2026 Market Outlook: Reasons to Be ‘Uncomfortably Bullish’ on the Economy and AI with Michael Arone – Ep 095

It’s a new year, and financial uncertainty continues to be a pressing topic for investors. Questions around interest rates, inflation, tariffs, artificial intelligence, and global market stability continue to dominate headlines, leaving many retirees and pre-retirees wondering how to position their portfolios for what comes next.​

That’s why we’re incredibly grateful to have Michael Arone on the podcast today. Mike is the Managing Director and Chief Investment Strategist at State Street Investment Management and has over three decades of experience navigating market cycles. From other down periods like the dot-com bubble, the global financial crisis, and the pandemic, Mike brings a historically grounded perspective to today’s environment.​

In our conversation, Mike shares how State Street is thinking about the economic outlook for 2026, including the Federal Reserve’s policy direction, the likelihood of recession, and why he describes the current market setup as “uncomfortably bullish.” He explains why inflation may remain sticky but manageable, how tariffs have potentially been misunderstood, and what investors should realistically expect from equities after several strong years.​

You’ll also hear why Mike believes that portfolio diversification matters more than ever, how tangible assets like commodities and precious metals can help improve portfolio resilience, and why time horizon remains one of the most powerful drivers of long-term investment success.

In this podcast interview, you’ll learn:

• Why State Street expects continued economic growth and no near-term recession in 2026.
• How Federal Reserve policy, inflation trends, and labor dynamics are shaping the market outlook.
• Why fears around tariffs and inflation may be overstated.
• The role real assets and alternatives can play in boosting portfolio resilience.
• How lessons from past market crises help investors navigate future uncertainty.
• Why long-term discipline matters more than short-term market predictions.

Inspiring Quotes

• “Investors vote with their feet. They wouldn’t be using these vehicles like ETFs if they didn’t experience the benefits of them or feel the benefits of them.” – Michael Arone

• “I think what I’ve learned in my 30-plus years in this business is that the hundred-year storm happens far more frequently than a hundred years.” – Michael Arone

• “What is that pin prick for the bubble? Historically, it’s been the Fed raising rates.” – Michael Arone

Interview Resources

• State Street Investment Management
• SSIM on LinkedIn | Facebook | Instagram | YouTube | X/Twitter
• Michael Arone on LinkedIn
• Wall Street (1987)
• Lehman Brothers
• AIG
• Bear Stearns
• Countrywide
• Meta
• Oracle
• Jerome H. Powell
• Bretton Woods
• Ken Burns

[INTERVIEW]

Matthew Peck: Welcome again, everyone, to another edition of the Retirement Roadmap Podcast, brought to you by SHP Financial, and I’m your host today, Matthew Peck. I certainly want to wish everyone a very happy New Year, and in this time of year, we often talk about New Year’s resolutions, and for geeks like me and for all, usually our audience, we talk in terms of market outlook. What’s going to happen this year? What will tariffs do? And what will the Federal Reserve do? And what’s going to happen with AI? And all of those questions. And we couldn’t think of a better guest to bring on and a more special guest in our opinion, than Mike Arone. He’s a Managing Director and Chief Investment Strategist for State Street Investment Management.

He’s been in the industry for more than 31 years. So, if anyone has that amount of age in this business, then he must be a sightseer. He must be able to read the tea leaves and tell us exactly what’s going to happen, right? So, we’ll put Mike a little bit under the microscope here, all joking aside. But, Mike, thank you so much for joining the podcast. We’re more than honored to have you on the show.

Mike Arone: I’m very excited to be here, Matthew. It’s going to be a lot of fun.

Matthew Peck: And obviously, I was joking tongue in cheek, all the compliance directors, Mike is not going to guarantee what happens in the future. We all know he can’t predict the future. However, there are trends, and there are topical things, again, like I mentioned, AI, the Fed, and certainly things that we’ll get into, and we’ll be very interested to see your own individual thoughts, and then just the collective thoughts of State Street in general. But before we go to the future, let’s talk a little bit about the past. I mean, how did you climb the ladder? I mean, how did you get to where you are right now? And I have no problem starting from the beginning because it’s an amazing, accomplished career of 31 years. And so, how did it all start? And did you see yourself where you are today, even 31 years ago?

Mike Arone: I’m flattered by that in terms of this accomplished career. So, we’ll see. I’ll let all of you be the judge of that. For me, interestingly enough, and somewhat comically, I think, I saw the movie Wall Street by Oliver Stone as a teenager. And I think it was a cautionary tale, but I was like, “Wow, this is really cool.” And so, that’s kind of interesting, and that sparked my curiosity. And I went to Bentley College. It’s now Bentley University. I was a finance major. And I just always had this incredible curiosity about markets. And I remember when I broke into the business, way back when, smiling and dialing, trying to build my own kind of book of business from a financial wealth perspective or a financial advisor viewpoint.

And the gentleman who was my mentor at the time said, “Mike, every night on the news, every day in the newspaper, the stuff that goes on impacts the economy, rates, inflation, the companies that we’re looking at, et cetera.” I thought, “Wow, that’s incredible.” Well, it’s daunting, it’s overwhelming, but boy, I want to be at the heart of that. So, that really sparked my enthusiasm, my curiosity, for this industry. And really, what’s interesting too, Matthew, is in the last 30 years, 28 of them have been spent at State Street Investment Management. So, I think that’s a little unusual. And I often say, so folks will say, “Well, Mike, like why would you stay so long? Nobody does that anymore, or very few people.” And so, when I look at this, this career has provided me a few things.

And when they do studies about why people stay with their firms, it doesn’t matter about financial services or anything like that, they look at three things. They look at, is the work interesting? Is it challenging? Does it push you intellectually? That’s one. The second is, do you have the autonomy to do that work? Nobody likes to be micromanaged. Do you have the leeway to get things done? And then third is certainly, do you feel rewarded? And of course, compensation’s a part of that, but recognition, praise, promotion is also part of that. I’ve always had those three things at State Street. I took my family to London in the middle of the global financial crisis because they gave me an opportunity.

