"Wood's" 2026 Outlook: An upgraded version of "Reaganomics," U.S. stocks continue their "Golden Age," and a rising dollar suppresses gold

ARK Invest founder Cathie Wood ("Cathie Wood") released a macro outlook in her latest New Year letter to investors for 2026, comparing the next three years to "Reaganomics on steroids." She pointed out that with deregulation, tax cuts, sound monetary policy, and the integration of innovative technologies, the U.S. stock market is set to enter another "golden age," while the impending surge of the dollar may put an end to the upward momentum of gold prices.

Specifically, Cathie Wood believes that despite continuous growth in real GDP over the past three years, the underlying U.S. economy has actually experienced a rolling recession and is currently in a "coiled spring" state, poised for a strong rebound in the coming years. She emphasized that with David Sacks taking on the role of the first AI and cryptocurrency czar to lead deregulation, along with the effective corporate tax rate moving towards 10%, the U.S. economic growth will gain significant policy dividends.

On a macro level, Wood predicts that driven by productivity prosperity, inflation will be further controlled and may even turn negative. She expects that the nominal GDP growth rate in the U.S. will remain in the range of 6% to 8% in the coming years, primarily driven by productivity improvements rather than inflation.

In terms of market impact, Wood predicts that the relative advantage of U.S. investment returns will drive the dollar exchange rate significantly higher, reminiscent of the 1980s when the dollar nearly doubled. She warns that although gold prices have risen significantly in recent years, the strengthening dollar will suppress gold prices, while Bitcoin, due to its supply mechanism and low asset correlation, will exhibit a different trend from gold.

Regarding the market valuation issue that investors are concerned about, Wood does not believe that an AI bubble has formed. She pointed out that although the current price-to-earnings ratio is at a historical high, the explosion of productivity driven by technologies such as AI and robotics will absorb the high valuations, and the market may achieve positive returns while compressing price-to-earnings ratios, similar to the bull market path of the mid to late 1990s.

Here is the original letter to investors:

Wishing ARK's investors and other supporters a Happy New Year! We greatly appreciate your support.

As I outline in this letter, we truly believe that investors have many reasons to remain optimistic! I hope you enjoy our discussion. From the perspective of economic history, we are at an important moment.

Coiled Spring

Despite the continuous growth of the U.S. real GDP over the past three years, the underlying structure of the U.S. economy has experienced a rolling recession, gradually evolving into a spring that has been compressed to the extreme, which may rebound strongly in the coming years. In response to supply shocks related to the COVID-19 pandemic, the Federal Reserve raised the federal funds rate from 0.25% in March 2022 to 5.5% over a 16-month period ending in July 2023, marking a record increase of 22 times This interest rate hike has pushed housing, manufacturing, non-AI-related capital expenditures, and the middle and low-income groups in the U.S. into recession, as shown in the following chart.

Measured by the sales volume of existing homes, the housing market has declined by 40% from an annualized level of 5.9 million units in January 2021 to 3.5 million units in October 2023. This level was last seen in November 2010, and over the past two years, sales of existing homes have fluctuated around this level. This indicates how tightly the spring has been compressed: the current level of existing home sales is comparable to that in the early 1980s, when the U.S. population was about 35% smaller than it is now.

Measured by the U.S. Purchasing Managers' Index (PMI), the manufacturing sector has been in a contraction phase for about three consecutive years. According to this diffusion index, 50 is the dividing line between expansion and contraction, as shown in the following chart.

Meanwhile, capital expenditures measured by non-defense capital goods (excluding aircraft) peaked in mid-2022, and since then, this expenditure level has rebounded regardless of whether it was affected by technology. In fact, this capital expenditure indicator has struggled for over 20 years to break through since the tech and telecom bubble burst, until 2021, when supply shocks related to the COVID-19 pandemic forced both digital and physical investments to accelerate. The former spending ceiling seems to have transformed into a spending floor, as artificial intelligence, robotics, energy storage, blockchain technology, and multi-omics sequencing platforms are ready to usher in a golden age. Following the tech and telecom bubble of the 1990s, a spending peak of about $70 billion lasted for 20 years, and today, as illustrated in the following chart, this may be the strongest capital expenditure cycle in history. We believe that the emergence of an AI bubble is still a long way off!

