The Sunday Drive - 12/28/2025 Edition [#195]
Musings and Meanderings of a Financial Provocateur
👋🏼 Hello friends!
As is becoming a tradition for the year’s final edition, this week we’ll lay out our outlook for 2026 in the form of a collection of Fearless Forecasts. We’ll also report on how we did in 2025.
Now, let’s enjoy 2025’s last Sunday Drive around the internet.
🎶 Vibin'
As we approach the end of the journey that was 2025, and peer around the corner to contemplate what might lie ahead in 2026, it’s worth the time to take a breath and rest up for the onslaught of activity that will surely come in a week or so.
With that in mind, this week I’m vibin’ to Bob Seger’s classic hit Turn the Page, because that’s certainly what we’re about to do.
💭 Quote of the Week
“To understand the man, you have to know what was happening in the world when he was twenty.“
— Napoleon Bonaparte
📈 Chart of the Week
The Chart of the Week shows, at least according to Carlyle, that the big AI spenders have returned to a sustained level of relative overvaluation - meaning that their P/Es are well above those of the rest of the S&P 500.
In my opinion, in the near to intermediate term, there’s more risk to their earnings multiples than their earnings.
As these companies are transitioning from asset light to asset heavy enterprises, with significantly increased capital expenditures related to their AI spending, the stocks would very well re-rate lower to be more reflective of the fundamentals of free cash flow that is becoming significantly impaired by that cap ex.
This is a topic we’ll delve into much more in the coming year, but my New Year’s Wish is the Goldilocks scenario where any downward pressure on the multiples of the largest names happens in an orderly fashion where other names in the investment universe perform better, not just in relative terms, but in absolute terms as well.
Hey, a fella can dream can’t he?
🔮 Fearless Forecasts for 2026
Once again, we lay out our outlook for the coming year as a collection of fearless forecasts.
But first, in the spirit of “often wrong, but never in doubt”, let’s see how we did in 2025.
2025 Report Card (link to 2025 Forecasts):
U.S. Equity Returns Moderate: We see a moderation of U.S. equity market returns, in particular the S&P 500 compared to 2023 and 2024. Result: The S&P 500 did moderate over 2023 and 2024, but not by much.
Better Performance Outside the Mega-Caps: Mid-cap and higher quality small cap stocks outperform mega-cap stocks. Results: Wrong! The S&P 500 outperformed the Equal-Weighted S&P 500 quite handily…again.
Fixed Income Performs Poorly: Bond returns are tepid or worse. Result: Not wrong against a strong equity market performance, but bonds performed pretty well versus history.
Inflation Returns: We see a modest but meaningful return of inflation. Result: Depending on which components of inflation you look at, this forecast was only partially wrong, but on average, wrong nonetheless.
Commodities Make a Comeback: Commodities perform very well. Result: This was a pretty broad forecast that should’ve been more targeted. Precious metals performed quite well, but Energy performed poorly.
U.S. Dollar Weakens: We see a weaker dollar against other major currencies. Result: Correct.
DOGE is Real + Return of the Bond Vigilantes: The U.S. makes some meaningful progress on slowing the rate of U.S. fiscal spending, which is still pacing near pandemic levels. Result: Wishful thinking on my part, I guess. Some progress on fiscal spending at the margin was made, but on the whole I was wrong.
Europe Reawakens: Stocks in developed European markets start to narrow the performance gap with U.S. stocks. Results: Correct, though Emerging Market equities performed even better.
AI Goes Nuclear: An AI-focused data center which is self-sufficient in terms of power and incorporates its own on-site, “baby” nuclear power plant will be announced. Result: Not substantively wrong, but wrong as to timing. This will take a lot longer than one year to play out.
Bitcoin Crashes Again: Bitcoin will have (another) 50+% drawdown. Result: Directionally correct, but wrong in terms of magnitude with the drawdown being more in the 30% range.
And now…
Fearless Forecasts for 2026
The AI Hyperscalers Re-Rate Lower: As mentioned in the Chart of the Week section above, the big AI names end the year with lower forward P/E multiples than when the year began.
Natural Gas Prices Increase Meaningfully, as the commodity transitions from one of Supply-Driven Demand to Demand-Driven Supply given the power needs of terrestrial data centers. Fuel to power data centers begins to compete with Liquified Natural Gas (LNG) exports and the wide gap between Henry Hub gas and delivered LNG narrows.
Orbital Data Centers Take Center Stage: With power emerging as the binding constraint for terrestrial data centers, space-based data centers, powered by virtually unlimited and free solar power, become the next leg of growth in AI spending.
AI Leadership Becomes an Explicitly-Stated Policy Goal, pitched as a matter of national security.
Electricity Rationing, or the fear of it, becomes a real issue in the upcoming midterm elections.
Inflation Surprises to the Downside, given the accelerating impact of AI on productivity and the labor market.
We See a Major Private Credit/Private Equity Failure, not as big as what caused the Great Financial Crisis, but big enough and disruptive enough to force material deleveraging across global allocations.
The U.S. Dollar Has a Major Rebound, but it turns out to be a “bear market rally” and ultimately the dollar resumes its decline against other major currencies.
The Best Performing Equities are Latin American Equities, both in local and USD terms, continuing what I believe could be a multi-year period of strong performance.
The New England Patriots Win Superbowl LX, causing NFL Commissioner Roger Goodell to fire the entire NFL Officiating crew. He replaces them with Somali Warlords in order to ensure more predictable results in the future.
As always, some or all of these forecasts could turn out to be dead wrong, but laying them out in this format helps frame our current thinking and lays out a base case for the year. New information and events throughout the year could certainly present themselves and alter our views, but for now… We are fearless.
🚙 Interesting Drive-By's 🚙
🤔 The Accidental Death of Diversification
💯 Surprise Math: The Working-Class Checkout Experience
💡 Bursting the Bubble in the AI Debate
👀 2025 in 25 Stats: The Data That Explains the Year
🎯 The Return of the Weirdo: Will This Be the Cool New Thing of 2026?
👋🏼 Parting Thought
Seems that I’m not the only one who is concerned about Private Credit…
If you have any cool articles or ideas that might be interesting for future Sunday Drive-by's, please send them along or tweet 'em (X ‘em?) at me.
Please note that the content in The Sunday Drive is intended for informational purposes only, and is in no way intended to be financial, legal, tax, marital, or even cooking advice. Consult your own professionals as needed. The views expressed in The Sunday Drive are mine alone, and are not necessarily the views of Investment Research Partners.
I hope you have a relaxing weekend and a great week ahead. See you next Sunday...
Your faithful financial provocateur,
-Mike
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