He dates the equity bear market to the summer of 2024, when cyclical and high beta stocks began to underperform defensives, and says “capitulation day” in April this year marked the turning point. Wilson describes a proprietary capitulation index of sentiment, positioning and volatility that reached levels seen only a handful of times in the past two decades. That episode, he says, “was the end of a bear market and the beginning of a new economic cycle”.
On policy, Wilson situates the new cycle in what he calls an era of fiscal dominance, with “too much debt, too many deficits” building over decades rather than under any single administration. He argues that the second Trump administration has sequenced policy in two phases, initially tightening immigration restrictions, DOGE-related enforcement and higher tariffs, before pivoting towards more growth-friendly measures. “I liken Trump this time to be like the new CEO. He comes in, he kitchen sinks the quarter, cleans it out, then puts his policies in place,” says Wilson.
For Wilson, the Federal Reserve (Fed) sits at the centre of the new regime. He contends that the central bank’s real priority is not its formal dual mandate of inflation and employment. “I believe that the dual mandate of full employment and price stability is somewhat of a made-up mandate, but the real mandate is financial stability,” he says. “If financial stability gets in the way, they will always err on the side of stability in markets because of the debt problem.” He is critical of the Fed’s reliance on lagging labour and inflation data, calling non-farm payrolls “some of the worst” data series due to their pro-cyclical revisions.
Inflation is central to his constructive equity view, as Wilson notes that the strongest recent earnings growth came in 2021, when nominal GDP surged on the back of high inflation while the Fed kept policy loose. “Inflation is good for stocks, so as long as the Fed isn’t raising rates or tightening policy.”
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Structurally, Wilson believes the global economy has shifted out of a 35-year disinflationary environment into a more inflationary one, as tailwinds such as offshoring, cheap commodities and favourable demographics fade. He expects “hotter but shorter” cycles of roughly two years of expansion followed by one year of downturn, mapping 2020 to 2025 into this pattern and projecting a similar dynamic in the coming years. Higher and more volatile inflation, he argues, will push up the term premium embedded in long-dated US Treasuries for decades, undermining the long-term appeal of bonds. “That means stocks and other inflationary hedges are the only game in town.”
Good start to 2026
In the near term, Wilson is wary of tightening liquidity as money supply growth rolls over and funding market stresses pick up. He highlights the sharp drop in some high multiple US stocks and one of the worst two-month stretches for Bitcoin in recent years as “bleeding edge” signals of shrinking liquidity. He is watching funding spreads, bond market volatility and the term premium for signs of financial instability that could force the Fed to halt quantitative tightening and expand its balance sheet more aggressively.
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Wilson’s base case, however, is for earnings to accelerate into 2026 as early-cycle operating leverage takes hold. He sees scope for mid- to high-teens earnings growth for the S&P 500 next year, with many companies that have not grown for three years delivering 30% to 50% earnings growth as demand and pricing power normalise. He also expects artificial intelligence investment to support margins by allowing firms to grow without rehiring as aggressively as in previous cycles.
That backdrop leads him to favour classic early-cycle and laggard trades. Wilson says Morgan Stanley has upgraded US small caps to overweight for the first time since March 2021 and prefers equal-weight indices over market-cap weight, arguing that the median stock in the Russell 3000 is now emerging from a three-year earnings downturn and should post about 9% y-o-y earnings growth in the third quarter, the fastest since 2021. On sectors, he highlights financials and industrials as preferred cyclicals, with healthcare as the main defensive barbell alongside quality technology.
If the Fed is forced into an aggressive easing cycle by market stress, Wilson expects an even more pronounced catch-up by laggards. In that scenario, he says, “you will want to be rotating your portfolios as aggressively as possible into the underperforming stocks, whether it’s consumer goods, freight stocks, regional banks, or tech stocks that have not performed financially.”
Over the longer term, Wilson still anchors on high-quality US franchises such as the Nasdaq 100 and the Magnificent 7, which have outperformed global indices and even gold since 2020. But he emphasises that investors should be ready to pivot tactically in periods, such as he expects in 2026, when inflation is accelerating and the Fed is easing rather than tightening, since those windows tend to favour lower-quality cyclicals and smaller companies.