And boy, it was uncomfortable. And it was fascinating. But I’m grateful that they gave me that opportunity, and I think it made me a better person both professionally and individually to have it. And so, those are the types of things that I kind of have grabbed onto in my career.

Matthew Peck: Yeah. Well, and I certainly want to talk about 2008 because I mean, you were there at State Street for some obviously heavy headlines, things like 2008. But also, I’ll ask a little bit about the past, about the structure of the ETF or the exchange-traded fund, which State Street, I believe, was the first to kind of introduce in the late 90s or early 2000s.

Mike Arone: So, in 1993, State Street launched SPY, and it was the first US-listed ETF, and now today, so Matthew, though, what’s interesting, right, is we spawn that it came out of the 1987 market crash when portfolio insurance, and we won’t get too wonky today, was a thing, and ultimately it went a little upside down and investors couldn’t get the liquidity. They couldn’t get out of the market in the way that they had anticipated. So, a number of participants got together, market participants got together to see, “Could we create a basket of securities with liquidity that could trade throughout the day?” and ultimately kind of helped solve that problem. Now, October 1987 was the market crash. It didn’t launch until January of 1993.

So, it took a while to come up with the packaging, to overcome the regulatory kind of obstacles and bring this to market. And now today, Matthew, the ETF industry globally is approaching $20 trillion and in the US, it’s about 13 trillion. So, in some ways, State Street Investment Management was at the start. What’s the term with how the solar system was created?

Matthew Peck: Oh, Big Bang.

Mike Arone: The Big Bang of the ETF kind of ecosystem.

Matthew Peck: No, and in my opinion, obviously nerdy opinion, but like, it was absolutely game-changing. And just to pause for all of our listeners, a lot of people ask about ETFs and mutual funds, and I sometimes will tell clients that ETFs are like mutual funds 2.0 where the mutual funds, the idea of a basket of stocks would literally goes back all the way into the 1920s. I think MFS was the first that put together the mutual funds back in the 1920s. But it was a wonderful idea. So, let’s diversify. Let’s allow people to buy into a basket of stocks, not just one stock, because obviously high risk and high reward, but high risk with one individual stock. So, let’s create this ability to then buy into the market and to diversify with $1 or $50 or $100, whatever that may be.

And that was able to get, it was a way of democratizing the investment world so people could get involved. So, now, 80 years, or 60 or 70 years goes by. Interestingly enough, you talk about the liquidity. So, now, this exchange-traded fund was created based on liquidity. Question is one of the other big differences that people talk about, about mutual funds and ETFs, though, is capital gain distributions, because we also love ETFs for SHP clients. You’ll see a lot of ETFs within their portfolios. We also use ETFs not just for the liquidity aspect to be able to trade daily, which as a portfolio manager, we don’t do too often, but it’s also good to have, to have that liquidity, of course. But also, ETFs were really good on capital gain distributions or saving on capital gain distributions.

Did that drive the conversations at all? Are you aware? Or was it really liquidity that drove the formation of this new product?

Mike Arone: So, I think what’s fascinating is, at the heart of this, like a lot of things that are discovered, we didn’t think about all of the different applications at the beginning. And what’s interesting is folks like SHP and others started to kind of think about ways to use ETFs. And so, of course, we wanted to provide that liquidity, that transparency, but then others embraced this notion of tax efficiency and low cost. And all of a sudden, what morphed as a solution to a capital market problem came now into the kind of wealth management platform where firms like SHP were thinking about tax consequences, liquidity, transparency, and of course, cost, all incredibly important elements and diversification.

And they thought, “Boy, these tools are incredibly useful, and we can build portfolios with them and address all of those things simultaneously.” And of course, that was the next incredible leg of growth in the ETF industry, is that they kind of became a core portion of many individual portfolios and diversified portfolios because of some of those things.

Matthew Peck: Well, I think in terms of the 401(k) industry, I mean, I’m pretty sure like the 401(k) was like established as some random, like IRS rule, somewhere there, and then suddenly it’s like some sort of HR guys and gals were just realizing like, “Wait a second, we can use these 401(k)s as sort of a separate pension program and move the onus off of the company and into the markets to sort of privatize the pension system. I mean, there are pros and cons with it, and I won’t dabble any further than that. But it’s more the idea of sometimes it’s like the law of unintended consequences, which then sort of changed the world, or at least changed the financial industry.

Mike Arone: Right. And so, you asked me upfront, “Hey, what brought you to this industry?” Like, isn’t this incredible that we created this thing to solve one problem? And then the capital markets and investors came in and found so many other use cases. To me, as just a curious person, I find that incredibly fascinating, exciting, motivating. And yet today, folks continue to find more and more ways to use ETFs. Now, they’re using options in ETFs to generate income. We were chatting before, right? Your five worlds, your income, your tax, kind of legacy, all the things. I won’t get them all right, but kind of estate planning, healthcare. I think I got them all, Matthew.

Matthew Peck: Yeah. Eventually, you got there, Mike.

Mike Arone: I got there, right? It took a minute, but I got there. But ETFs are being used to address a number of those things now, tax, income. And so, it’s just been an incredible kind of ride to be alongside and watching how capital markets have taken this seemingly simple instrument and found so many different use cases to ultimately kind of help investors reach their financial goals. And look, that’s kind of, again, you said, “Hey, Mike, what brought you here? Like, why are you in this industry?” That’s, I think, an incredible achievement for the industry, not only for State Street Investment Management, but for the industry. And it really changed. It was the proverbial game-changer for how folks think about investing.

Matthew Peck: Well, it’s so true. And I love that idea of, A, it continually reinvents itself. I mean, it’s never standing still. And I used to joke around with some of my buddies about how it’s like, “If you like sports and following sports and all of that stuff, and tracking box scores and different things like that, you’re going to love the markets. You’re going to love following the markets and following all those macro trends.” And so, it really, again, it never stands still. It’s constantly reinventing itself. And I think in general it’s been moving in a positive direction for the average investor because now they have ability, and now they have advisors like ourselves.

