I’ve been a trader and investor for 44 years. I left Wall Street long ago—-once I understood that their obsolete advice is designed to profit them, not you.
Today, my firm manages around $4 billion in ETFs, and I don’t answer to anybody. I tell the truth because trying to fool investors doesn’t help them, or me.
In Daily H.E.A.T. , I show you how to Hedge against disaster, find your Edge, exploit Asymmetric opportunities, and ride major Themes before Wall Street catches on.
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Table of Contents
H.E.A.T.
Looking Ahead to 2026: The Broadening Bull and the Three Landmines
If 2023–2025 was the “Mag 7 + AI at any price” market, 2026 is setting up very differently.
Under the surface, we’ve quietly moved into a regime where:
retail investors have never been richer or more engaged,
leadership is finally broadening beyond mega‑cap tech, and
fiscal + monetary policy are both tilting easier into a late‑cycle economy.
That’s a strange cocktail. It’s bullish for risk assets in the near term… and it plants a few landmines for later in the year.
Here’s how I’d frame 2026 using Citadel’s 5‑part lens: Retail, Rotation, Profits, Policy, Positioning.
1. Retail: From Sideshow to Structural Force
Households are coming into 2026 with record net worth and record cash.
Even the bottom 50% of households now hold >$4T in wealth, and their wealth has grown faster than the top cohorts since 2010.
Equity and fund ownership has ramped across every wealth and age bucket, with under‑40s increasing their exposure several‑fold since 2020.
Despite that, cash as a % of financial assets is still near the 98th percentile historically – meaning there’s plenty of dry powder left if confidence stays high.
You can see it in the tape: retail has been net buyers of calls almost every week this year, and they show up aggressively on every dip. Citadel literally sees the “buy‑the‑dip” flow in their order book day after day.
Implication for 2026: every air pocket in the indices runs head‑first into a structurally bigger retail wallet. That doesn’t prevent corrections, but it does mean the marginal buyer is often a household, not a risk‑parity fund.
2. Rotation: From Seven Names to Seven Sectors
The market isn’t just “up” – it’s widening.
Small caps have broken out, equal‑weight S&P has pushed to new highs, and transports / industrials / financials have quietly started to outrun the glamour names.
Yet the top‑10 S&P names still soak up ~40¢ of every $1 in the index. There’s a lot of room for the “other 493” to catch up.
On the commodity side, gold, silver, copper and even platinum have tagged new cycle highs while energy and industrials still sit at depressed index weights.
Layer that on top of the AI‑capex unwind we’ve been talking about — $ORCL, $AVGO, GPU clouds, DC REITs getting repriced — and the message is pretty clear:
2026 is set up to be a broadening bull, not another year where only seven tickers matter.
This is exactly the backdrop where beaten‑up “dead money” software, cyclicals, and real‑asset names can quietly become 2026’s winners.
3. Profits: Earnings Diffusion, Not Earnings Cliff
The bear story says: “We’re late cycle, earnings are peaking, recession around the corner.”
The data says something different:
The S&P is putting up ~13% EPS growth YoY, with the AI capex boom acting like the biggest tech‑investment wave since the dot‑com buildout.
Annual tech capex has blown through $700B+, and we’re finally seeing productivity improvements bleed into the “other 493,” not just the Mag 7.
At the same time, the labor market is cooling, not collapsing. Payrolls are choppy, unemployment has drifted up into the mid‑4s, but layoffs are still historically low and retail sales control group is running ahead of expectations. That’s classic “growth slowing from hot to warm,” not a full‑on stall.
My read: earnings risk is sector‑specific (levered AI infra, over‑earners in data centers, etc.), not systemic. Profit growth is broadening enough to support a grind‑up market as long as policy doesn’t slam the brakes.
4. Policy: From Headwind to Sugar High
Here’s where it gets interesting – and eventually dangerous.
