Podcast: Speaking of Quality
Season 6 Episode 1 Title: 2026 Outlook

Episode Transcript:

Maxine Cuffe 00:03 

You’re listening to “Speaking of Quality” with Hank Smith, a podcast by The Haverford Trust Company. On “Speaking of Quality,” Hank features authors, business leaders and wealth management experts who share stories from their careers and insights on topics that impact financial wellness. And now, here’s your host, Hank Smith. 

Hank Smith 00:24 

Hello, and welcome to our first episode of season six of “Speaking of Quality.” I’m your host, Hank Smith, Director and Head of Investment Strategy at The Haverford Trust Company. On this podcast, we explore topics ranging from leadership and economics, capital markets, to civic engagement and community building. Today, I’m pleased to welcome three dynamic minds to dive into the Haverford Trust 2026 Economic and Market Outlook. First, we have Maxine Cuffe, our Vice President and Director of Global Strategies. Maxine has been with Haverford since 2013 and brings more than 25 years of experience in investment research. Next up, we have John Donaldson, our Vice President and Director of Fixed Income. John has been with Haverford since 2008 and has more than 45 years of experience in the investment industry, managing fixed-income portfolios. And rounding out our panel of experts, we have Halie O’Shea, our Vice President and Director of Research. Halie joined Haverford in 2017 and has been an equity analyst for more than 25 years. So, without further ado, let’s get started. Welcome. Let me first, before I dive into a number of questions that I know our audience is anticipating the answers to, let me just lay out a backdrop, if I may, as to 2025 and what we see leading into 2026. For three consecutive years now, the economy has outperformed expectations. I mean, if you go back three years ago, virtually every economist was forecasting a recession in 2023 and many in 2024. We started the year in 2025 with a negative first quarter and then immediately followed by “Liberation Day” with the announcements of extraordinarily high tariffs that sent the stock market into a near bear market, down 19% in six trading days, but even more devastating was the selloff in the bond market. Yet it was all short lived, and the economy actually showed signs of acceleration in the second half. And what has clearly been underestimated both in 2025 and in previous years is the strength of the US consumer and how ironic that we have these consumer confidence surveys throughout 2025 that continue to trend downward. And in fact, we’re at some of the lowest levels of consumer confidence readings that we have seen in 40 years, and yet it has not impacted what the consumers do with their wallet, and that is spend, and it’s been very, very steady. We’ve had a slowing jobs market but still at full employment by any historical standpoint. And maybe most important with respect to jobs is the leading indicator of jobs, the weekly jobless claims, have remained very low and very steady for really the past several years, but certainly throughout 2025, which suggests that companies are loath to lay off employees, but at the same time are very guarded about adding new employees. And given the uncertainties around tariffs, which I know Maxine, you’ll be talking about in a few minutes, I think that helps explain part of that. And our immigration policies implemented this year probably explains the other part of it. As we go into 2026, we have the momentum of continued fiscal stimulus, deficit spending, but also the implementation of the “One, Big, Beautiful Bill,” which will provide tax relief and other business incentives. We have continued deregulation. We have the continued spending on AI, and we have corporate profits, which are estimated to grow at a double-digit level, somewhere around 15%. And those are powerful tailwinds as we enter the first half of 2026. Having said that, we should caution all of our investors that it is extraordinarily rare for the S&P 500 to deliver four positive years in a row, let alone four consecutive double-digit returns as we have had for the previous three years. That would be a very rare event were it to occur. And we should also point out that seasonality, we are entering the second year of a presidential cycle. And of the four years of a presidential cycle, the second year is decidedly the weakest year that typically sees fairly significant drawdowns in the first half, even first nine months of the year. But we’re speculating now. Why don’t we just jump into how we are positioned, how we’ve positioned your portfolios. And let’s start, Halie, with how we’re positioned with respect to our equity portfolios. 