At the same time, data from the University of Michigan shows that the confidence of middle and low-income groups has fallen to its lowest point since the early 1980s. At that time, double-digit inflation and high interest rates severely weakened purchasing power and pushed the U.S. economy into consecutive recessions. Additionally, as shown in the following chart, confidence among high-income groups has also declined in recent months. In our view, consumer confidence is currently one of the "springs" that is compressed the tightest and has the most rebound potential.

Relaxing Regulations While Reducing Taxes, Inflation, and Interest Rates

Benefiting from the combination of relaxed regulations, reduced taxes (including tariffs), inflation, and interest rates, the rolling recession experienced by the United States in recent years may rapidly and dramatically reverse in the coming year and beyond.

Relaxed regulations are unleashing innovative vitality across various fields, particularly in artificial intelligence and digital assets, led by the first "AI and cryptocurrency czar" David Sacks. Meanwhile, the reduction of tips, overtime pay, and social security taxes will bring substantial tax refunds to American consumers this quarter, potentially driving the annualized growth rate of real disposable income from about 2% in the second half of 2025 to approximately 8.3% this quarter. Additionally, as manufacturing facilities, equipment, software, and domestic R&D expenditures enjoy accelerated depreciation, the effective tax rate for businesses is expected to be lowered to nearly 10% (as shown in the figure below), with the scale of corporate tax refunds expected to rise significantly, and 10% being one of the lowest tax rates globally.

For example, any business that begins construction of a manufacturing plant in the United States before the end of 2028 can achieve full depreciation in the first year of the building's operation, rather than spreading it over 30 to 40 years as in the past. Equipment, software, and domestic R&D expenditures can also achieve 100% depreciation in the first year. This cash flow incentive policy has been permanently established in last year's budget and is retroactively applicable from January 1, 2025.

In recent years, inflation measured by the Consumer Price Index (CPI) has stubbornly hovered between 2% and 3%, but in the coming years, for several reasons shown in the figure below, the inflation rate is likely to drop to an unexpectedly low level—possibly even negative. First, the price of West Texas Intermediate (WTI) crude oil has fallen about 53% from its post-COVID peak of approximately $124 per barrel on March 8, 2022, and is currently down about 22% year-on-year.

Since peaking in October 2022, the sales prices of newly built single-family homes have decreased by about 15%; meanwhile, the price inflation rate of existing single-family homes—based on a three-month moving average—has dropped from about 24% year-on-year at the peak post-COVID in June 2021 to approximately 1.3%, as shown in the figure below.

In the fourth quarter, to digest nearly 500,000 units of new single-family home inventory (as shown in the figure below, the highest level since just before the global financial crisis in October 2007), the three major home builders significantly lowered their prices, with year-on-year declines of: Lennar -10%, KB Homes -7%, And DRHorton -3%. The impact of these price declines will be reflected in the Consumer Price Index (CPI) in the coming years with a lag.

Finally, one of the strongest forces in curbing inflation, non-farm productivity, has grown against the backdrop of a persistent recession, increasing by 1.9% year-on-year in the third quarter. In stark contrast to the 3.2% increase in hourly compensation, the rise in productivity has reduced the unit labor cost inflation rate to 1.2%, as shown below. This figure does not reflect the cost-push inflation seen in the 1970s!

This improvement is also validated: according to the inflation rate measured by Truflation, it has recently decreased year-on-year to 1.7%, as shown in the figure below, nearly 100 basis points (bps) lower than the inflation rate calculated by the U.S. Bureau of Labor Statistics (BLS) based on CPI.

Productivity Boom

In fact, if our research on technology-driven disruptive innovation is correct, then in the coming years, influenced by cyclical and long-term factors, the growth rate of non-farm productivity should accelerate to 4-6% annually, further reducing the inflation of unit labor costs. The integration of major innovation platforms currently under development—artificial intelligence, robotics, energy storage, public blockchain technology, and multi-omics technology—not only promises to drive productivity growth to sustainable new highs but also has the potential to create immense wealth.