On fiscal:
The big “One Big Beautiful Bill” flips the fiscal impulse from a drag in late‑’25 to a tailwind in early ’26 (Citadel pegs it at roughly +0.5% to +0.9% of GDP).
A chunk of that is retroactive personal tax cuts – ~$80B in refunds hitting households in Q1. That’s real cash in pockets… and in brokerage accounts.
On monetary:
We’ve already had ~175 bps of rate cuts, and the lagged impact of easier policy keeps feeding through into easier financial conditions through ’26.
The Fed is openly more worried about the labor market than inflation right now, which means they’re biased to stay easy unless the data forces their hand.
Net‑net, Q1 starts with looser policy, more money for households, and a Fed that would prefer not to fight growth.
The risk, of course, is that we overshoot: you can’t layer looser policy on top of already‑healthy demand and trillion‑dollar deficits forever without rekindling an inflation scare in the back half of ’26. If that happens, the “problem child” won’t be equities – it’ll be bonds and the dollar.
5. Positioning: Nobody’s All‑In (Yet)
Despite the big 2025 run, institutional exposure is not maxed out.
Hedge‑fund and real‑money positioning is still only part‑way back to prior risk levels; a lot of people missed chunks of the AI rally and then got spooked by the AI burnout phase.
At the same time, options notional is enormous – over $7T rolling through this December triple‑witch – which means positioning around big expiries can still produce sharp, mechanical moves in the indices.
Combine that with retail’s call‑buying streak and the usual “January effect” (historically positive seasonality into early Q1), and you have a setup where:
The path can be choppy and headline‑driven…
…but there’s plenty of fuel for dips to get bought and for laggards to mean‑revert higher once the calendar resets and PMs are back to 0–0.
One More Quiet 2026 Theme: AI’s Molecule Problem
Separate from the Citadel work, TD Cowen’s latest gas deck makes an important point: AI runs on molecules, not magic. They see U.S. data‑center build‑out adding 6+ Bcf/d of incremental gas demand by 2030, on top of LNG and industrial use, with Henry Hub able to sit above $4 for years and around $5 in 2026. At those prices, some gas E&Ps earn the majority of today’s enterprise value back in free cash flow by 2030.
That’s the “physical AI” trade we’ve been circling: even if the market flips from worshipping $NVDA to yawning at GPUs, the pipes, plants, and molecules that feed those data centers still get paid.
How I’d Frame 2026
Base case: a broadening bull market – more sectors participating, more retail money, more earnings contributors – supported by a fiscal/monetary combo that’s still net‑stimulative.
Upside surprise: institutions finally chase; laggards in software, cyclicals, and real assets rip as the market shifts from “AI hardware” to “AI software + plumbing.”
Main landmines: a late‑year inflation scare if stimulus + growth run too hot; a funding accident in the “AI‑capex complex” (data‑center credit, over‑levered GPU clouds); or a policy mistake if the new Fed leadership tries to prove they’re tougher than the market expects.
In other words, 2026 doesn’t look like the year the music stops. It looks more like the year the party moves to a different room – from seven crowded tickers to the rest of the market – with a few obvious spots on the floor you don’t want to step on.
News vs. Noise: What’s Moving Markets Today
Best CPI in Years”… or the Fed Ringing a Bell?
The tape loved yesterday’s CPI print. The nuance behind it? Way messier.
On the surface, the numbers were everything the market wanted to see:
Headline CPI: +2.7% YoY vs 3.1% expected
Core CPI: +2.6% YoY vs 3.0% expected – the slowest since early 2021
October + November core combined: +0.159% total, which annualizes to ~1.9%
That’s disinflation nirvana… with one giant asterisk.
Because of the shutdown, BLS literally didn’t collect October data. They carried forward September prices into October and then compared November to that patched‑in October. CPI is always noisy, but this report was borderline synthetic – especially the flat reading on Owners’ Equivalent Rent everyone’s side‑eyeing.