Halie O’Shea 06:37 

Thank you, Hank. In terms of positioning, when we think about 2026, we think about positioning in four main buckets. The first is artificial intelligence. So, companies with exposure to AI. AI is an early-stage transformational technology, and with that, we expect many years of strong growth. As AI is adopted more and more by corporations, we expect companies to be able to generate measurable revenue growth and cost savings from AI. In terms of the portfolios, we have exposure to semiconductors, cloud services, and we especially favor companies that are able to use AI to generate and monetize applications. A good example is Alphabet, the parent company of Google. Google is using AI in its search engines in order to increase engagement, and they’re seeing positive results from that. And they also have physical, real-world applications such as their Waymo autonomous taxi service. Also, within AI, we own a number of companies that are leveraged to the ongoing build-out, the CapEx build out, of data centers, infrastructure to support AI and the necessary power to fuel these data centers, companies such as Eaton, companies such as Invent, companies such as NextEra Energy. So, we’re very positive on AI, but we also recognize that this is an early-stage transition in terms of technology, and there will be periods of volatility. So, with that, we balance that with an overweight in areas like defensive sectors such as healthcare, such as consumer staples. So that’s the second bucket. The third bucket is financials. We’re very positive on financials this year, given what we’re seeing from the Fed in terms of rate cuts, so an easing cycle that lowers credit costs for the banks. This should be a pretty good year for the banks. We anticipate a strong year for M&A, for capital markets activity, and they’re early in terms of the deregulation that we are starting to see, and we think that’s going to lead to a lot of opportunities for lending and growth. And then our fourth bucket, we think of as medium economic sensitivity stocks. So that incorporates some industrial, some materials, some energy, some of our consumer stocks. So very balanced, but those are our four main buckets. 

Hank Smith 08:55 

You mentioned healthcare, and I must point out that given that backdrop of the second year of a presidential term being the weakest performing year in terms of market returns, it’s actually, on a relative basis, one of the best performing years for healthcare. So, if history plays out, I think we’re very well positioned there. Maxine, tell us a little bit about our positioning with respect to our global strategies. 

Maxine Cuffe 09:25 

Yeah. So, 2025 was a fantastic year for global markets, outperforming the US markets by the widest margin in more than 20 years. And in fact, I think some of our viewers might be surprised to hear that the S&P 500 was actually one of the worst-performing markets globally out of the major markets, even though it had a very strong, double-digit return. So, we have been saying to clients that it makes sense to have a little bit of global markets in your portfolio for diversification. It doesn’t have to be the whole one-third of your portfolio, which would be the allocation that the MSCI would recommend, but having some sort of exposure. And one of the reasons that we have pointed out is just the concentration in the S&P 500 and how extended that has become even more so now where you have just 10 stocks making up 40% of the S&P 500. In fact, just three stocks are making up 22% of the index. You don’t have that internationally. So that was one reason I think that investors started looking globally this year or in 2025. The other reason was the dollar started to decline on the back of some of the tariff announcements and just concerns about the trade policies. That clearly helps international markets, not just from extra return if you’re in another currency, but it helps a lot of countries around the world can be a little bit more flexible with their interest rates and not have to worry so much about their currency. We also saw a broadening of that AI trade across markets. So, there’s a supply chain that goes into these big AI companies here in the States that trickles all across Asia. So, we saw places like Korea, kind of an ignored market, up 75% this year, Taiwan, China, all of these markets that have a lot of technology, they did extremely well this year. And then of course, you actually have economies that are picking up a little bit better than what we were expecting. And some of that has been driven by more fiscal stimulus, defense policies in Europe, fiscal stimulus in China. So, it just helps that international markets just had a fantastic year, up more than 33%. 

Hank Smith 11:38 

You mentioned that for the past 20 years, international markets have been a relative underperformer, certainly to our domestic markets. The million-dollar question is, is 2025 just a one-off or perhaps the beginning of a bit of a reversion and a makeup for 15 to 20 years of underperformance? 

Maxine Cuffe 12:04 

Well, all of those factors that I just mentioned will continue into 2026. So, I think that investors will still continue to be looking at global markets for diversification. And in fact, on the margin, I think things are getting better earnings-wise. I mentioned the technology trade across Asia, but even in Europe, we’re starting to see the earnings are a little bit better. And the one factor that I haven’t spoken about is valuations are so inexpensive relative to US markets. There’s no getting around. The S&P 500 is trading at quite an elevated valuation at the moment, 22 times or more. International markets just look really, really inexpensive relative to that. So again, looking quite attractive this year for global markets. 

