2026 Outlook: The U.S. Is the Place to Be

In this special edition of "Breaks of the Game," Ashok Varadhan discusses the current macro trading environment, characterizing it as attractive with a Fed funds rate between 3.5% and 3.75% and a two-year rate at 3.5%. He expresses surprise at the administration's swift policy achievements and anticipates inflation will moderate and the labor market will cool in 2026. Varadhan views concerns about Fed leadership changes as "overblown" and expects the dollar to stop depreciating, with the U.S. remaining a key investment destination. He believes the AI story in 2026 will shift from supply to consumption, focusing on how companies adopt AI for efficiency. While acknowledging potential pressure on corporate credit markets due to AI CapEx, he sees market forces as a self-correcting mechanism. Varadhan does not identify any frothy areas in the market, highlighting the resilience of broad, deep, and liquid U.S. markets. He expects "affordability" to be a major policy theme in 2026 and advises against recency bias, emphasizing that current market conditions are often temporary.