The irony:
When jobs data looks soft, people say “ignore it, it’s distorted.”
When CPI looks amazing, algos and humans chase it like gospel.
Important tell:
Fed funds futures barely moved. The market was already pricing ~60 bps of cuts in 2026 before the print… and it’s still ~60 bps after. So yes, the CPI headline juiced equities for a day, but it did not extend the easing cycle. We’re already 3 cuts in, halfway through the 12–18 month “insurance” window that started when Bessent basically said Powell is a lame duck.
The “easier for longer” bet is closer to the end than the beginning.
The Real Story: QE Is Back, Quietly
The Fed did something last week most people didn’t really process:
It restarted QE and refuses to call it QE.
They’re buying $40B/month in T‑bills to “ease money‑market stress” and “manage reserves.”
This is on top of the reinvestment flows from MBS runoff.
That’s not “normal plumbing.” That’s balance‑sheet expansion in an economy that:
Is still growing ~3%+ GDP
Has CPI in the high 2s, not a deflation scare
Is not in a banking panic or a Covid lockdown
Translation:
The Fed has pulled out its bazooka without a crisis – because rate cuts alone aren’t doing much, and the “transmission channel” is getting weaker.
If you want one market tell that summarizes that regime shift, it’s simple:
If $NVDA makes new highs again → green light for risk, AI capex still the growth engine.
If $NVDA rolls and can’t reclaim the highs → yellow light, the capex boom has a financing problem.
Right now, it’s stuck below the top. Caution, not panic.
Jobs vs. Prices: What the Anxiety Shifts To Next
Inflation is annoying. Job loss is terrifying.
The public narrative is still “affordability crisis,” but under the surface, jobs are quietly becoming the real risk:
Unemployment: up to 4.6%, a 4‑year high.
Underemployment (U‑6) and people stuck in part‑time work have jumped.
Long‑term unemployed (>6 months) are creeping higher.
Powell himself says the payroll data since April is overstating jobs – he thinks the reality is closer to ~20k job losses per month, not +40k gains.
Meanwhile:
Wage growth is down to ~3.5% YoY (lowest since pre‑Covid, ex distortions).
CEOs are optimistic on growth, pessimistic on hiring – tariffs, AI, and cost pressure make “cut headcount, don’t raise prices” the easy button.
So you get this weird mix:
GDP ~3%
Inflation drifting toward 2–3%
Labor data slowly fraying
That’s exactly the backdrop where stagflation risk begins – not the 1970s version, but a modern one: meh growth, sticky 2.5–3% inflation, and political pressure to juice demand into an already strained supply side.
Japan Rings a Smaller Bell: BOJ and the End of Free Yen
Quiet but important: the BOJ just hiked to 0.75%, a 30‑year high.
Why it matters:
For three decades, the yen carry trade funded global risk: borrow at zero in Japan, buy U.S. Treasuries, credit, equities, crypto, whatever.
As Japanese rates grind higher over the next 2–3 years, two things happen:
Carry becomes less attractive → leverage comes out of global risk books.
Japanese pensions/insurers may repatriate capital → sell some U.S./European bonds → upward pressure on global yields.
It won’t blow up the world tomorrow – the BOJ is moving glacially – but as we move through 2026, Japan quietly becomes a second source of higher real yields, on top of U.S. deficits and fading Fed power.
That’s another reason why QE is back: the Fed sees the walls closing in.
Quad Witching: Real Volatility or Just Options Noise?
Finally, today’s “circled on the calendar” item: record options expiry.
$7.1T notional expires Friday
~$5T tied to the $SPX
Index options + index futures + single‑stock options + futures options = full quadruple witching
What that means:
Expect big volumes and jumpy intraday moves, especially near big strikes (think S&P 6800).
A lot of this is mechanical hedging flow – dealers adjusting gamma, big players rolling positions.