Hank Smith 12:48 

John, 2025 for fixed-income investors, excuse me, was quite a rollercoaster. And yet the fixed-income markets provided another good year for returns. How are we thinking about 2026? 

John Donaldson 13:08 

Well, first of all, when you mentioned the tailwinds for the market, the Fed still has some more interest rate cuts to come. Even though they’ve cut the Fed funds rate from five and a quarter to five and a half at its peak, down to three and a half to three and three-quarters as we speak, there’s projected to be two more this year. Some of the debate will be, would the new Fed chair be more accommodative than that or not? That’s to be determined, but you still have that tailwind there. Certainly, rates aren’t going back up a lot. That doesn’t mean you can’t have volatility in the meantime, but we like and prefer to stay in the intermediate sector. We still have a strong conviction that the yield curve will steepen, i.e., that there will be an extra reward to lend long into a more volatile world. So that is definitely in place. We still favor US Agency Mortgage-Backed Securities. We still favor corporate bonds. We underweight US Treasuries. And on the tax-exempt municipal side, we are being hyper careful on credit as it’s still to be determined exactly what all the long-term implications of some pretty dramatic changes in the relationship of the federal government and state and local governments. So, we want to be very, very careful there. 

Hank Smith 14:35 

Given that inflation is trending down, albeit very slowly, it’s kind of stuck in a 2.8, 2.9% range over the last four or five months. What about our exposure to TIPS? 

John Donaldson 14:54 

We still like it as a hedge. It’s the one thing that will do well when everything else in the bond market doesn’t. And again, it’s not been a straight line on what’s going on, and we don’t think it will be a straight line in the future. There’ll be bumpy days. We’d like to continue to have that limited exposure, but have it, again, as a hedge, as a defensive, and it’s kept paced with the broad market indexes too. It’s not as though it’s underperformed. 

Hank Smith 15:23 

So, you haven’t sacrificed anything for that diversification. 

John Donaldson 15:25 

No. 

Maxine Cuffe 15:26 

John, what do you think is going to happen with mortgage rates this year? Because I think that that’s quite a big bottleneck in the economy and has caused some of this K-shaped economy concerns of people not being able to get on the housing ladder, affordability. What do you think is going to happen there? Do you think that rates could come down enough to really spur housing demand? 

John Donaldson 15:47 

Yes, I think it can because you’re going to get over a couple of thresholds. One, you look at it from new money, people buying a house for the first time or people who’ve been renting because it’s been so expensive. Rates were as high as seven and a quarter for a 30-year mortgage. They were 6.15% last week. This week’s number’s going to get released after we’re finished taping, but that gets below six where the handle’s a five something. It gets to feel more affordable. The drop, for instance, between seven and a quarter and getting to, say, a reasonable target of five and three quarters, that is a savings of $100 per month, per $100,000 that somebody borrow. So, if somebody’s buying a house and has to borrow $400,000, that’s $400 a month less cost, which at least dents the affordability question. And the other bigger factor in that log jam you referenced is there’s so many people who have houses, but took advantage of low, low rates and have sometimes into the two-plus percent, but a lot of three- to three-and-a-half-percent mortgages. And when rates were at seven, that’s a pretty big disincentive to move because you’d increase your payment so much. And the fact that, okay, all of a sudden three and a half to five and three quarters, or maybe it gets to five and a half, if the Fed cuts enough, but certainly not the difference between three and a half and seven. So some of that log jam, just breaking that up a little bit and getting more activity, and you’re not going back to 0% rates, you’re not going back to two and a half mortgages anytime soon, but something that just narrows that gap and makes it less of a hurdle for everybody involved. 

Maxine Cuffe 17:40 

It can make it a nice tailwind for this year if we start to see it. 

John Donaldson 17:44 

It certainly would not hurt. 

Maxine Cuffe 17:44 

Definitely. 

