Viewpoints: 2026

The debate rages on: do lofty corporate equity prices indicate an enormous speculative bubble or an emerging, tech-driven golden age? High equity valuations are naturally a basic part of the discussion, but price-to-earnings ratios (P/E ratios) alone do not fully reflect the grandeur of the expectations built into today’s stock prices. What makes market expectations remarkable is that high earnings multiples are based on profits that have already recorded extraordinary growth to the point of historically wide margins. Large multiples and remarkably wide margins together explain corporate equity values that are unprecedentedly huge in proportion to corporate operations. The United States will have to undergo a dramatic economic acceleration and an enduring, unusually rapid expansion to avoid a major disappointment for the stock market. By all appearances, stock prices will need the emergence of an AI-driven golden age if their present level is to be justified.

A number of market observers have noted that the Buffett Indicator, which is the total value of U.S. corporate equity relative to GDP, is at an exceptional record high (chart 1). For half of a century after World War II, corporate equity was at most equal to GDP and sometimes less than half of it; presently, that corporate equity is worth two-and-a-half times GDP.

Global investment in the energy transition continues to accelerate. The International Energy Agency (IEA) forecasts energy-sector investment will reach US$3.4 trillion this year, up 5%, with advanced economies and China accounting for around 70% of the total. More than US$2.2 trillion will be directed towards renewables, nuclear power, electricity grids, energy storage, low-emission fuels, electrification and energy efficiency.

Renewable power investment alone now totals around US$665 billion annually, while nuclear investment has reached US$80 billion and low-emission fuels US$30 billion.

Electric mobility remains one of the principal growth engines. Global EV sales are expected to reach 21 million vehicles this year, a 20% increase on last year. At the same time, artificial intelligence and data centres have emerged as powerful new sources of electricity demand, particularly in the United States. Investment in data centres has now overtaken global spending on oil supply, with the energy sector contributing US$105 billion of associated investment in 2025—more than the entire energy-sector investment across Africa last year.

The benefits of this investment are already becoming apparent. According to the IEA, a decade of spending on renewables, nuclear energy, electrification and energy efficiency has materially improved energy security while reducing emissions across major fuel-importing economies. In 2025 alone these investments saved China, the European Union, Japan, Korea, Southeast Asia and India an estimated US$260 billion in fossil-fuel import costs. Roughly one-third of the savings came from renewable energy, another third from energy-efficiency gains, around one-fifth from electrification and the remainder from nuclear power.

Nickel and the energy transition

The implications for critical minerals are profound. As governments pursue energy security, artificial intelligence expands, technology costs fall and net-zero policies remain in place, demand for minerals such as lithium, cobalt, nickel, copper, graphite and rare earths will continue to rise. These materials underpin batteries, electricity grids, permanent magnets and increasingly digital infrastructure.

Nickel is particularly well positioned (Figure 1). The IEA projects that global nickel demand will almost double by 2050, with clean-energy technologies accounting for 44% of total demand, compared with just 17% in 2024. Electric

For much of the past decade, the working assumption was that interest rates, having collapsed after the financial crisis, would eventually fall back once the latest disturbance had passed. Events are now overturning that assumption—and not only in the United States. Both consensus forecasters and the Federal Reserve's model for estimating the equilibrium rate across advanced economies point to the same conclusion: the real rate of interest—the price of capital after inflation is stripped out—has risen and is likely to remain higher. The question is no longer whether this shift has occurred, but why so much of the financial system is still configured for a world we have left behind.

The evidence is clearest in the United States. The driver is the demand for capital: an investment cycle in artificial intelligence, defence and the reshoring of supply chains is competing for scarce savings, capacity and labour, and that raises the return the economy has to offer to fund it. It now shows up in the forecasts. Over the past six months the Blue Chip consensus for the US policy rate one year ahead has risen by about 44 basis points, while the consensus for inflation over the same horizon has barely changed; only around ten of those basis points reflect higher expected inflation. The remaining 34 are a higher expected real rate. Forecasters are not marking up the price outlook so much as the return on capital the economy can sustain.