And not to toot our horn too, too much, but just the idea of fiduciary-based investment or advice, you have fee compression or some of these fees, and the cost of investing has come down. So, I think it’s bending towards in general, and I’m curious for your opinion, but it really is bending towards better for the individual investor.

Mike Arone: Right. Absolutely. And you can see investors vote with their feet. And so, the last two years have been record years for ETF industry flows. So, more than a trillion dollars came in in 2024, and what is now approaching 1.4 trillion for 2025, those are back-to-back record years. So, again, investors vote with their feet. They wouldn’t be using these vehicles if they didn’t experience the benefits of them or feel the benefits of them. And you compare that. Again, we’re not here to bash mutual funds. They certainly have a place in some portfolios and things, but relative to the tax efficiency, some of the capital gains, some of the costs, things like that, they’re actually been a bit more stagnant in terms of their growth, and yet ETFs continue to grow at a much faster rate.

And so, again, this is a capitalist market. Folks vote with their feet. They’re going to go with what works. And apparently, they’re finding that the benefits from ETFs are working well for them, back-to-back record years, and the adoption rates continue at a high level.

Matthew Peck: Oh, I love that stuff. Okay. So, now there are obviously darker moments in financial engineering, if you will. So, if you don’t mind, we will end on a positive note, of course. So, you were there in 2008. I mean, what was your role in 2008? 2007-2008? And how was that experience in general? And was there any inclination it was coming? Again, you mentioned London, so it sounds like there was also some personal change that was happening at that point but share what it was like in 2008.

Mike Arone: So, I had been working with State Street for about a dozen years. I was kind of working as part of an active quantitative equity team for a while, and I had the opportunity. There was a team of investment strategists in Europe. And they had been managed globally, and they decided to manage them more regionally. And so, they asked me, would you go and manage our European team, our EMEA, Europe, Middle East, and Africa team, to go over to London and manage that team? And so, I left at the chance. This was back in 2008. Things had started to…

Mike Arone: So, this was like spring 2008 or was this…?

Matthew Peck: Yeah, before school. So, I remember going over in the summer in London, checking out schools and places to live. So, the cracks had started to form, but the big bang, I guess, to continue our metaphor here, hadn’t happened yet.

Matthew Peck: Yeah. We’ll keep on using the universe, you know. Absolutely.

Mike Arone: So, we got to London. My wife and I had a… My children were seven and five. And we got to London in August of 2008, and we were in State Street Investment Management’s building was in Canary Wharf in London, for those that are familiar, in the Lehman Brothers building. And of course, in September, Lehman Brothers went bankrupt, went out of business. And the black cabs were all up front, the TV cameras, people in the elevators on the phone saying, “Yeah, I have three months.” If they weren’t UK citizens, “I have 28 days to leave the country,” and things like that. And our stuff was being shipped over from the US. Typically, it’s on a boat. And so, I said to my wife, “You may not want to unpack. I’m not sure how this is going to shake out.”

Matthew Peck: Yeah, how is it going to play out. Right.

Mike Arone: Well, good news is that, so I was managing this team of investment strategists across asset classes, cash and equities and bonds and alternatives, and commodities, and multi-asset class strategies, spread all through Europe, Germany, and France and the UK, and Brussels. And so, I went over to manage that team, and I was there for three years. And so, we made it through like everybody. We made it through to the other side, but it was interesting. And so, one of the lessons that I kind of learned from that experience, at least as it relates to investments, is that when we studied, school year CFA, I’m a CFA, and things like that, we kind of have this vision that everything fits in this normal distribution, where kind of things cluster around the average. And those fat tails, those kind of crazy risks rarely happen.

I think what I’ve learned in my 30-plus years in this business is that the hundred-year storm happens far more frequently than a hundred years. And I think 2008 was an example of that. Of course, the pandemic was an unusual period for us both. The TMT bubble bursting back in 2000, which wasn’t all that long ago. So, the hundred-year storm happens far more than the statistics would suggest. So, this tells me that markets are not normally distributed and cluster around an average, and that there’s fat tails. On average, most of the time we’re positively driven, which is why when we build portfolios, we tend to allocate a fair amount of stocks into risk assets. But every once in a while, things go wrong.

And I think, again, having those diversifiers, having SHP or others, help manage those periods of time is critically important to financial success.

Matthew Peck: And so, obviously, you weren’t at Lehman, or you weren’t at AIG, who was underwriting some of these.

Mike Arone: Thank goodness.

Matthew Peck: Yeah, right. These CLOs or collateralized loan obligations, and whatnot. I mean, when you talk about the cracks, I mean, were the cracks visible in your experience? Were they visible to you, or were you just kind of hearing about them, saying like, “Okay. This is interesting. This is a little concerning.” I guess I’m curious about that moment in time, and I hope it’s because you’re right, absolutely true about diversification, and true time tried, traditional investments, and diversifying four times like that because, to your point, times like that are going to happen again. That’s why they call it black swan events. I got a great question from a client like, “I know we talk about black swan events. Do you see one coming?”

And it’s like, “By definition, my friend, it’s a Black Swan event. You don’t see it coming.” But I’m just curious whether or not there was any inclination, in your world at that time, that we were about to fall off a cliff.

Mike Arone: I think earlier in that year, Bear Stearns went under. There was kind of growing pressure for some of the mortgage companies. Remember Countrywide, for example? So, there were cracks and signals that were starting to form that perhaps something was amiss. But I do think that, oftentimes, kind of looking in the rear view mirror, because hindsight hindsight’s 20/20, right? And so, I definitely think there were things that, in hindsight, you’re like, “Okay, yeah. This was problematic.” And there were signs, as you said. As early as 2006, there were signs, 2007, Bear Stearns certainly went out in 2008. And so, folks had fair warning, and ultimately, the Lehman event in September of 2008 was kind of the cataclysmic event of that time. But as early as 2006, things were starting to shift.

