit corporate bottom lines.
1. Fiscal clarity: It’s hard to avoid the constant reminders that Americans are bitterly partisan and ever more divided. Yet we’ve seen two extremely different presidential administrations make large investments that should continue to benefit corporate bottom lines.
The One Big Beautiful Bill Act, signed into law July 4, allows for sizable increases in the expensing of equipment, higher deduction limits for research and development and manufacturing infrastructure, and looser interest-deduction limits for companies. These have the potential to give companies an earnings boost that can offset the noisier costs associated with tariffs.
The Infrastructure Investment and Jobs Act, signed into law in 2021 to modernize U.S. infrastructure, has seen just half of its $1.2 trillion allocated so far. The CHIPS and Science Act, signed into law in 2022 to support technology innovation, also has yet to be fully allocated. The push to strengthen onshore supply chains remains a top priority across political parties.
Favored equity asset classes: U.S. large-caps and midcaps over small-caps, U.S. stocks over international.
The AI revolution is larger and moving faster than past periods of seismic technological change.
2. AI capital expenditures: Across business eras, great wealth and great innovation have been made at the two extremes: founders and disrupters. Rarely do they coincide, but when they do, you get monumental periods of transformation.
The AI revolution is larger and moving faster than past periods of seismic technological change. As the pace quickens, the spending to support this infrastructure is simply staggering. McKinsey’s estimate for AI infrastructure spend is close to $7 trillion by 2030, driven by explosive demand for data centers, computer power and semiconductors.
We are closer to the beginning than the end of a new capital expenditure supercycle. Technology companies are constructing private data centers, utility companies are harnessing power generation for data-center build-outs, and industrial companies are winning new customers. Even the small and defensive Utilities sector is morphing into a growth sector – its $2.4 trillion market capitalization projected to double in the next 10 years.
Favored U.S. stock-market sectors: financials, industrials, information technology and Utilities.
When the Fed cut rates without an impending recession, equities thrive.
3. Monetary policy clarity: In the past 40 years, every time the Fed has cut interest rates by more than 75 basis points (0.75%), the economy has experienced a recession. Look back deeper into history, and you’ll find that when the Fed cut rates without an impending recession, equities thrived.
If the economy were close to hitting a wall, it would historically show up in the financials sector, where we’d notice either tepid loan growth or rising delinquencies and defaults driving down stock prices. Recently, that sector has made new all-time highs.
If economic-growth concerns were rising, we would see credit spreads in lower-quality areas of the bond market begin to widen. Currently, both investment-grade and high-yield credit spreads have not shown any such warning signs.
The point: Monetary policy stimulus without an economic recession historically has been powerful for both economic and financial-market growth.
Favored bonds: U.S. intermediate-term (3- to 7-year) taxable bonds and U.S. municipals (general obligation and revenue).
While a few megacap stocks can create big noise, most large-cap stocks now are reasonably priced.
4. Market breadth expansion: Equity valuations look high by historical standards, but when we view the S&P 500 SPX on an equal-weighted basis, we get a different signal. The S&P 500 Equal Weight Index XX:SP500EW reminds us that while a few megacap stocks can create big noise, most large-cap stocks now are reasonably priced.
Another reason for optimism is the piles of dry powder sitting on the sidelines. The Fed just cut short-term rates, but money-market balances, at $7 trillion or so, remain at all-time highs. Not all of this will get reinvested, but if the Fed lowers rates further, as we anticipate, we expect a portion of those funds to find their way into stocks, bonds, and commodities.
One more point: Historically, when equity valuations are high and deregulation is in the air, we get a resurgence in merger-and-acquisition (M&A) activity. What we’ve seen is that when M&A deals are robust, equity markets have tended to perform well.
Darrell L. Cronk is president of the Wells Fargo Investment Institute and chief investment officer of Wells Fargo Wealth & Investment Management.
More: The last thing the stock market wants right now is a government shutdown. Here’s why.
Also read: How the Trump administration is boosting stock buybacks
-Darrell L. Cronk
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10-04-25 0647ET
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