As we enter 2026, investment banks are rolling out their annual “outlook” predicting exactly where the S&P 500 will finish, how many jobs will be created, and delivering their “base case” with high conviction, despite it being contingent on the world behaving exactly as expected.
At Equinum, we are skeptical of approaches that rely on precise year-end forecasts. We think about markets more like a chessboard: which forces matter most right now, how they interact, and where risk is unevenly distributed. The key is in understanding the board, so that you are always positioned at an advantage—while controlling the risk.
The Queen: AI is the Biggest Piece on the Board
Artificial Intelligence (AI) is the dominant piece on the board because it impacts everything: how investors think about productivity narratives, capex cycles, chip supply chains, how Big Tech reports earnings, and market concentration. If AI expectations move, a lot of prices move with it.
But because AI is built more on stories and expectations than on settled cash flows, it is also the most unstable part of the market. It’s where sentiment can flip fastest, from “this changes the world” to “wait, what are we actually paying for here?” This makes AI both the most powerful driver, and the most fragile one.
Bubble Watch: Public and Private Markets
AI’s impact isn’t limited to public equities; it also affects private company valuations, venture capital funding, and everything “AI-enabled”. Early wins in AI attract more money, pushing valuations higher and creating a feedback loop of hype and investment. The key is not whether AI is real (spoiler: it is!), it’s whether the market is assuming everything will go perfectly.
Some industries are already being upended. The graph below illustrates software companies’ 2025 performance compared to the S&P 500.
These companies’ business models depend on getting their service into a company and adding ‘seats’ as the company grows. But with firms hiring less and becoming more efficient—and with many software systems incorporating AI and doing more themselves—some providers are being cut out.
Our Approach to Hedging
Hedging, in simple terms, is the strategy used to reduce risk and protect portfolios from potential losses or unfavorable market moves. We do not recommend hedging by trying to outsmart the next AI headline. Instead, prepare by not letting one narrative dominate the portfolio. Keep meaningful exposure to innovation, while also allocating to the more value side of the market that is not as tethered to the AI momentum trade.
Rooks: Economic Growth (Straight Lines, Big Force)
Rooks move in straight lines, and so does the math of valuations. Strong growth supports earnings, which can support valuations. Weak growth makes today’s pricing feel optimistic.
The Key 2026 Growth Lens: GDP Growth
For markets, the growth rate is a major factor. Currently, the price-to-earnings ratio of the S&P 500 is 27.88%, which is very high compared to historic rates. The only way the market can keep being priced this way is if growth keeps pace.
Most economists estimate that nominal U.S. GDP growth around 4 to 5% is a mainstream base case. TD Economics’ forecast tables show nominal GDP growth around 4.8% for 2026.
That is a helpful anchor. If nominal growth holds in that range, it is easier for earnings to stay steady. If it comes in meaningfully lower, the rook starts pushing to the other side of the board.
Our Approach to Hedging
We recommend using tools that allow participation without needing everything to go perfectly. This can include hedged equity exposure, or, in certain cases, structured approaches designed to cushion downside while still offering some upside participation—always depending on goals, time horizon, and risk tolerance.
Bishops: The Fed (Quiet Moves that Control the Board)
Bishops do not look dramatic—until you realize they were controlling the board all along. The Fed is like that bishop, and Jerome Powell is like its pope.
The big question is, how many cuts are coming in 2026, and how confident the market really is.
What The “Betting Board” Says (as of Mid-January 2026)
Polymarket, the betting market many use to predict outcomes, is mixed as to how many cuts to expect. Here are the betting odds for the number of 25 basis point cuts during calendar 2026:
- 2 cuts: 26%
- 3 cuts: 26%
- 4 cuts: 16%
- 5 cuts: 11%
The odds are lower for 0–1 cuts and for 6 or more. Fed funds futures and CME-implied probabilities show a similar picture: markets are generally pricing 1–2 cuts as the most likely, with a smaller chance of no cuts. One summary put it at roughly 32% for two cuts, 25% for one cut (much lower on PolyMarket), and about 8% for no cuts through 2026. These probabilities shift daily.
Our Approach to Hedging
When rate expectations can swing wildly, focus on quality in fixed income. The goal is for the bond allocation to do its job when it’s needed most, rather than behaving like equity with a coupon.
Knights: China and Taiwan (Quiet Until It Is Not)
Knights can seem irrelevant, until a single jump shifts the whole board.
We believe the risk of China invading Taiwan matches that risk.
Taiwan matters because it is not just geopolitical; it is supply-chain physics. Taiwan’s role in advanced semiconductors is enormous, and disruption risk would ripple far beyond tech stocks. Some estimate that as much as 80% of chips rely on Taiwanese companies or equipment for key steps of their manufacture or assembly.
Our Approach to Hedging
We don’t bet on war, but we do acknowledge that defense and security spending can rise with heightened geopolitical risks. Maintaining some exposure to aerospace and defense can help diversify that risk.
Pawns: Small Things That Can Become Queens
Pawns are easy to ignore, until they reach the other side of the board and transform into a queen. Some lesser factors worth watching for in 2026:
- Dollar reserve status: The risk of the dollar losing its reserve currency role is rising as precious metals gain attention.
- Commercial real estate: Refinancing pressures could affect regional banks, as well as the real estate and construction sectors.
- Treasury supply and deficits: This is usually quiet, but it can matter when liquidity tightens.
- Energy shocks: Can feed directly into inflation and policy decisions.
- Market concentration: When a few names drive returns, overall market breadth risk increases.
***
As 2026 begins, the board is set, the pieces are moving, and AI, geopolitics, and economic shifts will all play their parts. We do not need to predict every move. Our goal is to understand the forces at play, watch the small items that could grow into larger issues, and position ourselves thoughtfully—so that we’re alert and ready to make informed decisions when it’s our turn to move.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
