Summary
UBS Chief Investment Officer Jason Draho opens 2026 with a constructive outlook: The US economy is growing moderately by about 2%, inflation should decline, and the Federal Reserve is expected to lower interest rates. Despite strong market performance in 2025, Draho warns of excessive valuations and sees risks from tariffs and geopolitical tensions. His core recommendation: buy equities, remain selective on bonds, favor gold and commodities.
People
- Jason Draho – Head of Asset Allocation, Americas, UBS CIO
- Dan Cassidy – Moderator, UBS Market Moves Podcast
- Jay Powell – Fed Chair
- Kevin Hassett – Potential Fed Chair candidate
- Kevin Warsh – Former Fed Governor, candidate
Topics
- US economic growth and inflation trends
- Monetary policy and Fed leadership
- Trump Administration and tariff policy
- AI investments and bubble risks
- Market valuations and positioning
- Geopolitical tensions and resource competition
Detailed Summary
Economic Environment
The US economy closed 2025 with growth of approximately 2% – in line with consensus expectations of 2.1–2.2%. However, the path there was unexpected. Tariffs proved higher than forecast, yet consumers remained resilient. Draho expects acceleration in 2026, particularly in the first half of the year:
- Higher tax refunds through the "One Big Beautiful Bill" ($1,000–2,000 per person)
- Business investments thanks to depreciation incentives
- Loose financing conditions (higher lender default rates, declining credit spreads, high liquidity)
Labor market dynamics remain ambiguous: few layoffs, but moderately tightening conditions without extreme pressure.
Inflation Dynamics
Headline inflation rates could initially be higher (tariff carry-over effects), but the core trend is constructive:
- Non-shelter services and rental inflation continue to decline
- Tariff-adjusted inflation shows downward trend
- Year-over-year figures may not peak until Q2
Overall, the scenario supports a moderate inflation orientation for 2026.
Monetary Policy and Fed Leadership
The FOMC held steady in December and signaled caution. Draho expects one more rate cut in Q1 (likely March), as the labor market remains weak and the neutral rate debate continues.
Critical focus: Trump's nomination of the next Fed Chair (expected in January). Candidates are Kevin Hassett and Kevin Warsh, neither of whom are extreme doves. Without committee changes, this points to gradual cutting – no aggressive easing.
Trump Administration and Fiscal Policy
The tariff landscape is fragmented:
- Supreme Court ruling on IEPA tariffs expected (January/February); markets price in rejection
- Sectoral selective tariffs possible, but limited before midterms
- USMCA renegotiation likely marginal, not radical
- Fiscal measures (e.g., tariff pauses) difficult to push through Congress
Exception: Consumer protection measures (e.g., elimination of pasta import tariffs) to dampen inflation.
Three Macro Themes for 2026
1. "Running Hot": Expansionary policy + strong demand (AI CapEx, consumer spending) could accelerate growth, but also intensify inflation. Labor market supply and AI productivity gains are decisive.
2. Multipolar great power competition: Venezuela's sanctioning by the US signals resource and oil power competition. China could do likewise (Taiwan). A critical geopolitical risk factor.
3. AI bubble risk – differentiated: Unlike the 1990s:
- Valuations are elevated, but not excessive (Forward Multiple: 21.5 → 22)
- Earnings growth, not valuation expansion, drove 2025 returns (17% S&P, only 3 pp from multiples)
- Profitability remains stable; no fraud wave like back then
- Investment ratios are low relative to GDP; plenty of room
Conclusion: No bubble conditions now, but risk present. More of a 1997 scenario than 1999–2000.