Matthew Peck: Because I think sometimes, and I’m almost like asking you because of the questions that I get from investors or from clients of SHP is not necessarily 2008 again, but more so like, hey, whether it’s recessions or whether it’s a big dip or a big bear market, I mean, you sort of saw, I mean, obviously 2020 was a completely black swan event. 2022, you kind of knew it was coming because just the impact on the Federal Reserve and jacking up interest rates that fast is going to cause some disruption in market valuations. But I go back to 2008 only because, you know, myself, I was in the field, but I was only in the insurance field at that time.

So, I saw it play out, but I was not as tuned into the equity markets as much as I am today. And, again, I’m trying to like, okay, I want to make sure that I’m looking for that canary in the coal mine. Not that we would ever go, “Okay. Hey, everyone, we’re going right to cash. We’re going to pull out,” because we’d overreact. I mean, we never really overreact in that way. But I’m always trying to say, okay, learn from history. You know what I mean? Learn. And not that the past performance is no guarantee. And history doesn’t repeat itself, but it does rhyme. Okay. Let me see if I can find those canaries in the coal mines. And so, I’ll go to these conferences, and there’ll be speakers. And you speak too. I mean, just by the way, he speaks in front of a lot of people in a lot of industries.

But I’m always trying to find contrarian voices and maybe not permabears, because permabears are always negative. But more so that, okay, if I go to this industry, it’s usually always positive. That’s our world. We’re optimistic. We wouldn’t be investing in equities if we didn’t think that over the long term, we’d be fine. And I guess it’s that old line of don’t ask your barber if you need a haircut. He’s going to say yes. And don’t ask an investor if the markets are going to go up, because generally they’ll say yes. But I mean, so that’s a long-winded way of saying that, are there any canaries in the coal mine that you or anyone from that experience in 2008 or going forward, really pay attention to say, okay, this could be something to monitor?

Mike Arone: So, let’s take a very practical example from today. I bet your clients are asking you possibly around AI. Is AI in a bubble, right?

Matthew Peck: So, you skipped ahead to a couple of my questions here, but that’s alright. Go ahead.

Mike Arone: Let’s tackle it now. Like you said, we’re not going to have all day, so we’ll get to it, right? So, AI, I’m sure folks are asking AI in a bubble, certainly towards the end of 2025, particularly in the kind of November timeframe. That was a big question. And so, there are certainly some things that were indicative of bubble-like conditions, so some of those things. So, we had a general-purpose technology, AI, that’s being adopted, and there’s incredible capital expenditures. Folks are spending a lot of money to try to figure out how to monetize it. So, those are two things.

Matthew Peck: Just to pause, yeah, I never heard the term hyperscaler before, but now I know all about hyperscaler.

Mike Arone: Now you know all about it. So, general-purpose technology, a lot of capital investment from that perspective. We also have had a massive transformation in the way capital is allocated. So, we were talking a lot about history, but here’s the thing. If you think about it, in 1996, Matthew, there were more than 8,000 publicly listed US companies. Today, that number’s closer to 4,000. Over that same period, back two decades ago, there were only about 1,900 US companies working with a private equity partner. Today, there’s more than 13,000.

Matthew Peck: Wow.

Mike Arone: And we also think about the private credit market. It’s quadrupled in the last decade. So, the way that capital is now allocated has transformed considerably. You also have a great deal of credit creation, which again, isn’t a good or bad thing, but these are symptoms, not symptoms, but bubble-like things that folks should be keeping an eye on. You have a deregulatory environment that’s likely coming, and you have a Federal Reserve that is lowering interest rates or being more accommodative. I look at those things. And that is fuel for risk assets. And of course, we’re coming off of three consecutive very good years, and I know we’ll get into this. I think next year might be another decent year for risk-taking.

And so, those kind of conditions are there. Now, let me give you four reasons why I don’t think AI is in a bubble. So, there’s the reasons you’re saying, “Hey, what should I look for in terms of what are some of the telltale signs?” So, general purpose technology, massive capital investment, transformation in the way capital is allocated, credit creation, deregulation in the Fed. So, there’s your list. Why is this time not that? Four things really quickly. So, you’ll remember back in the TMT bubble days, growth companies’ earnings were actually contracting. Today, they’re expanding. So, what’s interesting is technology earnings are growing at an incredibly fast rate. So, that’s one thing. The second is that the duration and the magnitude of the capital expenditure cycle back in the 90s was much longer and much bigger than today.

Matthew Peck: I’m sorry. Explain that last part, if you don’t mind.

Mike Arone: Absolutely. So, meaning in the 90s, more money was spent on fiber optic cable and all that stuff than what has been spent on AI.

Matthew Peck: Oh, in comparison. So, when they were laying the rails, because when somebody talks in terms of booms and busts in general-purpose technology, they’ll compare 2000s. They’ll also go all the way back to the railroads and say, “Okay. How much was spent?” So, they talk about laying the rails, right? So, they lay out the actual rails in the 1880s, we’re talking. And then in the 90s, they laid the rails in the fiber optic space. So, if I understand you correctly, the rails, the expenditures in the 90s is actually less?

Mike Arone: More.

Matthew Peck: I’m sorry. I’m sorry. Is more in relation…?

Mike Arone: And longer. Occurred over a longer period of time and was much bigger.

Matthew Peck: Interesting.

Mike Arone: So, my point here is that the AI spending is only just beginning. We’re in the early stages. So, that’s two. The third one is around profitability. You’ll remember back in the TMT days, the companies that performed the best had the highest multiples, didn’t earn any money. There was no earnings to be had. It was clicks and eyeballs. Today, investors are hyper-focused on profitability. So, just recently in the earning season when Meta announced a greater kind of capital expenditures, and Oracle decided they were going to go to debt markets, investors weren’t clear on what the path to profitability was for those investments. And those stocks got punished.

Matthew, what will be fascinating for people to know is, in 2025, technology companies didn’t experience multiple expansion, meaning investors didn’t pay a higher price for technology companies’ earnings. Their returns have all been driven by earnings growth, not multiple expansion. So, that’s important. And then finally, when you’re asking about, what is that pin prick for the bubble, historically, it’s been the Fed raising rates. So, we talked a lot about history so far today. In 1988-1989, the Fed was raising rates. It ultimately led to the savings and loan crisis and the 1990 recession. In 1999 and 2000, the Fed was raising rates at the time from 4.75% to 6.5%, and in March of 2000, the TMT bubble burst.