John Donaldson 17:44 

And that’s a market that if you ask about some of the dilemma facing policymakers is that you want to get the mortgage rates lower, but you don’t want to go so far as to get rates so low, you start to even think about triggering inflation again. 

Hank Smith 18:00 

So, while I have you, John. You’re on a roll. Ever since President Trump took office, he’s been a vocal critic of Fed policy and personally the Fed chairman, Jerome Powell, calling for his resignation, his ouster. And it has brought up a concern regarding Fed independence. And do you believe, at some point in the very near future, the president will appoint a new Fed chairman to take over in May of ’26? Do you think Fed independence is really something investors should be worried about, or is it more of a kind of a political opposition talking point? 

John Donaldson 18:49 

If it happened, it is a big deal. That said, all of the people who’ve been mentioned as prominently a potential successor to Chairman Powell know that. They know that Fed independence is paramount, and it’s very important and should not be threatened. So, from that standpoint, the base case and most likely outcome ultimately is not threatened. Doesn’t mean there can’t be headlines between now and then, but it should not be threatened. That would show up dramatically in the currency market. As we talked about, steeper yield curves with higher yields necessary for long-term financing would show up, again, dramatically there. Credit spreads dramatically. It would not be a particularly good thing. But again, fundamentally, everybody that has been mentioned knows that and believes it. 

Hank Smith 19:53 

Halie, for the past two years at our year-ahead outlook, we’ve talked about a broadening out of the market. Maxine mentioned a few minutes ago that there’s such a concentration, three stocks making up 22% of the market, the top 10 stocks making up over 40% of the market, and yet that broadening out really hasn’t occurred. When it’s occurred, it’s only been very temporary only to return back to those top 10 stocks, Mag Seven, whatever name you want to label it. And yet we continue to forecast a broadening out of the market. Can you just give our listeners a little bit of our rationale for that call? 

Halie O’Shea 20:54 

So, this year we anticipate strong corporate earnings growth. On average, about 15% is where estimates are for EPS growth for the S&P 500. And while technology stocks are expected to grow very nicely, up over 25% in terms of average EPS growth, other sectors are also expected to post really nice growth, and there are a number of reasons for this. So, if we look at industrials and manufacturing companies, we’re seeing, of course, we talked about that leverage to infrastructure to build out AI, but there’s also more manufacturing moving back to the US. Many of them have cost savings, margin expansion opportunities. So, we feel like those two sectors are going to post really nice earnings growth. Financials, we talked about a few minutes ago, many reasons to feel very good about what we’ll see from financials this year early in terms of benefiting from some of the deregulation and then, of course, lower credit costs and good capital markets activity. Just a couple of minutes ago, John talked about lower mortgages. That would be very encouraging for some of the consumer companies, for residential construction. That also factors into HVAC, other areas of the economy. We look at companies like the home-improvement retailers, and then of course, the “One, Big, Beautiful Bill” legislation and the tax refunds that consumers are expected to get this year. It’s widely expected that we could see refunds of $150 billion more this year. I think a lot of that is going to be spent and flow back into the economy. So, a lot of drivers for corporate earnings growth and then, of course, valuation as Maxine was talking about, the S&P 500 at 22 times. Now that’s expensive, but that doesn’t mean that the average stock is trading at 22 times earnings. The technology stocks after two years, over the past two years, AI has driven about 60% of overall returns in the stock market. There are plenty of stocks still trading well below those elevated multiples. So, we’ll see this year, but we remain very encouraged by technology, but also other areas. 

Hank Smith 23:07 

Right. And you could easily see a broadening out of the market in healthy returns, and let’s call it the S&P 490, absent those top 10 stocks, and yet the market-cap-weighted S&P 500 being a very modest performer because the top 10 does only so-so in terms of market returns while the rest of the 490 do pretty well, it also argues for diversification, which we are hired to be a diversified manager and to control risk. And I think we’ve balanced that out by having the exposure to that AI trade, but not to an extent that creates too much risk. Maxine, this has been a very challenging year for anyone in the C-suite, given the uncertainty around tariffs. The rules of the road seem to change every single week, depending on what mood our president is in. But as we enter 2026, by the time our listeners hear this podcast, we will probably have had a Supreme Court decision on the validity of the tariffs imposed by an emergency act. And there’s a thought that the president might back off to a great extent to allow a more certain environment that would help GDP growth that would certainly play well into the midterm elections. Does this really impact how you’re thinking about our global position? 

