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Main Street Research Bets on AI to Sustain Market Momentum in 2026

Market Movers: The Opening Bell

January 9, 2026

Video Transcript

Wall Street is higher on this Friday morning on the heels of the US jobs report for December and currently holding on to gains.

Now taking a step back, the S&P 500 is trading about 22 times for earnings after a 16% gain last year, its third straight year of double-digit percentage returns.

Now history does suggest 2026 could be challenging.

The term election years have delivered weak returns, especially when a new president is in office as policy uncertainty weighs on markets.

Well, that said, stocks have typically rallied strongly in the months after midterms.

Well joining me on this Friday morning.

This is James Demer, CIO of Mainstream Research.

Happy Friday, James, and happy New Year.

Happy Friday, Rey on this.

Friday morning we are looking at US stock stocks higher, and this has come on the heels of the jobs report.

Now now farm payrolls coming in lower than expected on the heels of revisions, but also the unemployment rate lower.

So what does all of this mean?

I think it means a lot.

Investors really want to focus here.

People have been worried about that labor market, and this shows it's stabilizing.

And that tells us that the Fed probably doesn't need to cut as much as maybe people had thought.

The economy is very strong.

You know you link that with the GDP number, the last 1, 4%.

This is a strong economy, 4.5% employment.

You know, employment typically is 5, 6%.

We sort of forget that.

We've got a really good economic climate here, I think.

A great setup for equities and speaking of which we are looking at US stocks higher this morning and we saw the Dow and S&P 500 hit new records earlier this week.

But you mentioned the Federal Reserve and obviously we are counting down to the Fed meeting at the end of this month.

Right now the probability of the Fed staying on hold is at 95%.

But you mentioned the US economy and the growth that we saw last year.

So walk us through the macro.

Outlook for 2026.

Yes, I think that investors here want to focus on a macro level.

The Fed is not going to be part of the picture.

Look at productivity growth.

Wow, it's at 4.9% now.

A lot of people wonder what does that mean?

Well, typically productivity growth has been around 2% for the last five years.

So what you're seeing is artificial intelligence is enhancing that productivity growth.

What that does for earnings.

It allows them to catapult higher than normal.

So where we typically might expect a 9 or 10% earnings for the market, we're expecting the S&P 500 might have 15% growth in earnings this year.

So from a macro standpoint, the Fed doesn't really need to be a part of this.

Productivity growth, strong economy drives those earnings, and I know a lot of people are worried.

Well, 22 times how can We go higher, right?

I think that comes up a lot, and we have to remember that most of the market is not at 22 times earnings.

Those mag 7 are.

We got a lot of the market that didn't do a lot last year.

Those stocks are trading at about 1617 times earnings, lots of opportunities in other parts of the market.

Yes, I think you mentioned a key word there opportunity for the markets, and we're here on Wall Street.

So tell me where you're seeing opportunity.

I think that's important as well.

The consumer sentiment numbers came today.

They were not pretty.

So I think as an investor you want to focus on sectors where robust profit growth and productivity are occurring.

So it's really not in the consumer discretionary area.

I don't think it's in energy.

Venezuela is just putting more oil back on the market.

Focus on tech and telecom, that's an easy one.

But now you can see with the Dow doing better than the S&P this year, it's the industrial stocks, it's the financials, it's the healthcare stocks which were in the doghouse last year.

And of course 2026 is also a midterm election year.

So tell us about the setup as we head into 2026.

Yes, that's going to be a lot of moving parts.

You know you've got this administration is going to try to look as good as possible and do some things that might rattle different parts of the market.

I think the most recent one was Trump's policy on going in and buying private homes and telling BlackRock they can't do that.

So I think investors should expect some volatility with this midterm election year.

And you know, don't forget a normal market has about 2 or 3 10% corrections a year.

I think this year is going to fit very nicely into that kind of market.

Yes, and you brought up an important point there.

We're only 9 days into the new year, the month of January, but if this week is any indicator, we're likely to hear announcements coming out from the Trump administration.

But in reality, in terms of what ends up happening and what sectors are actually affected, we'll have to wait to see how all of this shakes out.

So I have a behavioral investing question for you.

Do you think investors are getting too complacent when it comes to risk?

You know I love.

Behavioral finance.

So thank you for asking that question.

And what's interesting is we look at the institutional levels of cash levels.

We look at independent polls of individual investors, and what's strange is that people seem to be complacent when they talk about the market, but what they're actually doing is there's higher cash levels than normal, so there's a little bit of what I call a mildly bullish environment.

So it's not excessively where you do get worried about.

That's going to make the market maybe take a very big tumble.

So we've got a bit of a cautious investor psyche when it comes to what they're doing, and I think that means that there is more upside as investors crawl the wall of worry, as we call it.

Yes and James, I'm also glad that I have you here today because next week earnings season gets underway.

Hard to believe given that the new year has just started.

But of course we're paying attention to the big banks.

We start.

Of what JPMorgan Chase followed by Citi, and we also get Bank of America, Wells, Goldman Sachs, Morgan Stanley next week.

So what are your expectations and also with all this deal making activity, what do we expect from the big banks?