The improvement in productivity may also correct significant geopolitical economic imbalances in the global economy. Companies can direct the gains from productivity improvements towards one or more of the following four strategic directions: expanding profit margins, increasing R&D and other investments, raising wages, and/or lowering prices. In China, raising wages for higher productivity employees and/or increasing profit margins can help the economy overcome the structural issues of over-investment. Since joining the World Trade Organization (WTO) in 2001, China's investment as a percentage of GDP has averaged about 40%, nearly double that of the United States, as shown in the figure below. Increasing wages will drive the Chinese economy towards a consumption-oriented transformation, breaking away from the commodification path.

However, in the short term, technology-driven productivity improvements may continue to slow U.S. job growth, leading to an increase in the unemployment rate from 4.4% to over 5.0%, and prompting the Federal Reserve to continue cutting interest rates Subsequently, the relaxation of regulations and other fiscal stimulus measures should amplify the effects of low interest rates and accelerate GDP growth in the second half of 2026. Meanwhile, inflation may continue to slow down, not only due to the decline in oil prices, housing prices, and tariffs, but also thanks to technological advancements that drive productivity increases and reduce unit labor costs.

Surprisingly, the cost of training artificial intelligence is decreasing by 75% annually, while the cost of AI inference (i.e., the cost of running AI application models) is decreasing by as much as 99% each year (according to some benchmark data). The unprecedented decline in various technology costs should drive a surge in their unit growth. Therefore, we expect the nominal GDP growth rate in the United States to remain in the range of 6% to 8% over the next few years, primarily due to productivity growth of 5% to 7%, labor growth of 1%, and an inflation rate of -2% to +1%.

The deflationary effects brought about by artificial intelligence and the other four major innovation platforms will continue to accumulate and shape an economic environment similar to the last major technological revolution period triggered by the internal combustion engine, electricity, and the telephone, which lasted until 1929. During that period, short-term interest rates synchronized with nominal GDP growth rates, while long-term rates reacted to the deflationary undercurrents accompanying technological prosperity, causing the yield curve to average an inversion of about 100 basis points, as shown in the figure below.

Other New Year Thoughts

Gold Prices Rise and Bitcoin Prices Fall

During 2025, gold prices rose by 65%, while Bitcoin prices fell by 6%. Many observers attribute the surge in gold prices from $1,600 per ounce to $4,300, a 166% increase, since the end of the U.S. stock market bear market in October 2022, to inflation risks. However, another explanation is that global wealth growth (as evidenced by the 93% increase in the MSCI Global Stock Index) has outpaced the annualized growth rate of global gold supply of about 1.8%. In other words, the incremental demand for gold may have exceeded its supply growth. Interestingly, during the same period, Bitcoin prices rose by 360%, while its supply growth rate was only about 1.3% annually. It is noteworthy that gold and Bitcoin miners may respond very differently to these price signals: gold miners would respond by increasing gold production, while Bitcoin cannot do so. According to mathematical calculations, Bitcoin is expected to grow by about 0.82% annually over the next two years, after which its growth rate will slow to about 0.41% per year.

Long-Term Perspective on Gold Prices

Measured by the ratio of market capitalization to M2 money supply, gold prices have only exceeded this level once in the past 125 years, during the early 1930s Great Depression. At that time, gold prices were fixed at $20.67 per ounce, while the M2 money supply plummeted by about 30% (as shown in the figure below). Recently, the ratio of gold to M2 has surpassed the previous peak, which occurred in 1980 when inflation and interest rates soared to double digits In other words, from a historical perspective, gold prices have reached extremely high levels.

The chart below also shows that the long-term decline of this ratio is closely related to the robust returns of the stock market. According to research by Ibbotson and Sinquefield, the compound annual return of stocks has been about 10% since 1926. After this ratio reached two major long-term peaks in 1934 and 1980, stock prices measured by the Dow Jones Industrial Average (DJIA) achieved returns of 670% and 1015% over the 35 years and 21 years ending in 1969 and 2001, respectively, with annualized returns of 6% and 12%. Notably, the annualized returns for small-cap stocks were 12% and 13%, respectively.