Last week the U.S. Department of Commerce announced that real GDP grew at a 1.5% annualized pace in 2026Q1. The media reports and commentary emphasized the weakness of the GDP Report: “U.S. Economic Growth Slows” and “Slow growth highlights economy’s fragile state”. Indeed, growth of 1.5% is below standard estimates of sustainable potential growth. But a closer look at the composition of the GDP report and the circumstances suggests that “resilience” and “strength” are better characterizations of the economy than “fragile” or “weak”.

The composition of the 1.5% suggests strength in the domestic economy. Real consumption rose at a 3.2% annualized pace, contributing 2.1 percentage points to real GDP growth, and business fixed investment rose 8.4%, contributing 1.1ppt (Chart 1). Businesses liquidated inventories at a faster pace than Q1, which subtracted 0.7% from domestic production, while the trade deficit widened by $73 billion, reflecting healthy 4.5% growth in exports and an 11.5% rise in imports, which subtracted 1.0 ppt from real GDP. Residential investment, by far the weakest sector of the economy, rose modestly following five consecutive quarters of decline. Adding it up, inflation-adjusted aggregate demand was strong: final sales to domestic private purchasers rose 3.9% annualized, and final sales to domestic purchasers that includes the decline in government purchases rose 3.1% (Chart 2).

At his news conference on July 29, 2026, Fed Chairman Warsh stated that even though the FOMC had not made any policy changes since he was piped aboard the Board, market interest rates had risen, which he interpreted as “the market” tightening monetary policy. I will argue in this commentary that the market cannot tighten for the Fed or the FOMC. Rather, perhaps counterintuitively, I will argue that an increase in market interest rates in the absence of an increase in the federal funds rate represents an easing in monetary policy.

Plotted in Chart 1 are the daily observations of the yields on the Treasury 10-year, 2-year notes along with the effective federal funds rate from May 2026 through the most current. Warsh was sworn in as Federal Board chairman on May 22, 2026. From May 22 through July 31, the yield on the 10-year Treasury note increased a net 11 basis points. The yield on the Treasury 2- year note increased a net 15 basis points. And the effective federal funds rate increased a net 1 basis point from May 22 through July 30. So, versus the federal funds rate, the yield curve steepened.

Fed Chair Warsh's term has begun with some challenges, and it's still uncertain how he intends to handle monetary policy. Forecasting plays a vital role in effective policymaking, yet Mr. Warsh has not provided his forecast and does not support maintaining the practice of delivering quarterly forecasts.

Former Fed Chairman Mr. Greenspan was highly skilled in making monetary policy decisions, with one of his key strengths being his experience as a forecaster before becoming the Fed Chair. Mr. Greenspan dedicated countless hours to analyzing economic data and financial markets to understand future economic and financial trends. Although his forecasts were not always spot-on, they were sufficiently accurate to guide monetary policy, often preemptively.

Forecasting is not easy; I know, as I did it for almost 40 years on Wall Street. Having worked at the Department of Commerce, I studied and learned the economic data, what was important for forecasting, and what was less so. Utilizing certain macro variables to set growth parameters was extremely beneficial, allowing the economy to "fill in the blanks" or composition of growth for each quarter. Every forecast needs to be cross -checked as much as possible, and it was always important to make sure what appeared to be occurring on the product side of the economy was also true on the income side (or jobs & wages, and profits).

The Bureau of Economic Analysis (BEA) once released a handbook of cyclical indicators, and one of my reliable indicators was "liquidity flows." I quickly realized that "money drives the economy." BEA no longer publishes this book, and the Fed stopped publishing data that was used to estimate liquidity flows.

One of Mr. Warsh's task force's tasks is to "evaluate new information sources and consider methodological changes to improve data gathering, with the aim of giving policymakers more accurate, relevant, contemporaneous, and, perhaps most important, actionable information on the state of our economy." This is a "nothing burger".

