Buy the Dip in 2026? AI, Credit and Fed Rate Cut Outlook

TL;DR

Markets are rallying on hopes for a December Fed decision even as skepticism grows around AI spending, private credit and inflation. Katrina Dudley of Franklin Templeton calls the recent volatility a buying opportunity, noting 68% of investors are bearish and third-quarter earnings grew 15% versus the 6.5% expected.

Transcript

♪ >> WE DON'T THINK AI IS A BUBBLE BUT WE WANT TO EXPAND OUR INVESTMENT UNIVERSE OF HOW TO CAPITALIZE ON THAT TECHNOLOGY. >> WE SHOULD STAY RISK ON THAT ALSO THINKING ABOUT WHICH OTHER PARTS OF THE MARKET WE COULD BE INTO. >> THESE THINGS HAPPEN IN A HYPER GROWTH. >> WE JUST NEED VOLATILITY TO COME DOWN A LITTLE BIT. >> THE NARRATIVES WILL GET EVEN... Read More

Key Insights

• Three concerns weigh on investors heading into 2026: AI spending, private credit and the Federal Reserve, described as the 'three bears' the market came to realize last week.
• 68% of investors sit in a bearish momentum camp, which Franklin Templeton's Katrina Dudley frames as a 'wall of skepticism' rather than a wall of worry, creating a contrarian buying opportunity.
• Third-quarter earnings growth came in at 15% against an expected 6.5%, evidence that companies are 'really starting to earn' and supporting an optimistic market outlook.
• The AI narrative is shifting from identifying use cases to putting them into production and calculating returns, with firms now measuring time-saved and cost-savings from tools like AI summarization.
• A December Fed rate cut looks unlikely because the government shutdown delayed key data, especially jobs figures, making the Fed cautious about cutting further before that data arrives.
• Inflation remaining uncontained is the central factor limiting the Fed's ability to cut rates, leaving the Fed 'hamstrung' if inflation does not come down.
• Tariff pain has been delayed because many companies stocked up on inventory to avoid tariffs, so consumers may face less sticker shock now but the full benefit or impact is not yet calculated.
• A US 28-point plan to end the Russia-Ukraine war is in focus, pushing crude oil lower, with NYMEX crude down 3.4% last week on the peace negotiations.

Questions & Answers

Q: Is now a good time to buy the dip in the stock market?

Katrina Dudley of Franklin Templeton views recent market volatility as a chance to reassess portfolios, saying strategic reallocations can be especially rewarding because volatility often precedes times of renewed growth. She notes 68% of investors are in a bearish momentum camp, framing this 'wall of skepticism' as a contrarian buying opportunity in select areas rather than a signal to sell.

Q: What are the three main concerns weighing on investors right now?

The three concerns, described as the 'three bears' the market came to realize last week, are AI spending, private credit and the Federal Reserve. Investors question how AI will be funded and worry about debt leverage and private credit, while the Fed's path on rate cuts remains uncertain. These three factors together are weighing on investors' minds heading into 2026.

Q: How strong were third-quarter corporate earnings?

Third-quarter earnings growth came in at 15%, far above the 6.5% expectation heading into the quarter. Dudley calls earnings the real arbiter of how markets work and says companies are 'really starting to earn.' She points to the breadth of AI spending and cites her own firm investing significant amounts into AI from a pristine balance sheet without using leverage.

Q: Why is a December Fed rate cut looking unlikely?

The market is signaling December is not likely to see a cut because the Fed is data-dependent and the government shutdown delayed key data, with the most important jobs data coming after the meeting. Entering December with data not available, the Fed is cautious about cutting too much more and is likely to push potential cuts into next year, increasing the chance of a small cut in 2026.

Q: How does inflation affect the Fed's ability to cut rates?

Inflation continues to not be contained, which is the central part of the equation the Fed is focused on. Dudley warns investors need to be cautious because if inflation does not come down, the economy is left with a higher basis, and the Fed's ability to cut rates becomes, in her words, 'really hamstrung.' Inflation remains the key constraint on the pace of future easing.

Q: How important is the consumer and holiday spending for the 2026 market outlook?

Dudley says the consumer is crucial, and three earnings reports this week plus the Christmas and Black Friday shopping season will give a read on where spending stands. A baseline consumer that keeps spending is needed. She adds that because Black Friday puts people on the ground, the data will come much quicker this time, providing a real temperature check on the consumer.

Q: How is the AI trade evolving beyond hype?

The AI narrative is moving from identifying use cases, which started at around 400 and narrowed down, into a phase of getting those use cases into production and calculating returns. Firms are now starting to measure time saved, such as hours an executive saves using AI summarization tools, along with associated cost savings. Dudley argues this measurable ROI will be the next underpinning of a bullish AI narrative.

Q: What is happening with the Russia-Ukraine peace negotiations and oil prices?

The US is pushing a 28-point plan to end the Russia-Ukraine war, which is very much in focus. On the transcript, getting Europeans and Ukrainians to agree is called a mammoth task, described as a worst-fear scenario where a US-Russia talk is shoved upon Ukraine. The negotiations sent crude lower, with NYMEX crude trading down 3.4% last week on the peace talks.

Summary & Key Takeaways

• Stocks are trying to rally for a second straight session, building on Friday's gains, with S&P and Nasdaq futures higher amid hopes tied to the December Fed meeting. Oil traded lower on Russia-Ukraine peace negotiations, and investors await delayed government data including retail sales and inflation.

• Katrina Dudley of Franklin Templeton views recent volatility as a chance to reassess and reallocate portfolios, arguing volatility often precedes renewed growth. With 68% of investors bearish, she sees a 'wall of skepticism' around AI, private credit and the Fed that presents a buying opportunity.

• The consumer, holiday spending and Black Friday data will be a real temperature check heading into 2026, while the Fed is expected to stay cautious in December given delayed data and uncontained inflation. Dudley favors staying long the market and expects a continued broadening of market breadth.