1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 123
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
economy on one hand, which stands in stark contrast to the second tale of an embattled
lower/middle income consumer dealing with sticky inflation and eroding confidence on the other
hand.
Index level equity market returns mask a K-shaped recovery from Liberation Day lows between
AI related stocks and the consumer driven economy
56.0%
-5.2%
Dec
Jan
Mar
Mar
Apr
May
Jun
Consumer Goods
Jul
Aug
Sep
Oct
Nov
Dec
MS Broad AI
Sources: Bloomberg Finance LP, Scotia Wealth Management, returns through December 31st, 2025, in USD.
Despite the current dichotomy in the market, we see compelling reasons for the gap to begin
to narrow in 2026 as other parts of the market help to support performance.
On the AI front, spending continues to grow, with some suggestions that AI infrastructure
spending could reach as much as $5.2 trillion over the coming decade. This wave of investment
should continue to support earnings growth, not only for leading model developers, hyperscalers,
and semiconductor names, but also for construction firms, equipment manufacturers, utilities,
grid and power developers, engineering companies, natural resource companies, and a range of
local service providers tied into AI-related projects.
However, the same forces that powered AI-related equity stocks in 2025 also frame the main
risks for 2026. Capex is rising rapidly even though measured productivity gains are still limited,
valuation multiples (exhibit below) are elevated across all geographies, and funding relationships
across the ecosystem are increasingly circular, with hyperscalers and AI specialists partly financing
each other’s infrastructure and demand. This has heightened fears that the expected benefits may
not fully materialize and that an AI bubble could be forming.
We see some bubble potential in pockets, but not broadly. Unlike past speculative cycles, today’s
AI leaders are diversified, profitable, and generate positive free cash flow, with adoption already
visible across enterprises and consumers. Many of these companies are monetizing AI investments
through cloud usage, advertising, subscriptions, and licensing. In terms of the risk of excess
spending, physical and power constraints are limiting how fast capacity can grow. Taken together,
these factors suggest AI-linked firms are still poised to lead market returns in 2026, but with slower
growth and a higher hurdle for incremental upside.
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