Market Valuation and Positioning
2025 performance was strong (S&P +17%, EM +30%, Europe +20%, bonds positive). Investors are cautiously optimistic:
- Macro outlook aligned with expectations
- But: elevated valuations, geopolitical uncertainty, overweights in AI names
- Markets price in "good" rather than "fantastic" conditions (2% growth, not 2.5%)
- Positioning does not suggest "frothy" markets
Core Messages
- Equities recommended: S&P 500 target 7,700 by year-end (>10% total return); constructive macro conditions, AI investments remain non-bubble-like
- Fed will cut gradually: Likely one move in Q1; next Chair critical, but no dovish surprise expected
- Tariffs and fiscal hardly expansionary: Selective measures, no major stimulus
- Inflation moderates long-term: Headlines temporarily higher (tariff carry), but core trend down
- Gold benefits: Safe haven, diversifier (2.5% on Jan 5), especially in EM uncertainty
- Fixed income: remain selective: Tight spreads, yield risks (4.5% Treasuries possible), little carry beyond
Stakeholders & Affected Parties
| Group | Impact |
|---|---|
| US equity investors | Benefit from moderate growth, reasonable valuations, gradual rate cuts |
| Bond investors | Low additional return potential; risks if rates rise (inflation, growth) |
| Emerging markets (EM) | Risk from US tariff measures and geopolitical tension (China dynamics) |
| Commodity/gold producers | Gains from commodity and gold boom plus uncertainty demand |
| US workers | Moderate employment opportunities, possible wage stability, but no dramatic boom |
| Consumers | Tax refunds (+$1–2K), but potential tariff impact on prices |
Opportunities & Risks
| Opportunities | Risks |
|---|---|
| Moderate growth + falling inflation → Soft landing | Tariff escalation → Price inflation, trade retaliation |
| AI productivity gains realize over time | Labor market tightens → Fed expectations shock |
| Gold price rises further (safety, uncertainty) | Geopolitical escalation (Taiwan, Venezuela fallout) |
| Fed flexibility on tariff shocks | Valuations come under pressure at higher yields |
| EM recovery on China stimulus | Credit markets tighten on fundamental deterioration |
Action Relevance
For decision-makers and investors:
- Follow Fed nomination (expected January): Signal for monetary policy direction 2026–2028
- Monitor tariff calendar: Supreme Court ruling (Jan/Feb), sectoral measures, USMCA renegotiation
- Intensively monitor labor market data: Are "soft landing" conditions intact?
- AI fundamentals review: Profitability, investment returns, not just CapEx volumes
- Geopolitical escalation signals: China's reaction to Venezuela sanctions, Taiwan focus
- Build positions asymmetrically: Favor equities, defensive fixed income, gold as hedge
Quality Assurance & Fact-Checking
- [x] Core statements (2% growth, Q1 rate cuts, S&P 7,700 target) verified
- [x] Numbers and data (17% S&P 2025, +30% EM, tax refunds $1–2K) validated
- [x] People and positions correctly assigned (Jay Powell, Hassett, Warsh)
- [ ] ⚠️ Supreme Court ruling on IEPA tariffs: Status in January 2026 not independently verifiable
- [ ] ⚠️ Forecasts (Fed cuts, S&P target) are projections, not established facts
- [x] Bias check: UBS is financial services firm with vested interest in equity recommendations; nonetheless factually grounded
Supplementary Research
US Federal Reserve – Monetary Policy Decisions
Official FOMC minutes and Powell speeches for interest rate outlook validation
https://www.federalreserve.gov/monetarypolicy/Bureau of Labor Statistics – Employment & Inflation Data
Nonfarm Payrolls, PCE Inflation, Unemployment Rate for constructive scenario testing
https://www.bls.gov/Tariff Tracking – U.S. International Trade Commission
IEPA, USMCA and sectoral tariff measures real-time status
https://www.usitc.gov/
Bibliography
Primary Source:
UBS Chief Investment Office – "Top of the Morning" Podcast (January 5, 2026)
Moderation: Dan Cassidy, Guest: Jason Draho
https://www.ubs.com/content/dam/podcasts/wma/260105%20-%20Top%20of%20the%20Morning.mp3
Supplementary Sources:
- U.S. Federal Reserve – FOMC Minutes & Policy Statements
https://www.federalreserve.gov/monetarypolicy/fomcminutes.htm - Bureau of Economic Analysis – Real GDP & Advance Estimates
https://www.bea.gov/ - U.S. Department of Treasury – Current Yield Curve & Rate Forecasts
https://home.treasury.gov/
Verification Status: ✓ Facts checked on January 5, 2026
Footer (Transparency Notice)
This text was created with support from Claude (Anthropic).
Editorial responsibility: clarus.news | Fact-checked: January 5, 2026
Disclaimer: The statements presented in this article are from a UBS podcast and represent the opinion of the UBS Chief Investment Office. They are not personal financial advice. Investment risks are substantial.