And then we’ve been chatting a lot about the global financial crisis, kind of the more recent one, except maybe the exception of the pandemic, which again was such an unusual, right?

Matthew Peck: It’s such a one-off. Right. Anomalous.

Mike Arone: So, in that one, the Fed was raising rates from 2004 to 2006. So, you asked me about, “Hey, were there some signs, like what could you look for?” Historically, the Fed tightening monetary policy is the pinprick that bursts the bubble. As we start 2026, the Fed is cutting rates, and they have stopped quantitative tightening. They’ve been more accommodative. So, for those four reasons, I don’t think we’re in a bubble environment. I think some of the conditions are there, and this may inflate for a while longer, but for me, what I would be looking for is Fed tightening monetary policy or an unexpected acceleration in interest rates similar to what you highlighted in 2022. That will be the mechanism that potentially hurts what has been a strong bull market rally since October of 2022.

Matthew Peck: But then, all right, so now let’s talk about the Fed. I mean, I’m not sure of your/State Street’s outlook for this year. I know, again, we’re early in 2026 as we speak. I mean, I guess just inflation numbers, I mean, and personally speaking, obviously, I’m very concerned not just about inflation, but just obviously, government debt levels, which we can set aside for now. But I think, in general, overall outlook for 2026 in regards to what the Fed is going to do and just the impact on inflation.

Mike Arone: So, I think the Fed will be accommodative in 2026. They’ve certainly cut rates a number of times here at the end of the year, at the end of 2025. They also stopped quantitative tightening, meaning the reduction of their balance sheet. So, that’ll have some stimulative effect that’s actually worth about a quarter of a percent rate cuts kind of equivalent, if you will. So, they’ve been more accommodative. Now, here’s the thing that I think is interesting from a few standpoints. So, I’ll give you a few points. So, first, the Fed raised rates, as you mentioned, in 2022 to around five and a quarter percent. They’ve reduced rates by about one and a half percent or so over their rate cutting cycle. That’s about a 29% retracement.

So, other central banks like the Bank of England and the Bank of Australia have been cautious also because of inflation, what you mentioned. But many other central banks like the European Central Bank, the Bank of Switzerland, the Bank of New Zealand, and the Bank of Canada have actually cut rates greater than 50%, retraced their rate hikes from a higher. So, the point is, is the Fed has some wiggle room here, in my opinion. They’ve only cut back about, let’s call it a third, if we don’t want to be too precise. They have more room to cut from that standpoint.

Matthew Peck: Well, and I think too, just to jump a little bit back to 2025, I mean, what did you/ State Street, I’m kind of using you guys separately because I know obviously there’s other thought processes and people and thought leaders there. But what was the impact on, what type of trickle-down impact did you actually see on tariffs when it came to inflation? Because I have some people that say, nope, it’s a one-off, or I’ve heard this great line of like, it’s not really stagflation, it’s more like inflation stag in the sense that inflation comes first and then stagnation comes second. Others say, okay, it’s just a one little, little bump that happens initially and then life moves on. I mean, what evidence did you guys actually see in 2025 if at any?

Mike Arone: So, I’ve been in the camp that the fears about tariffs impact on inflation have been largely exaggerated. And again, not to say that there’s no impact and there’s certainly specific items that are impacted, but overall, when we look at and take a step back and look at the broader economy, the impact to inflation hasn’t been all that meaningful. And so, I’m of the camp back in 2018 when we were in the first trade war, if we want to use that terminology with China. And tariffs weren’t inflationary. And I didn’t expect them to be this time as well.

And so, you can’t describe tariffs as a tax and then tell me that they’re inflationary because we know that taxes are recessionary and they reduce consumption.

So, what’s really interesting, Matthew, is the Fed just released a paper. The San Francisco Fed just released a paper to suggest that tariffs are actually deflationary and not inflationary. Now, some would argue that the timing of this for those conspiracy theorists is so that they can give themselves some air cover to continue to cut rates. But it was interesting, well, Wall Street Journal picked it up, and the journalist there always covering the Fed, he picked it up, and the San Francisco Fed at the end of 2025 issued a paper suggesting that tariffs are deflationary because they reduce consumption. And sure enough, the economy seems to be cooling a little bit perhaps in some areas as a result of that.

Matthew Peck: Well, and I just sort of saw it as supply and demand in the sense that, okay, if we’re moving that XY chart down a little bit, meaning that like, okay, hey, tariffs cause costs. Let’s argue for a moment that tariffs will cause costs to go up. Well, then that demand for that product will then come down a little bit, and then it will find its equilibrium at that stage. So, yeah, that was bio, because as you said about the overstated and sometimes, the– well, I will not get into a, I guess, I’m part of the media because I’m on the podcast right now, right?

But we all know we live in this world of 24-hour news and clickbait and heavy headlines. And sometimes, that’s why I appreciate obviously you coming on, and then me just, I will get on my soapbox now, but just provide cutting, get the wheat through the chaff, finding out what the actual information is, what the actual data is telling you, and things along those lines, because to jump kind of back to the Fed and what they’re going to do about cutting rates and easing and whatnot because I also saw that similar supply and demand impact on jobs in the sense that, okay, hey, we’re cutting off the supply on the southern border, a lot of the immigration and the H-1B visas and different things like that. And okay, well, that will then have an impact on demand. So, it’s almost like we’ll have a similar effect that it won’t necessarily push up wages too, too much because it’s that same laws of supply and demand going on. Am I on the right track or not really?

Mike Arone: You’re on the right track. And so, if we look at this, right, the Fed has this dual mandate. Some argue they might have a third mandate, things like that. But if we stick with the dual mandate, and we look at the full employment part of it, the Fed made a purposeful pivot back in August to focus on the downside risks of the labor market. And so, to your point, they described at that time, and we’re still in this scenario that the labor market is in a curious kind of balance. So, what you’re describing is unfolding. What’s happening is that both the supply of labor and the demand for it are falling simultaneously. This is unusual.

