Top of the Morning: CEO Macro Briefing Book - Year ahead

Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. This year has been a whirlwind for markets and business owners characterized by big shifts in policy, market volatility, both to the up and downside.

To help guide small business owners in the year ahead, the UBS Chief Investment Office has released its CEO Macro Briefing Book, addressing some of the most pressing questions from our business owner client segments. So with that joining us for today's conversation, glad to welcome back from the UBS Chief Investment Office, Asset Allocation Strategist, Paul Hsiao. Paul, it's great to have you back here on Top of the Morning.

Thank you for dropping by. Welcome back. My pleasure.

Thanks, Dan. Happy holidays. For the purposes of our conversation today, we are highlighting the year ahead edition of the ongoing CEO Macro Briefing Book series, which we have covered here on Top of the Morning throughout 2025 for our listeners and their clients, which is now available for everyone up on UBS.com forward slash CIO.

Though let's dive into it a bit here. How would you characterize sentiment, Paul, as we go into the holiday season? How is 2025 different from 2024?

You know, it seems like a cliche, but perhaps, you know, the phrase cautious optimism that describes the sentiment this year compared to where we were last year. Remember, this time last year, we just had an election that seemed to be on the go 50-50. So there was a lot of uncertainty in the markets.

And we did have a sentiment bump for both markets and business owners after the election last year. But this year, I would say that there's perhaps more scrutiny over the AI trade since valuations are elevated and some of the constraints, energy, adoption levels are becoming clearer for business owners and markets. So there seems to be greater pressure for a lot of these AI-related companies to continue generating those revenues and indeed for the end user to increase monetization.

We do have Q3 earnings in the rear view mirror, and revenues have been robust, particularly for Mag7 and AI-related companies, and that seems to be propelling equities higher. But there are some signs of softness in the broader macroeconomy. A lot of consumer-facing companies are describing that the lower-end consumers in particular are showing more visible signs of stress in a weaker labor market.

And to wit, a lot of these companies are seemingly reluctant to hire right now or inclined to increase layoffs, just given some of the margin pressures presented by tariffs, which are still seeping into the economy and the potential cost-saving opportunities that AI adoption may bring. So I would say it's still generally positive going into next year. But a lot of the risks, I think, are becoming clearer for a lot of business owners going into 2026.

So Paul, just reflecting on the year that has been, what has been a surprise for you here in 2025? I think one thing that is surprising is just how resilient markets and the economy has been. And a reminder, just at the top of this year, we did have a wobble at the start of this year when China had its deep-seek moment where the AI, sort of much more cheaper version of AI looked promising in China.

And then we also had that tariff shock presented by Liberation Day back in April, where a lot of forecasters thought, you know, if presented, it would definitely plunge the economy into recession. But, you know, starting December, at least, and the data from the government shutdown is still trickling through, but it does show that the U.S. economy is growing close to trend this year, which is on the upside compared to a lot of the forecast revisions following Liberation Day due to tariff inflation has also remained quite, it's still well-maintained despite tariffs seeping into the economy. And I'd say another sort of surprise this year is just, even though the U.S. economy has been quite resilient, there has been an outperformance in ex-U.S. markets.

We definitely see that in the equity market space that the U.S. has been, U.S. equity earnings have been quite robust, but it has lagged behind, you know, that of some emerging markets and Europe that has contributed to CIO's upgrade of equities in general, but particularly outside the U.S., outside in U.S. DMs. So I'd say the resilience in the U.S. and outside of the U.S. has been a definite surprise for markets this year.

Now, with respect to policy, which has been a big focus, whether from the White House or the Fed, as mentioned, has been a dominant theme here in 2025. How is policy shaping up, Paul, for 2026? Right.

So, perhaps to no one's surprise, there's definitely much more of an effective trump this year compared to where we were in 2024. And it does seem like a magnification of its first term, where we had a whirlwind of policy announcements, certainly within the first 100 days. But for our vantage point, we do see some growing constraints from the policymaking perspective.

The first is economic. Inflation has so far been contained, at least according to the latest data. Companies, especially much more exposed to tariffs, have reported price increases during the latest Q3 earnings season.

So we have yet to see that seep into CPI reports that are facing consumers right now. Energy costs from AI are also a rising risk, especially given how geopolitical risks are seemingly decreased this year. Oil is trending at its lowest point in four years.

