Hello readers,

One thing we’ve learned over the years is that you shouldn’t hold a strong view unless you can articulate the (opposing) view as well (if not better) than the people who actually believe the other side.

“I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.”

-Charlie Munger (RIP)

With that in mind, today’s report covers several “bullish narratives” for 2026.

What do we think the bulls believe? And why do we disagree with them?

Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment advice.

Let’s go.

Earnings Growth & Margins

Analysts have been steadily revising forward Earnings Per Share higher — creating optimism for equity bulls into ‘26. The Street is essentially pricing in a world where companies become meaningfully more profitable over the next 12-24 months.

We think the key assumptions embedded in these forecasts include:

• Productivity gains (primarily driven by AI)

• Full expensing of capital expenditures (lower taxes, higher EPS)

• Stabilizing labor costs (cooling labor market shifts power to employers)

• Lower interest expense (rate cuts)

As such, we think the Street is essentially pricing in growing profit margins.

But what about revenues?

Revenues are still growing. But the pace has clearly decelerated as the post-pandemic surge fades. With top-line growth normalizing, analysts are relying heavily on margin expansion — not stronger sales — to justify higher earnings. That makes the current EPS trajectory more sensitive to any demand slowdown.

Now. Companies can still maintain strong EPS during a revenue slowdown, driven by operating leverage and productivity gains.

But we’re pricing in a goldilocks scenario in our opinion. If long-end rates continue to rise. If liquidity tightens (it is). If demand softens. Or if the AI productivity narrative turns out to be overstated.

Then the narrative will shift pretty quickly, in our opinion. However, that’s not the central theme we want to convey in this section.

The key point that I really want to convey is this:

We think equity valuations (especially MAG 7) are primarily driven by global capital flows. Not fundamentals.

Nearly $5 trillion has come into the U.S. over the last five years, a 51% increase in foreign capital into U.S. markets. As such, we think investors should focus more on the above chart and the drivers of these capital flows. Again. Not fundamentals.

Let’s not lose sight of the forest for the trees. More on this topic later in the report.