Yes, here they come, Remy, right?

And it's we're excited.

We think that the financial stocks could be what the tech stocks were last year.

There is a lot of evaluations are reasonable, a lot of IPOs coming down the pike, a lot of M&A.

And you've got Dreg of course coming to the banks and they're starting, and that part of the market is leveraging AI a lot more than investors expect.

So we expect really good numbers, not just from the US banks that you mentioned, but HSBC, Barclays overseas, very good places to be.

Yes, and you bring up an important point because it's not just US banks and when we take a step back and look at the performance of overseas equities, we'll be keeping an eye on.

Markets as well.

Give us your base case as well as Bull and their case, not just for US but also overseas.

You know we're a global manager, so 40% of our positions in equities are outside the US, and we think that's even more attractive than the US.

We're very bullish.

Valuations overseas are about 50% of what they are in the S&P 500, so attractive on valuation and institutional and individual investors are not positioned.

In those markets.

So now that those markets are outperforming the US, I think you're going to see a migration, let's say a FOMO trade, to getting back into those foreign markets and investors, I would suggest stay in those really great companies that have strong balance sheets outside the US HSBC, Siemens, AstraZeneca, Taiwan Semi, which is one of our biggest holdings.

And finally, before I let you go, do you have any specific price targets here?

On the S&P 500, hold hold your hat here, 8100, it's about 17% from here.

Foreign markets, we think will do better and by 2030, get this, we think the S&P goes to 15,000, the Dow goes to 100,000.

Well those are some lofty targets here.

So before I let you go for viewers out there, we have about 60 seconds here for American viewers who are wondering what all of this means for their everyday lives in terms of the economy.

What would you say to them?

I would say embrace AI.

If you're working, embrace AI in your job.

People are worried about their jobs now because of AI.

Just embrace it.

Let it allow you to be more productive at work, and the economy should be perfectly fine and safe.

And this should be a good 3 or 4 years left of this business cycle.

Well James, it was great having you on the show today.

Thank you so much for joining me and thank you so much for sharing all of your insights.

My pleasure.

The US stock market began the new year with optimism, buoyed by a mixed jobs report that revealed a stabilizing labor market. In a recent discussion, James Demmert, the chief investment officer of Main Street Research, shared valuable insights into market trends and the macroeconomic landscape as we transition toward 2026. His perspective sheds light on significant opportunities for investors while navigating the complexities of the current economic climate.

The S&P 500 has shown remarkable resilience, trading at roughly 22 times earnings after a robust 16% gain last year. This marks the third consecutive year of double-digit returns, but historical patterns indicate that election years in particular, often yield challenges for investors. Notably, the index’s records earlier this week reflect an ongoing recovery, underscoring the strength of underlying economic indicators. Demmert emphasized that a lower-than-expected non-farm payroll number, coupled with a decreasing unemployment rate, reinforces that the economy remains on solid footing.

As Demmert explained, one of the critical drivers behind current earnings growth is productivity enhancement fueled by artificial intelligence (AI). The productivity growth rate has surged to an impressive 4.9%, a stark increase from the historical average of around 2% over the past five years. This acceleration positions the S&P 500 for an estimated 15% growth in earnings this year, a significant uptick compared to traditional expectations.

While optimism persists, Demmert urged investors to be strategic about where to allocate their resources. Currently, consumer sentiment appears to be leaning negative, suggesting potential pitfalls in sectors such as consumer discretionary and energy due to market saturation. Instead, Demmert advocates for a greater focus on technology and telecommunications, as well as previously undervalued sectors like industrials and healthcare. He believes that these areas are poised for substantial growth as the economy continues to rebound.

With 2026 looming as a midterm election year, investors should brace for potential volatility. Demmert highlighted how political maneuvers and policies, such as recent announcements from the Trump administration regarding private housing, could disrupt various market segments. Understanding the historical context around election years can help investors remain vigilant and adaptable in response to these shifts.

As a global investment manager, Demmert shared his insights on overseas equity markets. He noted that valuations outside the US are appealingly low, with many foreign markets trading at approximately 50% of the valuations seen in the S&P 500. This could drive a dynamic transition for US investors seeking to diversify their portfolios. With anticipated momentum in international equities, opportunities in companies with robust balance sheets—such as HSBC, Siemens, and AstraZeneca—are worth considering.

As AI continues to redefine productivity and operational processes, Demmert encourages professionals to embrace this technology to enhance their effectiveness in the workplace. Acknowledging the concerns around job displacement, he advises individuals to leverage AI as a means to augment their productivity rather than resist it. This proactive approach is pivotal for personal development and overall economic health.

Demmert’s insights prompt investors to adopt a measured approach in the face of both opportunities and challenges in the market. As we advance through 2026, maintaining vigilance and adaptability will be key to navigating economic uncertainties. Stakeholders must balance their portfolios with a keen eye on sectors leading growth, both domestically and globally, while embracing technological advancements that promise to shape the future of work.

In summary, the conversation underscores the importance of informed decision-making in an environment characterized by change and innovation. Investors are encouraged to look beyond the immediate challenges and recognize the potential for growth fueled by AI and productivity advancements.

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