Special U.S. Large Cap Value Equity Strategy

Bryant VanCronkhite: Happy New Year! I’m looking forward to telling you a few big things about what happened last year and what's happening this year, but stick with me to the end. I have a really big topic I think no one is talking about, but it's going to drive markets in 2026 and beyond that's super important to understand.

Bryant: In the new year, I'm looking for change in a lot of things: my diet, my habits, and even the stock market. And personal resolutions are like the stock market sometimes. Sometimes things change and sometimes they stay the same. I think 2026 is going to have a little bit of both for us when it comes to the market narrative that dictates the direction of the market and the underlying currents that determine alpha. But first, let's talk about what will not change in 2026: the AI (artificial intelligence) revolution. It will continue to dominate the market narrative. That's not going away like the extra 10 pounds I put on this winter season. However, underneath the AI narrative will be chapters that will give us twists and turns. We're going to move from a cognitive buildout, which is creating the brains of AI, to a kinetic buildout, taking AI into the physical world. I think this is a cross-country journey from the East Coast to the West Coast. The entire journey is on the same path in the same direction with the same end place, but the scenery is going to change as we move along the highway. That AI scenery is going to change as well, and investors need to change their portfolio along the way. I see three phases of AI in 2026: number one, extension; two, implementation; and three, realization. Extension into broader participation in more than just a handful of semi companies, but we get into TPU (tensor processing unit) players, memory, networking, and more. Implementation is about taking AI and bringing it to our fingertips. We need upgraded devices, handsets, cars, and appliances. And three, realization. How do we get the economic benefit of the buildout to show up in our productivity as individuals and companies? And how does that change company financial profiles along the way? We want to own companies in each of these three phases, and that will lead to a broadening in the market. So, don't get stuck thinking AI continues to drive the headlines without changing the companies you own along the way.

Bryant: I think small caps might see the biggest change. We all know how low quality the small-cap market was in 2025 with non-earners and low ROIC (return on invested capital) companies leading the way. It's quite common off a bear market bottom, which we saw in April 2025. The first phase, though, usually only lasts six months. And right on schedule, October 15 marked the date when low quality stopped dominating. It does not mean that it's reversed, but Q4 is the first sign of change and that should accelerate as we get further into 2026. Non-earners should fall back in quality and higher ROIC should regain leadership. This will change the character of small caps in 2026 and could lead to a significant rotation.

Bryant: I think what people are missing is that we have the mother of all replacement upgrade cycles right ahead of us. Think about the power of a single cycle on the market. Now, a smartphone cycle can be huge and impacts a lot of industries. But add to that an auto cycle, a real estate cycle, a networking cycle. Individual cycles individually are important, but you put them all together and it can be massive. That's what I think we might have in 2026, especially in the second half. The economy is already in good shape. The Fed (Federal Reserve) is easing, fiscal policy is accommodating, and AI demand will require us to upgrade. And as that happens, think about the potential because of AI to not have to add labor to the economy to achieve it. That could be significant margin increases and, thus, stock price increases for the companies that can achieve this. This is the bull case, but it's not a dream. It's an achievable New Year’s resolution. As this plays out, I like semiconductors, networking, hardware, chemicals, machinery, transports, and metal stocks. This is broad and it's big. Along the way, pullbacks could test our resolve, but the destination will always be the same. As the scenery changes, be sure to change your portfolio along with it.