Maxine Cuffe 25:04 

Well, it’s interesting because I think most companies have actually managed through these tariffs very well. And it isn’t really just back to last April. I think companies have been thinking for a long time about being too tied to China, being vulnerable, their supply chains. We saw what happened during COVID when a lot of companies couldn’t get the components that they needed. So, companies have been working to diversify supply chains. They’ve been localizing, so putting their factories in the country where they sell so that coming into this year, they were in a better position than probably they were a few years ago; even still, that level of tariff that was first announced really did spook people. But now that it’s come down to something that’s a little bit more manageable, and Halie and I talk to a lot of companies and hear what they’re saying about tariffs, and most companies are saying, “Well, we can deal with this. We can shift around a little bit. We can put a little bit of the price through to the consumer. Maybe we’ll eat it a little bit in our margins, but we’re being more productive anyway, so margins are kind of staying the same.” So, it just hasn’t had the impact that we would’ve expected overall on corporate profits, and it hasn’t had the impact overall on inflation either. So, a little bit flowed through to durable goods, particular categories that really come from overseas, a little bit to food, but it really hasn’t impacted that much. So, no matter what happens with the Supreme Court decision, I think companies have kind of learned how to manage this. And then the one point that I would say is that all of this tariff money that has come in, and it is quite substantial, we’re looking at $260 billion a year is kind of the rolling figure right now, is really helping to offset some of the “One, Big, Beautiful Bill” tax policies. So that’s kind of helped settle down maybe the bond market concerns, other concerns around our debt levels is that we’re actually bringing in revenue from these tariffs. So that’s going to play into this as well, whether Trump wants to pull back on tariffs that they’re actually making the country a lot of money. 

Hank Smith 27:04 

And to your point, some recent studies have come out showing that tariffs don’t have the impact on inflation that most of us have always thought they would, but they do have an impact on economic growth, a negative impact. And so again, if you believe that this administration needs positive economic momentum for any chance in the midterm elections, it would argue for a much more calm tariff environment compared to the chaotic environment we had… 

Maxine Cuffe 27:50 

Uncertainty. 

Hank Smith 27:51 

…certainty replacing uncertainty. 

Maxine Cuffe 27:53 

I think a lot of, as you said, the C-suite has not known quite what to do with this, but as time has gone on, things have become a little bit more clear, and you’re right, that’s probably dented some of the economic data that we’ve seen this year, just this uncertainty. Who wants to go forward with a huge investment project when they don’t know whether they can get the components and what price they’re going to pay and what the tariffs are going to be? So just the certainty alone will bring just more stability to corporate investments going forward. 

Hank Smith 28:25 

So much has been made of AI, the capital spending behind AI, some of the spending circular in nature, and then also the potential productivity of AI. Halie, where is our view on the benefits and the risks of AI, and where do you think we are in this very powerful build-out? 

Halie O’Shea 29:01 

Yeah, it’s a powerful build-out and clearly very exciting. We look at what some of the large tech companies are spending behind to build out infrastructure. It’s estimated the hyperscalers, so those are the companies, the large tech companies involved in cloud services, are expected to spend $450 billion this year. It’s a staggering amount of money. However, and then if you look at sort of other companies within AI, that number goes higher. However, when we look at research, the amount of spending relative to our huge GDP is not so far out of line with prior technology transitions. So, whether it’s estimates out there, 1 to 2% of GDP spending on AI infrastructure relative to the telecom build out, railroad, electricity, which according to some of the research we read has varied kind of 1 to 5% over time in terms of percent of GDP. So those are some of the concerns. However, when we also look at the opportunities related to AI, this is an early-stage technology. We think that the opportunities in terms of productivity will be quite vast. A recent report from Goldman Sachs anticipates 8% to 15% uplift of productivity from AI over time. So, these are a lot of estimates and a lot of research has gone into this, but when we start to really look at what the applications could be, it’s really far reaching and vast. So, think about areas like drug discovery, coding, for instance, helping companies with increasing personalization of services, fraud detection. There are just so many opportunities. So, we think over time that the opportunities for companies to generate measurable revenue growth and cost savings from AI are very real. And anytime you do see these early-stage technologies, there will be sort of that one step forward, one step backward. However, when we also look at the companies that are investing, these are companies with incredible cash flow. A lot of them are investing based on cash rather than borrowing. And valuations, while stretched, are not at the levels that we saw, for instance, in the late ’90s and the dot-com boom. So overall, we’re watching. We have investments in companies that fit our quality criteria. We’re excited about it, but we’re always going to look at that yet manage risk. 