But if energy costs due to AI increase more than expected, and there's rising geopolitical risks next year, that could also pose an inflation risk that would delay some of the rate cuts that the markets are expecting from the Federal Reserve. So that's on the economic front. There's also increasing political constraints that the White House is facing.

President Trump's approval ratings are reaching the lowest point within the second term. But I think given how 2026 is a midterm election year and there has been greater pushback from his own party, it does behoove the White House, it seems, to be much more of a listening mode to voters as well as his own party going into 2026. And finally, there's also a financial constraint.

You know, we did have that downgrade from Moody's on U.S. debt quite a while ago. But even with programs such as DOGE, spending from the White House is still quite high. There are renewed concerns over debt levels and deficits in the U.S.

And that tends to push up long-term interest rates. Added to that, we did have the Bank of Japan sort of hinting that rate cuts are incoming. So that would increase Japanese long-term yields.

And that's having an effect on U.S. longer-term yields here. All to say that there seems to be increasing pressure, sorry, increasing scrutiny over the direction of long-term interest rates here. And that would be exacerbated by higher inflation as well.

So I think going into 2026, policymakers probably have less wiggle room compared to where they have in 2025. Now, have to, of course, spend a few moments on AI. Artificial intelligence has, of course, been a big narrative in 2025.

Paul, what can business owners and investors expect next year to bring with respect to developments surrounding artificial intelligence? Right. Just a reminder, it's only been a couple of years since the introduction of Chat GPT, where a lot of folks would consider it to be the start of this AI cycle.

And relative to the beginning, I think a lot of the benchmarks of AI, I think, are becoming clear for both businesses and the market. So there is a big expectation for CapEx to continue, and that's been signaled by MagSeven firms, especially relative to the other infrastructure build-outs in history, such as railroad and telecom. The AI sort of investment relative to GDP is still somewhat modest, so we do expect that to accelerate into 2026 and for the next couple of years.

But that's certainly a benchmark that markets are watching out for. Secondly, a lot of firms are talking about AI adoption, especially given a more challenging labor market. So I think there is more pressure for the productivity benefits to be seen in a lot of more firms adopting AI in the broader economy.

The third is just the overall commodity consumption. I mentioned how the energy might be a constraint to broader AI adoption. So we're looking at whether or not the direction of energy prices, given how much AI adoption is taking into that market, but also its impact on water supplies globally and also the direction of industrial metals.

So that's something that I think should be watched out for as well. Now, before we wrap up, Paul, I want to spend a few moments on the deal-making space. 2025 has been a welcome acceleration. What can executives expect to see in 2026 when it comes to deal-making?

Yes. So in addition to just generally stronger markets this year, and after a couple of years in the doldrums, we've been wondering when M&A will pick up, and it seems that M&A has been sort of back on track this year, despite significant tariff headwinds. Keeping on the theme of AI, the focus of a lot of deals this year has been on AI.

It's probably not surprising. And a lot more mega-deals, measuring $10 billion or more. There's been 30 this year compared to 20 last year, according to some consulting reports.

Valuation alignment and still high levels of dry powder are tailwinds in the TE space, and firms are increasingly using creative structures like earn-outs to mitigate risk in sort of more cautious markets. Sentiment is improving, and we continue for that to improve into next year, helped by policy stability, especially if we get interest rates cut in that December meeting, as well as an announcement of the new Fed chair from the White House, which I think it's promised before Christmas, and continued optimism into AI investments. So with all that, I think it's important in general for businesses to make sure that their financial plan is on track, talk to financial advisors, and definitely check out the CEO macro-briefing book, UBS CIO, for greater insights into just the policy-making space and the economic environment going into 2026.

Well, Paul, thank you very much for dropping by for this year-ahead conversation, and appreciate all of your contributions here on top of the morning throughout 2025. Of course, looking forward to continuing with our conversations in 2026. Thank you very much.

And again, today we have been joined by Paul Hsiao, Asset Allocation Strategist from the UBS Chief Investment Office, highlighting the year-ahead edition of the CEO macro-briefing book series, which again is now available for you up on UBS.com forward slash CIO. For clients of UBS, please reach out to your UBS financial advisor if you would like to receive a copy of the year-ahead edition of the CEO macro-briefing book directly. From UBS Studios, I'm Dan Cassidy.

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I'm Dan Cassidy. Thank you for joining us.