16 Dec 16th December 2025

Index Movement Last Week

Let’s start this week with a little round up of the macro environment.

The Fed cut rates last week to 3.5% which is the same as Australia’s 3.6%. The market is expecting two more cuts next year too. Whilst here in Australia the concern is rate rises rather than cuts.

Inflation in the US is running at 3% which is their upper band, whilst ours is 3.9% and over our target.

The Fed has two mandates. Inflation and employment. As inflation is under control they can be more focussed on employment. But employment is good. Which is why in their statement last week Powell said they are moving to a wait and see approach and further rate cuts are not locked in for next year.

The Fed is saying the economy is strong and so is telling the market to reduce expectations of further cuts next year. We view this as positive for stocks. A strong economy, no real inflation, growing jobs, growing earnings….It does not really get any better.

Tariffs

Think back to April when Trump’s tariffs were announced. The market had a little tantrum and everyone panicked. Fast forward to today and we still haven’t seen a negative impact from them. They have added around $200billion to Federal coffers though.

Just another example of short-term concerns having no long-term impact.

The trick is to know what is short-term and what will make a long-term impact.

The AI Trade

We are seeing lots of talk presently about the unwinding of the AI trade.

Oracle (ORCL) has given up nearly all the gains it made early in the year. The company announced earnings growth of +54% over this time last year. But the market sold them down 11%. Seems harsh. It would appear the reason is the amount of spend they have forecast. They said they would increase CapEx spend from $15billion to $50billion. This puts them in a negative free cash flow position and they issued bonds to fund it at significantly higher rates.

Here is what the market is missing.

Oracle now has $523billion worth of Remaining Performance Obligations. That’s another way of saying they have $523billion worth of orders to build AI infrastructure. It just takes time to build it. And of course money. They will need to spend money upfront to later reap the revenue.

A $50billion upfront cost to secure $523billion worth of sales is a good move.

Part of the concern comes from OpenAI which is a significant portion of this RPO. The market thinks OpenAI will have trouble to meet these obligations as Google seems to be in the lead with the best AI models these days.

This view is very shortsighted.

Google has an excellent AI model that is under continual development. OpenAi has the same. These guys (and probably others) will leapfrog each other to advancement. But at this early stage, just because one happens to be ahead right now does not mean they will always be ahead.

Yes, we are seeing some weakness in the AI trade. Stocks are trading slightly off their highs. But as I said a few weeks ago, it is absolutely normal in a bull market to see a pause. In fact, the opposite, no pause would be very unusual. A pause does not mean the end.

What we are seeing is just a pause. Nothing more so don’t believe the rubbish out there. There are plenty more gains to come.

And FactSet put out this interesting analysis where those gains might come from

2026 Expected Returns

Factset took all the single stock price targets they could find from Wall Street Analysts and then put them into the S&P500 sectors. (blue bars) they then worked out the 3 year compounded return for each sector (green numbers)

Firstly lets look at the best performing sectors of the last 3 years.

Comm Services +34.4% (basically Google, Meta, Netflix…), Info Tech +32.2% (Nvidia, Apple, Microsoft) and Consumer Discretionary +23.3% (Amaxon, Tesla).

You might be looking at all those names and be thinking, hang on, they are all tech companies. You would be right. A few years ago S&P decided the tech sector was becoming too big so created two new sectors and pushed some names out to them. But to me they are still just one Tech sector.

There are two more groups that have performed well. Financials +17.1% and Industrials +16.9%.

The rest have posted very mediocre results.

Looking forward to 2026 (blue bars) the Street thinks InfoTech +19.8%, Consumer Discretionary+16.8% and Communications +15.8% will be the highest performer.

No surprise there as this is basically – Big Tech.

But something else stands out. Real Estate, Materials and Utilities are expected to produce much better returns than their previous 3 year period and could therefore see their fortunes improve in a significant way.

In the context of strong commodity prices and declining interest rates these three sectors make sense.

Risk seeking investors could do well to consider some exposure here. For the rest of us, just stick with Big Tech and make life easy.

Gold

I have to admit that I’ve never really been a gold bug. I can see the value in owning fast growing companies with innovative products, but not owning the asset that is supposed to be a hedge against inflation.

However, I’ve started to change my mind.

Over the last 40 years, Gold has averaged just +5.8% per year. However, recently things have changed and if you make the lookback period 20 years the return increases to +11.4%, and a lot of that is to do with the +44% in the last year.

Gold has even beaten Nvidia this year which is only up +26%

The reason behind this has been significant buying by central banks including China, Poland, Turkey and Brazil. It does feel to me like they are stockpiling gold to then issue a tokenised gold backed virutal currency and try to wrestle world trade away from the USD as the main means of settlement. But that feels a bit conspiracy theory like.

Whatever the reason, Gold is certainly on a tear.

So, to test my theory of whether I should own Gold or not, I did a comparison of Gold to the QQQ using maths I haven’t used since University.

What you see below is the relative returns of Gold to QQQ since 2006. When the blue line is above the zero line, Gold has outperformed QQQ over the previous 12 months.

Since 2006, human ingenuity (QQQ) has outperformed Gold by an average of +4.5% over any given 12-month period.

That is because innovation creates more value than the static demand for gold.

However, the relative returns have been choppy. The standard deviation of 25.1 means a return differential of between +20.6% and -29.6% is statistically normal.

There was a bit of a shift in 2013. Prior to then, Gold outperformed QQQ by +11.1% but since QQQ has beaten Gold by +12.9%.

Even this tells us a story. When economic conditions are stable, such as the 2010’s bull market, investors favour QQQ. From 2006 to 2012 we had the GFC and Greek Debt Crises when investors seek the safety of Gold.

Which all kind of makes sense.

The final point I will make is if you look at where we are right now, it is rare to see Gold continue to outperform one it has done so by +40% or more.

Therefore, I would expect QQQ to outperform Gold over the next 12 months and I’m sticking with my original thought of owning that over Gold.

However, what this analysis has taught me is, when that number reverses and QQQ beats Gold by 40% in any given 12 month period……I’m swapping to Gold. Could also be a nice little way of predicting a top in the stock market.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.