Diamond Capital Management's Market Commentary
JANUARY, 2026
Jeff C. Mantock, CFA, CMT
Vice President & Chief Investment Officer and Manager
Executive Summary:
- International stocks outperformed U.S. equities in both currency and USD terms; AI-related stocks contributed the most to the S&P 500 Index.
- The U.S. economy and financial markets should benefit from the Fed’s dovish posture in 2026.
- Big-Tech valuations and AI capex spending have investors increasingly worried about an AI bubble.
International equities outperformed the U.S. in both local-currency and USD-denominated terms, although notably most of the excess gains occurred during Q1 2025. Growth stocks also dominated with AI-related equities contributing the most to the returns for the S&P 500 Index. The S&P 500 Index has more than doubled since mid-October 2022, and we expect the bull market to continue given a combination of robust economic fundamentals, policy tailwinds, and innovation.
In our view, the odds of a near-term recession are low, and we expect the Fed will maintain its dovish posture in the face of declining inflation data and a tepid labor market. Judging from the FOMC’s “dot-plot” and Summary of Economic Projections, we expect more rate cuts in 2026 as inflation drops toward 2%. On the fiscal side, the One Big Beautiful Bill should be accretive to GDP through tax cuts and substantial incentives for corporate investment. 
Investments in artificial intelligence continue to ramp, with data center capex, hardware upgrades, and broader AI adoption expected to sustain elevated spending throughout 2026. AI adoption is accelerating across industries, and given these dynamics, S&P 500 earnings could easily grow at a mid-teens clip over the next 12 months.
What could go wrong? The degree of Big Tech spending on AI, and more importantly the significant debt being added to balance sheets, could increase fragility to external shocks. Moreover, as valuations have risen, some investors are concerned about a bubble. While excessive optimism may lead to a bubble in time, we believe it is too early in the demand cycle for those views to be investable. While downside risks remain, we do not view them as likely to materialize relative to current market pricing. 
Overall, we believe 2026 could mark the fourth year of this enduring bull market, driven by a virtuous cycle of growth, policy support, and innovation. While no forecast is certain, we believe the weight of evidence points to sustained upside.
The information and material contained herein is provided solely for general information purposes. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Certain sections of this publication contain forward-looking statements that are based on the reasonable expectations, estimates, projections, and assumptions of the authors, but forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Investment ideas and strategies presented may not be suitable for all investors. No responsibility or liability is assumed by The National Bank of Indianapolis, or its affiliates for any loss that may directly or indirectly result from use of information, commentary, or opinions in this publication by you or any other person.