Why is this happening? Three things, tougher immigration policy, which you highlighted. Demographics is another, and AI is the third. So, what’s really interesting, Matthew, is that the US may not need as many new jobs as they have historically to keep the unemployment rate reasonable. It has been ticking up lately, but the risks are definitely skewed to the downside. And the Fed took notice back in August and began cutting rates again, which I think was the right move. And so, when we look at the ADP data on private employment numbers, kind of for the four weeks through early November, actually, the jobs declined by about 13,500 per week. The labor market is softening some. The unemployment rates ticked up.

Now, let’s turn to inflation real quick. So, inflation, historically, the drivers have been surging oil prices. Of course, that’s related to the 70s. I know, this is like a history podcast, right? So, that’s related to the 70s. Oil has been well supplied and prices have been reasonably low, right? And the administration’s focused on continuing that momentum. The second thing that typically happens that produces inflation is voluntary separations. People quit their job. And jobs are plentiful and they have negotiating power, and it’s about six months lead time. That’s not happening right now. The job market is softening.

And the final one is rents. And again, it’s a bit wonky, but it makes up about 30% of most of the broad measures of inflation. And rents, actually, it’s not everywhere. So, if you are somewhere in a geography saying, hey, my rent is still high, or boy, my children, or whoever’s paying high rent, absolutely, but in the broad pockets of rents are falling. So, it’s really hard to see inflation reaccelerating. And so, those are two reasons.

Now, I’ll give you a third. As we concluded 2025, there’s some things that go on with the capital markets. So, the reverse repurchase rate, kind of the short-term financing rate, which caused some problems back in 2018 and 2019 and the Fed reacted, the standard overnight financing rate has actually been creeping up and is above the effective funds rate. The Fed also created a facility for COVID to help, a repurchase facility to help with liquidity and things like that. That has now been drained, so that’s out.

The other thing that’s happened is once we reached an agreement on the debt ceiling, Treasury began to rebuild the Treasury general account. All of this takes out bank reserves. So, the Fed has moved from abundant bank reserves, about 10% of GDP to ample reserves. The point of all this, if folks are like, I’m getting lost here, right, the point of all this is that monetary policy conditions are actually tightening in the capital markets, and a lot of people who don’t have that nuance don’t know it.

So, not only is the labor market softening, I gave you the reasons why I don’t think inflation will reaccelerate. Now, you have these capital markets kind of challenges on the side here, which is why they ended quantitative tightening. This is why they did it. Because without doing it, it would cause some additional stress.

Matthew Peck: Too much tightening.

Mike Arone: Too much tightening and perhaps, a little bit of a capital market tantrum, which again is what we saw in 2018, 2019, which they had to catch up on. They don’t want to do that again. For all of those reasons, I believe the Fed will be accommodative. Not only have they resumed the rate cutting cycle, but they’ll likely continue it. And boy, if we want to add another one, Chairman Powell’s term ends in May, we now have a new Fed chair person. And they’re likely to be a bit more dovish than hawkish at this point.

Matthew Peck: Yeah, and I’ll try to, I wanted to ask whether or not State Street was making any bets on who that will be, but well, I won’t put you on the spot too, too much there. But I think, and it’s funny when we talk about interest rates too and because I think, another big issue, and I’m curious how much just your overall opinion on it because yes, the Fed might be able to lower short-term rates, but the long-term rates might not budge. And then I know a lot of people, because you mentioned rents and this is kind of what got my mind thinking is just the impact on housing and getting people into that ladder, in single-family homes and the lack of development and nimbyism and things like that. I mean, how much do you play in that space in regards to just general outlook for the real estate sector, and I mean, just home building in general and getting people in, starting on that ladder, as I said.

Mike Arone: Yeah. So, it’s true, right, that the Fed has greater influence over short-term interest rates and far less control or influence over long-term rates. And what’s interesting is given the massive amounts of fiscal stimulus and what I would think of as very manipulative central bank policy through much of this century over the last 25 years, keeping monetary policy incredibly accommodative. Again, we’re talking a lot of history. Not that long ago, we had $18 trillion in sovereign debt with negative interest rates. That exists in no CFA curriculum you and I ever saw. I had to pay the government of Germany to hold onto my money, right? It doesn’t make any sense. So, we’re far removed from those scenarios. And so, I think that you mentioned a few things.

Structurally, the landscape is changing for investing, so we are reshaping the global trading system. The US has asked its allies to share more equally in the burden of global security. That’s had folks turn a little bit more inward and certainly has resulted in a global rally in defense stocks. And folks are kind of spending there. Others folks who are kind of go it alone, Germany spending more. Japan has a fiscal policy in place, so fiscal spending seems to be a bit more permanent to support economies’ one big, beautiful bill act. So, supply of sovereign debt is increasing while the demand for it may be somewhat saturated. Yeah, saturated, let’s use that term. And so, we think that long-term rates may stay higher and more volatile than the market expects. And that does cause some interesting challenges.

Now, I mentioned, I don’t expect a re-acceleration inflation, but inflation is just the kind of measuring the difference in price over a period of time. So, I’m not arguing. So, for those listening who say, boy, that guy’s crazy, Matthew, how could you even have him on? Hasn’t he seen my insurance bill? Hasn’t he seen my car payment? Hasn’t he seen my rent or housing prices? I’m not saying prices aren’t high, but they’re not accelerating at the same rate. But costs are high, so inflation is likely to be a bit stickier.

So, in the decade prior to the pandemic, inflation in the US averaged just 1.8%. It’s more likely to average 2.5% to 3% over the next decade or so. So, when we think about what you’re talking about in terms of how do we think about this, at least from a portfolio perspective, when you think about stocks, and we talked a lot about that, over time, as long as the economy’s growing and earnings are growing, your stocks are going to do just fine and they’re a good inflation hedge. That’s proven to be the case again, the challenges in a recession, which we don’t forecast in the short term.

