Let me start with the obvious. I have no special ability to forecast what the markets will do in 2026. That said, I think examining the factors behind 2025’s double-digit gains is instructive as a starting point for thinking about next year. The way I see it, there are three themes behind this year’s strong market. The first and obvious one is excitement around artificial intelligence (AI) including the promise of improved productivity and advances from the technology and the capex cycle around it. Is it a bubble? I will offer some thoughts on this below. Second, exogenous factors influencing the market, namely geopolitical conflict, has veered in the direction of resolution, rather than conflagration. Third, tariff-related disruption has proven so-far to be much less bad than some initially feared. Investors repurchased beaten-down consumer names at the end of November, broadening the overall rally away from just the mega-cap hyperscalers
Never bet against the U.S. consumer
I have become more optimistic about the consumer and consumer spending as the Holiday shopping season begins. ln my last writing, I discussed weakness in the restaurant industry performance, which some investors saw as a signal the consumer was cracking under economic pressure. Subsequently, retailer reports have exhibited surprising resilience. I think we can now say that the tariff impact has been much lower than feared. I credit this largely to the retailer and consumer products company management teams which worked tirelessly to mitigate tariff costs. But what do we make of the divergent trends in restaurants vs. retailers? My interpretation is that consumers are being “choiceful” to borrow Walmart CEO Doug McMillon’s term. Included in these “choices” has apparently been fewer trips to restaurants. This seems logical, as it is an obvious place to save money, especially considering cumulative menu price increases of 30%-40% foisted on customers since Covid19. Will this change in 2026? Some contrarians are looking at the beaten down restaurant space with hope around lower taxes, reduced interest rates, potential stimulus and easier comparisons. I’m going to stay choiceful.
A trip to China helped to change my thinking on AI
Last month I traveled to China, visiting Shanghai, Hong Kong and Shenzhen. My excuse was to attend the analyst day for YUM China (YUMC), the operator of KFC and Pizza Hut and largest restaurant company in China. However, aside from pure intellectual curiosity, my real objective was to get underneath the Western media narrative and understand what is really happening in the world’s second largest economy. I won’t share all my thoughts here but a visit to three cities with a combined population of nearly 50 million certainly hammers home the massive size of the market. Secondly, we may think of China as a manufacturing economy but it is also a consumer market. A culture of trend-driven consumerism was on display in categories from automobiles down to coffee. Generally speaking, my professional investor clients are nearly all avoiding the market. In contrast, I am seeking risk-appropriate ways to find more exposure.
A restaurant company changed my thinking on AI. If you consider a Pizza Hut or a Kentucky Fried Chicken restaurant, on the face of it, these are very analog businesses. However, management fro YUM China outlined at least five ways that it was using AI to improve and enhance its business. These included 1) managing the workforce including resume screening and training, 2) streamlining the site selection and lease review process for new locations, 3) optimizing menu offerings and pricing, 4) personalizing promotional offers to customers via its apps, and 5) optimizing complex supply chains. The takeaway is this is way beyond using ChatGPT to rewrite your emails (I’m personally insulted by the very suggestion) or to summarize material of dubious veracity for your college application essay.
I think it is fair to say that incorporating AI will be table-stakes for best-in-class companies going forward. It is analogous to how having an e-commerce strategy previously separated winners from those left behind. From an investment standpoint, this means that you should be considering AI’s impact, even if you aren’t investing directly in AI businesses. This will keep influencing stocks in 2026.
On the interminable return flight I also watched a documentary on AI called “The Thinking Game” which I recommend. We flew on a Chinese airline which permitted us to fly a more direct route over Russian airspace. However, the flight was still 14 hours leaving me with a lot of time and not much leg room. The Thinking Game tells the story of Demis Hassibis, a British-born Greek Cypriot and Chinese Singaporean mix who is the founder of DeepMind (sold to Google for $400 million) and winner of the Nobel Prize in Chemistry. This documentary reinforced to me the promise of machine learning and AI to change the future, not just enhance profits for companies. If you’re thinking it is all hype or a gimmick you should watch this film.
Travel Update
On Monday I will fly to Munich, Germany (near my birthplace on a U.S. Army base in Nuremberg) where I will be attending ISPO a retail and sports industry trade show. At the event, I will host a roundtable discussion on the hottest trends in sports retail for 2026 at Sports Tech Nation.
I’ll round out the 2025 travel with an end of December trip with my family to Naples, Florida to visit my parents. January already has multiple trips lined up so it just never ends! Happy holidays and best wishes for the end of the year!
*This is not a recommendation. Please consult your advisor for investment advice tailored to your risk tolerance and investment profile.
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The author of this letter and accounts managed by Quo Vadis Capital have a long position in shares of MTCH.
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