For asset allocators, another important consideration is the relatively low correlation of Bitcoin returns to gold returns and to the returns of other major asset classes since 2020, as shown in the table below. It is noteworthy that the correlation between Bitcoin and gold is even lower than the correlation between the S&P 500 index and bonds. In other words, for asset allocators seeking higher risk-adjusted returns in the coming years, Bitcoin should be a good diversification investment choice.

Dollar Outlook

In recent years, a popular saying has been the end of American exceptionalism, with the dollar experiencing its largest decline in the first half of the year since 1973 and its largest annual decline since 2017. Last year, measured by the trade-weighted dollar index (DXY), the dollar fell 11% in the first half and 9% for the entire year. If our predictions about fiscal policy, monetary policy, deregulation, and U.S.-led technological breakthroughs are correct, then U.S. investment returns will improve relative to the rest of the world, thereby pushing up the dollar exchange rate. The policies of the Trump administration are reminiscent of the situation during the early 1980s Reaganomics era, when the dollar exchange rate nearly doubled, as shown in the chart below.

AI Hype

As shown below, the booming development of artificial intelligence is driving capital expenditures to their highest levels since the late 1990s. By 2025, investment in data center systems (including computing, networking, and storage devices) is expected to grow by 47% to nearly $500 billion, with an additional 20% growth anticipated in 2026, reaching about $600 billion, far exceeding the long-term trend of $150 billion to $200 billion per year in the decade prior to the launch of ChatGPT. Such a massive scale of investment raises the question: "What is the return on this investment?" Where will it be reflected again?”

In addition to semiconductor and publicly listed large cloud companies, unlisted AI-native enterprises are also benefiting from growth and investment returns. AI companies are among the fastest-growing enterprises in history. Our research shows that consumers are adopting AI at twice the speed of internet adoption in the 1990s, as shown below.

It is reported that by the end of 2025, the annual revenue of OpenAI and Anthropic will reach $20 billion and $9 billion, respectively, an increase of 12.5 times and 90 times compared to $1.6 billion and $100 million in the same period last year! There are rumors that both companies are considering an initial public offering (IPO) in the next year or two to raise funds for the large-scale investments needed to support their product models.

As Fidji Simo, CEO of OpenAI's application division, said: “The capabilities of AI models far exceed the levels experienced by most people in their daily lives, and 2026 will be the year to bridge this gap. The leaders in the AI field will be those companies that can translate cutting-edge research into products that are practically useful for individuals, businesses, and developers.” This year, as user experiences become more humanized, intuitive, and integrated, we expect to make substantial progress in this field. ChatGPT Health is an early example, a dedicated area within the ChatGPT platform aimed at helping users improve their health based on their personal health data.

In enterprises, many AI applications are still in the early stages, hindered by bureaucracy, inertia, and/or prerequisites such as restructuring and building data infrastructure, leading to slow progress. By 2026, organizations may realize that they need to leverage their own data to train models and iterate quickly, or risk being left behind by more ambitious competitors. AI-driven applications should be able to provide instant and excellent customer service, faster product release speeds, and help startups create more value with fewer resources.

Market Valuation is Overvalued

Many investors are concerned that stock market valuations are too high and are currently at historical highs, as shown in the chart below. Our own valuation assumption is that the price-to-earnings ratio (P/E) will revert to around 20 times, the average level over the past 35 years. Some of the most significant bull markets have occurred alongside compressions in P/E ratios. For example, from mid-October 1993 to mid-November 1997, the annualized return of the S&P 500 index was 21%, while its P/E ratio fell from 36 times to 10 times. Similarly, from July 2002 to October 2007, the annualized return of the S&P 500 index was 14%, while its P/E ratio fell from 21 times to 17 times Given our expectation that actual GDP growth will be driven by productivity improvements and a slowdown in inflation, the same dynamics should reappear in this market cycle, and may even be more pronounced.

As always, a big thank you to ARK's investors and other supporters, and special thanks to Dan, Will, Katie, and Keith for helping me write this lengthy New Year's message!

Kathy