Today, the Fed and analysts possess ample government and private sector data, along with surveys, to make well-informed evaluations of current and future economic conditions. The Fed doesn't require additional data sources; instead, it needs to comprehend the existing data better and revive some of the crucial financial series it previously discontinued.

Mr. Warsh's critique of the Fed's economic projections is warranted. The Fed's forecasts consistently suggest that policymakers will meet their inflation mandate, if not in the upcoming year, then certainly within two years. However, policymakers should have recognized by this point that the economy and inflation operate independently of their predictions, making it crucial for them to comprehend the reasons why before policy errors happen.

The quicker Mr. Warsh "learns to forecast," the sooner he can make informed decisions regarding monetary policy.

The world is investing on an extraordinary scale. The question is whether that investment expands productive capacity or merely offsets a more constrained world.

The global economy is entering its strongest investment cycle for a generation. Artificial intelligence, the energy transition, geopolitical fragmentation and higher defence spending are all driving capital expenditure. Unlike previous cycles, however, these forces increasingly compete for the same scarce inputs: energy, grids, critical minerals, water and skilled labour.

As expected, the trade war is making a comeback and will likely be as disruptive to the economy as last year.

Trump Always Tries Again (TATA)

For the last three months or so the trade war had been bumped out of the headlines. This is partly because courts reversed some of the Administration’s original tariffs, and partly due to the all-consuming focus on the Iran War. Meanwhile, behind the scenes the Administration has being doing the prep work for “Section 301” tariffs. These take time to implement because they first require an investigation to prove “unfair” practices.

Those investigations are now bearing fruit. Not surprisingly, the Administration has defined “unfair” in the broadest way possible. Brazil has been slapped with 25% tariffs due to six kinds of practices: an unfair payments system, digital and tech policies, agricultural barriers, weak protection of intellectual property, and illegal deforestation. President Trump is has threatened a 100% tariff on countries that levy a tax on U.S. companies offering digital services, and a separate 100% tariff on generic pharmaceuticals.

Several other fights have escalated. At the start of the month, the US decided not to ratify the USMCA, forcing new negotiations. The US is also threatening 50% tariffs on, Canada due to provincial bans on US alcohol, auto tariffs and quotas, and dairy restrictions. There is a bill in Congress that would give the President the power to put a tariff on any country buying Russian energy, including the EU.

However, the biggest threat is being justified by “unfair” weak enforcement of labor laws. US trade officials have drawn list of 59 countries countries that either have weak enforcement of labor laws or trade with countries that have weak enforcement. The later means that a vast majority of US imports could be impacted by this definition of “unfair “ trade practices. The list includes Australia, Brazil, Canada, the European Union, India Japan, Mexico, Norway, Singapore, South Korea, Switzerland, and the UK. The irony here is that by this definition the US should also be on this list because it trades with many of the same countries with weak labor law enforcement.

Digging in for a long fight

Not only is there a flood of actions in the pipeline, but there are three reasons to expect long, ugly fights. First, prior agreements have left a lot of unfinished business. For example, some included promises of big investment in the US, most of which hasn’t happened. Other deals are up in air due to similarly vague, hard to achieve demands or because the original US tariff threat no longer exists.

Second, some of the Administration’s demands are simply unreasonable. Why would countries unilaterally accept tariffs based on “unfair labor” enforcement when the US has the same violations? In other instances, the US is effectively asking countries to ruin their economy by out-source key domestic industries—like Canadian autos or Taiwanese chips—to the US. It is also a violation of the balance of payments identity for US trading partners to both reduce their trade surplus and increase net capital flows. The two move up and down together as the capital flows finance the deficit.

Third, leaders in other countries are under intense popular pressure to push back against US demands. They’ve seen that acceding to US demands only encourages more demands. Surveys from Pew Research show the dramatic drop in outside views of the US (chart), As the last two columns show, the median view of the US is now worse than the median view of China! Canada has taken the lead in pushing back against the US, but Europe is close behind. The upshot is that new negotiations will likely be even more intense than last Spring.