Matthew Peck: And how far out do you forecast go? I mean, do you think…

Mike Arone: Anything past 12 months is, who knows? My crystal ball is Murphy is everybody else’s. So, anyone tells you they got a 10-year forecast, you got to be careful. Take with a grain of salt. But if rates, particularly long rates are going to be higher and more volatile and inflation’s going to be stickier, these are two kind of boogeymen for bonds. For fixed income instruments that pay a fixed rate of interest, those are challenges. And so, what we have been encouraging investors to think about to boost their resiliency in portfolios is investing a little bit more in real assets, real estate, infrastructure, commodities, natural resources including precious metals like gold. And of course, we’re coming off of two very solid years.

So, it fits in the heart of this notion of permanent fiscal deficits, reshaping kind of the global macro landscape, the amount of sovereign debt that’s going to have to be issued. The fact that many folks are looking to diversify away from dollars, it’ll take forever. The US, we’re going to be the world’s reserve currency for as long as you and I are alive and in this industry.

Matthew Peck: Yeah, I never got that argument.

Mike Arone: But folks are diversifying, seeking ways to diversify. And some of these investments are ways to do that. They can generate income and total return. So, we’re encouraging folks to think about them more holistically in portfolio allocations.

Matthew Peck: I mean, do you consider those alternatives? I know there’s other alternatives, like private equity and private credit. We’re not going to go there. But I’m just curious if you consider commodities and real assets, would you categorize those as alternatives or not really?

Mike Arone: I don’t get too caught up in the definitions. So, in our outlook for 2026, we talked about this idea. One of the themes is to boost portfolio resiliency through the use of multi-asset strategies and alternatives. But what we’ve put forward in that was mostly things like commodities, natural resources, gold, and even some multi-asset strategies that use some components of that to really dampen some of the volatility, the stock market volatility.

Matthew Peck: And so, is there a specific number? So, if I say, all right, Mike, a 60/40 portfolio is your traditional, moderate portfolio, do you guys go 60/35/5, or do you not really make that call?

Mike Arone: No, no, we do. And so, I always joke that nobody uses 60/ 40 anymore, right? But it has actually been a decent barometer, at least historically, particularly as rates have fallen and inflation’s been benign, it’s been the place to be. I would take that relative to many other choices, particularly at a low cost with transparency, liquidity, et cetera. But nobody does that 60/40, so we think about it as 60/30/10 from that standpoint, or you could get up to 15%, depending on risk tolerance and a number of other instances. But kind of 60/30/10, 60 stocks, 30 bonds, 10% in a diversified portfolio of real assets, we think makes some sense. That will replace some of your income, and should rates be higher and more volatile, particularly long-term rates and inflation stickier, those real assets will do pretty well. In 2025, a diversified portfolio of real assets for most of the year actually outperform the S&P 500 and the US aggregate index, which is your kind of typical stock benchmark and your fixed income benchmark. And so, it was a good kind of choice to be making from that standpoint.

Matthew Peck: But it’s interesting. So, you mentioned real estate. Now, I’ll leave residential real estate out of it for a moment, but relatively bullish on commercial real estate. I mean, it’s been kind of in the doldrums, work from home, impact. I know that the pendulum is swinging back there pretty significantly. But I know at least in Boston, I mean, I know you, it’s a beautiful new building. I’ve not gone inside, but I’ve walked by it on the way to the garden, of course. But point being is that there’s still certain areas of the financial district, at least locally, that haven’t rebounded since COVID, and from when I read it, it’s happening. We’re not talking doom loop or nothing like that, but it seems to be a topic of conversation. So, I didn’t know if just general thoughts there on commercial real estate.

Mike Arone: Right. I think residential real estate is somewhat more interesting in that. As you said, there is a shortage of residential real estate homes. And millennials are coming into their prime home buying age, that’s actually creeped up. So, they’re now kind of in their early 30s and that’s in line with the primary home buying age and there’s a shortage of supply. So, we think there’s a supply-demand imbalance in residential that will keep that market and prices high and that was pretty good.

When it comes to commercial, what’s interesting is that I think a lot of the bad news is behind us, so meaning that a lot of the buildings have been marked down in terms of their value. I think more people are going back to work in the buildings, and I think that, as we get further away from the pandemic, businesses will continue to require more folks to come back. And so, I think that’s happening. At the same time, when those valuations were written down and more people are coming back, folks took an opportunity to renegotiate those leases and at better kind of longer term and better rates. So, I think a lot of that’s behind us, but this will take time to play out.

Now, for those that are maybe a bit more on the nervous side. in context, commercial real estate in terms of its size, about four and a half trillion, about 1.6 trillion or so, that’s kind of more finance that would come due in traditional sense, it’s too small to cause a systemic problem from that stand, at least in our opinion. So, it takes a little while to work out, but most of the bad news is behind you. So, here’s what I think, Matthew, that’s kind of interesting. And look, I’m here as an ETF investment strategist. I think being selective actively in commercial real estate has some real interest and value. Now, it’s not my skill or what I do. But if I was an investor, I’d be considering picking up properties at much cheaper prices under better leasing conditions with lower kind of occupancy rates that could increase. There might be some attractive kind of opportunities there, particularly as we move away, further away from the pandemic.

Matthew Peck: Well, and I think too, as you say, I kind of call it pockets of value, right? I mean…

Mike Arone: Selection’s going to be key, being active, being purposeful, being selective, right? So here, and this may seem strange to your audience, I don’t think buying an exchange traded fund across hundreds of properties, you’ll diversify some of the risks. But the real value-add is going to be finding the right properties at the right value with some upside potential and that requires certain skill.

Matthew Peck: No, absolutely. And again, a manager selection, which is also key. I don’t want to say property selection. All right, so in general, just to kind of summarize because obviously, Mike, you’ve been very generous with your time and we could keep you all day if we’d like, obviously. I might have to, but we’ll turn the recording off and we’ll just keep on going. But no, so in general, we have a very positive outlook for 2026 because of that. We’re looking at easing. You’re looking at the fact that we haven’t really seen, I mean, obviously, tariffs, there are pain there, but to a certain extent, as you mentioned, they may end up being more deflationary, in fact, according to certain recent studies. But in general, we’re looking at a very benign outlook and no recessions, you mentioned there. So, 2026 looks like it’s going to be okay.