Maxine Cuffe 31:39 

I think it’s fair to say it, too, that of the 500 S&P companies, most are now tinkering, at least with AI, putting in new projects, thinking about how to use this. And we saw a report the other day talking about 60% of the S&P 500 companies are saying they’re already seeing efficiency gains from the AI projects that they’ve implemented. So again, that’s super encouraging. 

Hank Smith 32:03 

And productivity growth is key to economic growth. The two components are labor growth and productivity growth. Well, if we have a soft labor market, and we’re not bringing in the immigrants that we have in previous generations, we’re going to need a big boost from productivity growth to sustain an average or even slightly above average GDP growth. So, it is a very important area for us to, and for everyone, to stay focused on. As we say at every year-ahead outlook, that investors should always be prepared for a correction. A correction is defined as a 10 to 15% decline from the previous peak, a bear market, 20% or more. Corrections are a normal process of any bull market. They happen annually. They’re actually very healthy for sustaining the longevity of a bull market because they tend to flush out excesses and speculation and overexuberance that, again, allows for a longer bull market. And so, 2026 should be no exception in terms of giving our clients that kind of heads up. But at the same time, we have great confidence that when a correction happens, it will be a tremendous buying opportunity because the risks of a bear market are very small because the risks of a recession over the next 12 to 15 months are very small. You can never rule anything out. You could always have an external shock. It’s a waste of time talking about what that could be, but they’re very small, and bear markets almost always occur in anticipation of the next recession. I mentioned the risks of the fact that we’re in, seasonality, the worst performing year of a four-year presidential cycle. I think, John, we were introduced to a risk from the bond market back in April when it looked like, for the better part of 10 or 12 days, the so- called bond vigilantes came out and drove interest rates up. We don’t see that occurring in ‘26, but you can never rule anything out, particularly with the amount of debt outstanding and deficits, but it’s not just a US issue. It’s a global issue. But overall, it’s quite a sanguine outlook. And I think, for the first time in a handful of years or at least three years, investors will be rewarded for diversification. Thank you so much to this terrific panel for joining me today and sharing your insights with our listeners. It’s been great to have you. And to our listeners, thank you for listening to this episode of “Speaking of Quality.” Be sure to stay tuned this season as we bring you into the conversation with leaders from across business, nonprofit and academia – with a few surprise guests as well. I look forward to sharing their unique stories with you. In the meantime, please send suggestions or questions for me or the Haverford Trust team to podcast@haverfordquality.com. And don’t forget to subscribe, rate, review and share this podcast. Until next time, I’m Hank Smith. Stay bullish. 

Maxine Cuffe 36:21 

Thank you for listening to this episode of “Speaking of Quality” with Hank Smith. To hear future episodes of “Speaking of Quality,” please subscribe on Apple Podcasts, Spotify, Google Podcasts or wherever you listen to podcasts. To learn more about The Haverford Trust Company, please visit https://haverfordquality.com/. This podcast is provided as general commentary and market overview, and should not be relied upon as research, a forecast or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt an investment strategy. Any opinions expressed are as of the date this podcast was recorded and may change at any time and are the opinions of that commentator, not Haverford. Any opinion or information provided are believed by Haverford to be reliable at the time of this podcast’s recording, but are not necessarily all-inclusive or guaranteed for accuracy. Before making any financial decisions, please consult with an investment professional.