In some names, it can actually dampen volatility as prices “pin” at heavy strikes where options expire at‑the‑money.
So:
Short‑term: “noise” – the tape can look wild around the open/close for purely mechanical reasons.
Medium‑term: “news” only if:**
The flows shove the index through key levels and trigger CTAs/vol‑target de‑risking into an already stressed AI/CapEx complex.
Takeaways
CPI “beat” is real-ish, but noisy. It confirms the disinflation trend, but it didn’t extend the easing cycle. The market still sees ~60 bps of cuts left before Powell is replaced. We’re late‑innings on the “insurance cut” run, not early.
QE is back, and that’s the real story. The Fed is quietly buying T‑bills in an economy that isn’t in crisis – an admission that traditional tools aren’t delivering the juice they used to. The center of gravity is shifting to fiscal policy + AI capex as the primary demand engines.
Jobs, not prices, are the next political and market anxiety. Inflation is drifting toward “good enough”; unemployment and wage softness are headed the wrong way. That’s exactly the environment where politicians push harder on stimulus and where businesses lean even harder into AI to cut costs.
Global liquidity is tightening at the edges. BOJ creeping off zero and potential Japanese repatriation mean higher global term premiums over the next few years – just as the U.S. is funding structurally bigger deficits.
Positioning angle:
Respect the AI/CapEx unwind—funding conditions and politics are changing the rules of that trade.
Stay biased to self‑funders, real cash flows, and “physical AI” plays (power, gas, grid) over levered growth fantasies.
Treat today’s quad‑witch volatility as mechanics, unless it helps push the indices through key levels that trigger systematic selling.
The Fed just rang the bell on a new regime: less central‑bank omnipotence, more fiscal excess, more politics, and a lot more focus on who actually earns their cost of capital. From here, “news vs. noise” is less about the next 25 bps… and more about who can survive in a world where money isn’t free and the Fed can’t save everyone.
A Stock I’m Watching
Today’s stock is Salesforce (CRM)…..
CRM is on my “watch, don’t dismiss” list because it sits in the messy, high-friction part of enterprise AI that actually monetizes: customer data + workflows + compliance. The bull case isn’t that Salesforce invents the best model—it’s that it owns the customer system-of-record and can embed AI where budgets already exist (sales/service productivity, marketing optimization, agent assist, automated case resolution), with Data Cloud acting as the unifier that makes AI outputs trusted and actionable.
If that flywheel works, you get a rare combo for large-cap software: re-accelerating consumption (more queries, more automations, more “AI agent” activity) and operating leverage, because the platform cost base doesn’t scale linearly with usage. The bear case is equally clean: AI becomes a feature, not a product; seat growth stays sluggish; and Microsoft/HubSpot/vertical CRMs pressure pricing while enterprises stretch refresh cycles—leaving CRM stuck as a “great business, capped upside” stock.
What I’m watching quarter to quarter is whether Data Cloud + AI features show up in measurable signals (net new ARR contribution, attach rates, expansion/NDR stabilization, cRPO/RPO durability, and deal cycle times), plus whether margin discipline and buybacks can keep EPS compounding if revenue remains mid-single-digit. If those leading indicators inflect, CRM can surprise on the upside precisely because expectations have been reset lower than the quality of the installed base.
In Case You Missed It
In this engaging conversation, Jack Farley, Matthew Tuttle, and Pat Neville discuss the current state of the market, particularly focusing on the dynamics of AI investments, the role of software stocks, and the future of IPOs. They explore how AI is reshaping investment strategies and the importance of identifying themes for future growth. The discussion also touches on the potential of space investments and the search for alpha in a complex financial landscape.
How Else I Can Help You Beat Wall Street at Its Own Game
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Why Covered Call ETFs Suck-And What To Do Instead
Thursday January 15, 2-3PM EST |
Covered call ETFs are everywhere — and everyone thinks they’ve found a “safe” way to collect yield in a sideways market. |
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