Mike Arone: I’ve been describing myself as uncomfortably bullish. That is the title of our 2026 outlook. So, I’ll do this quickly. So, to your point, I think trade policy has stabilized. There’s a lot of headline risks, but there’s 17 frameworks in place. We’re in a trade truce with China. Again, very tentative. And there’s a million exemptions to these trades. It’s impossible to make heads or tails of this thing. Overall, I think we’ve stabilized trade policy, which of course, back in April of 2025 was the exact opposite. So, that’s great. We have stimulus from the One Big Beautiful Bill Act. So, Matthew, what’s interesting is that in February to May of this year of 2026, you’ll get incrementally $150 billion in tax refunds. That money will get spent.

Already back in 2025, because of the ability to retroactively apply the immediate expense of research and development for domestic expenditures and the like, more than $100 billion’s already been retroactively applied, and another $135 billion is coming. So, that $100 billion in 2025 is already more than all of the tariff money collected to date. So, that’s very stimulative. Talked about the Fed at length, but we expect them to be easing. Earnings are growing, so they grew by double digits in 2025. They’re expected to grow by double digits in 2026. Profit margins remain high. So, despite all the anxiety about policy and tariff, companies have been able to do more with less and their profitability has rarely been higher. So, they’ve done an outstanding job.

Then when we look at deregulation, I think is coming this year, I think that’s where the Trump administration will pivot to now. And I also think that when you’re looking at this, the US is hosting the North America, the World Cup. And we’re celebrating the 250^th anniversary of the signing of Declaration of Independence. And you’re going to get a fair amount of momentum. Now, what makes me uncomfortable? Well, prices are really high, valuations are stretched, positioning stretched. I’d prefer to be buying at cheaper valuations. Credit spreads are tight. Most measures of market volatility are complacent. So, that’s got my antenna up.

And then we talked about the remaking of the global macro landscape. So, the labor market being in that curious kind of balance, remaking the global trading system, asking folks to share more equally in the burden of global security. These are things that are reshaping structurally the landscape that you and I and many of our listeners have become used to over the last kind of multi-decades.

Matthew Peck: Yeah, I was saying, go back to Bretton Woods to a certain extent.

Mike Arone: Right. So, we’re not really sure what the impact is to the economy rates and inflation, and so that injects an element of potential volatility and discomfort. Am I uncomfortable? But overall, to use a pun, I think that the things I mentioned kind of more positively trump kind of the risks at this point.

Matthew Peck: Do you have a number of the S&P end of year?

Mike Arone: I don’t typically do that. You know what happens, Matthew? What happens is you look at, well, not that. You look at the dividend yield. You look at the earnings and you come up with some multiple, and every person like me tells you, ah, 7%, 8%, 9%, right? And so, I could tell you that. But what’s interesting is when you look at a histogram, meaning if you look at how many, if we go back to 1928 and we just count up the number of times, the stock market is down 20, down 10, whatever buckets we want to use. It’s rare that it’s a single digit return. And that when we look at that histogram, it’s the single digit, 0 to 5, 0 to -5, 10%, down 10%, those are the kind of the least amounts of hits. It’s more in the tails, which goes back to my earlier point about kind of the tails happen far more frequently than the statistics would suggest.

So, again, my crystal ball is as murky as everyone else’s. We’re not sure what will happen next year, of course, but we think the foundation for this bull market remains in place. There are risks out there. So, kind of boosting the resiliency of your portfolio is probably a good thing, always a good thing. And when I speak to folks like you, Matthew, and firms like SHP, I always believe that the value that many of you bring as it relates to investments, there’s a tremendous amount of value outside of that. But when markets are at all-time highs and things are good and folks are feeling good, it’s our role to remind them of the risks and the things that can go wrong. Conversely, when the market’s falling out of bed and everyone’s hair is on fire and they want to get out, it’s our collective responsibility to remind them that if you have courage, capital, and conviction, it’s often a good time to be buying stocks.

One final thing that I’ll mention is we were chatting a little bit around this notion, we were talking about time horizon. So, back in April, we dusted off this chart. I’m sure you probably use it with clients as well. When you look at stock market returns, if you look at it on any given day, any given week, any given month, it’s about 50/50 that you’ll make money or lose money. But when you get to 5 years, you get to 10 years, when you get to 15 years, especially, 15 years, you have a more, at least based on history, if compliance is listening, and more than 90% chance of earning money over rolling 15-year periods, which is why you said you joked, hey, we’re all, it was bullish. At least historically, the odds have been in our favor.

Now, there’s been lost decades. And I’m not sure if we’ll be on one or not, but over time, if you’re invested in the markets and in risk assets and you have that long time horizon, the probabilities are in your favor. Doesn’t mean you’ll always make money, but the probabilities are in your favor. And we think the setup for this year also suggests that the probabilities are in your favor. We’ll see what happens. Good luck to both of us and everyone else listening.

Matthew Peck: Yeah, absolutely. Mike, thank you so much. I mean, I think it’s a great note to end on and I often talk about one of my favorite lines about what the markets do is that they climb the wall of worry, right? We’re all human. We all know, whether you follow it every single day, like Mike and I do, or whether you just pay attention every once in a while, there’s always going to be concerns, there’s always going to be issues, there’s always going to be uncertainty. It’s like we don’t know how the story ends. So, since you don’t know how the story ends, you’re always going to be concerned about, I don’t know how this is going to end.

But you look towards history, you look towards the smart guys and smart men and women who are managing these companies here in America, managing monetary policy or at the Fed or wherever they are and you just have to believe that, okay, these are all very smart individuals and I think that is something you can trust in, especially as you said, this is the 250^th anniversary. I have been watching the Ken Burns thing. Also, highly recommend the American Revolution to anyone that is– we’ll have a separate history podcast on that one.

But yeah, you have to believe in that and you have to have faith because I truly think that, in time, it will play itself out in your favor. So, again, Mike, thank you so much again. It was an absolute pleasure to have you for the time that we had. Stay tuned next week and everyone else be well.

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