Client Update, January 2026: The New Year and the Economic Landscape

“What you see and what you hear depends a great deal on where you are standing. It also depends on what sort of person you are.”

C. S. Lewis

Happy New Year, and thank you, as always, for your continued trust and partnership. As we begin 2026, it feels appropriate to step back and assess the economic landscape, what the market is grappling with, and how we are positioning capital in an environment that remains unusually volatile and uncertain.

What should investors expect from 2026?

The honest answer is that it is hard to say with confidence. The economic signal-to-noise ratio remains poor. Volatility and uncertainty remain elevated, and some government data appears increasingly unreliable (sometimes for understandable reasons, and in other cases for more concerning ones).

Layered on top of this is a massive AI-related capital spending cycle that is masking weakness elsewhere in the economy. As a result, the headline indices tell a misleading, or at least incomplete, story. Market performance has become increasingly concentrated, driven largely by five to ten hyperscalers whose datacenter and cloud spending has propped up aggregate results.

For insight into the “real economy” operating beneath this AI and data center boom, we must look elsewhere within the S&P 500, including bellwethers like Walmart (NYQ: WMT), Ford (NYQ: F), General Motors (NYQ: GM), or General Electric (NYQ: GE). What we are hearing from these companies suggests a fragile equilibrium. Companies are reluctant to lay people off, but they are also hesitant to hire. Inflation remains mixed. Some costs are easing, others are rising. Energy prices are affected by AI-driven demand, while food and commodity prices remain stubbornly high relative to household income.

Against that backdrop, we do not expect to see sharp changes heading into 2026. Companies will continue to operate cautiously, proportionate to the persistent economic uncertainty and pressure. That said, the cumulative effects of tariffs, slow growth, and higher financing costs may increasingly strain smaller businesses and those operating in more exposed areas of the economy. Bankruptcy filings reached a 15-year high in 2025, and that trend may continue into 2026, particularly among firms more dependent on debt and bank financing.

At the same time, certain segments of the economy remain resilient and will continue to function as engines of industry. Our own focus remains squarely on separating durable value from speculative excess.

AI and the Capital Cycle

We wrote extensively about AI in our letters last September and November, so we will keep our comments here brief. As we enter 2026, two dynamics stand out.

First, we expect a widening gap between companies leveraged almost exclusively to AI infrastructure and those with diversified business offers and durable competitive moats. Second, we believe AI-related infrastructure investment is beginning to unwind or at least recalibrate. Indeed, there are early signs this process has already begun.

To start, while most AI-related capital expenditures initially came from internal cash flows, financing has now begun to shift into debt. “These AI-related issuers have accounted for $141 billion in corporate credit issuance in 2025 to date, eclipsing full-year 2024 gross supply of $127 billion,” says former Goldman Sachs Chief Credit Strategist Lotfi Karoui.

Moreover, what was once viewed as a capital-light business is increasingly revealing itself to be capital-intensive. All that debt spending, even if it’s only a portion of total spend, is likely to give investors pause. In fact, we are already seeing this: Oracle (NYQ: ORCL), which sits near the center of AI and data-center spending, has assumed substantial debt (over $111 billion including off-balance-sheet liabilities) to fund its expansion. Investors, in turn, are starting to show their skepticism. After peaking near $328 per share last September, the stock has since cooled to roughly $200. CoreWeave (NYQ: CRWV), another AI cloud provider, has experienced a similar pullback, falling from a peak of $183 last summer to around $90 today.

Another signal worth noting: over the past month, the S&P 500 equal-weight index has outperformed the traditional market-cap-weighted S&P 500 by nearly 15%. To translate, the standard S&P 500 weights companies based on their market value, meaning the largest firms dominate index performance, while the equal-weight version gives each company the same influence regardless of size. When the equal-weight index outperforms, it suggests that market leadership is broadening and concentration among the largest stocks is easing. While a one-month window is not conclusive, the contrast with a year ago (when the market-cap-weighted index outperformed the equal-weight version by roughly 27% over a similar period) is notable.

Our working assumption is that the market will continue to rotate toward a more “meat-and-potatoes” environment over the next two to three years, away from speculative growth and toward reliable businesses that are currently out of cycle, out of favor, and underpriced.

Where We Are Finding Opportunity

Mega-Cap Conglomerates with Multiple Ways to Win

Alphabet (NYQ: GOOGL) and Amazon (NYQ: AMZN) remain longstanding mainstays of our portfolio precisely because they are not dependent on a single outcome. AI can enhance their existing businesses through logistics, advertising, search, cloud, or operational efficiency without serving as the sole justification for their capital plans. We continue to view them as anchors: fairly valued today, entrenched competitively, and positioned to grow steadily rather than spectacularly.

Yes, both companies are investing heavily in data centers. Amazon announced approximately $100 billion in capital expenditures for 2025, much of it AI-related. But Amazon also operates AWS, retail, logistics, and advertising businesses that function under very different economic levers. Importantly, Amazon is also positioned to benefit from AI in ways pure-play infrastructure companies cannot, particularly through warehouse automation and efficiency gains.

And we’re already seeing clues that these companies will come out on top as the AI race falters. Google was clearly afraid of losing search to AI-driven competitors at one point, for instance, but even the incremental loss in search market share they experienced earlier this year has rebounded, rising above 90% again in December. Meanwhile, business segments like YouTube continue to outperform; YouTube has become dominant in the streaming space and consistently beat out all competing streaming platforms in 2025.

For additional context, we encourage readers to revisit our August 2025 letter, where these dynamics are discussed in greater detail.

Healthy but Cyclically Out of Favor Firms

Beyond our anchors, we continue to build positions in a set of under-owned, under-discussed, and under-valued businesses that share several defining traits: strong balance sheets, leadership positions in their industries, and management teams actively buying back their own stock.

Examples include Tidewater (NYQ: TDW), Valaris (NYQ: VAL), Constellation Brands (NYQ: STZ), Diageo (NYS: DEO) and Trex (NYQ: TREX). We have discussed TDW and VAL previously, as well as STZ and DEO here, so today we will focus briefly on TREX as a representative case.

TREX manufactures composite decking that continues to take share from traditional wood. The company holds 45% market share, benefits from strong demand for its 95% recycled products, carries no debt, and generates returns on invested capital north of 15%. Its stock reached a 52-week low in October 2025 and has only partially recovered since, making it a classic example of a high-quality business facing cyclical, non-structural headwinds that have pushed its market price below value. That is precisely the type of opportunity we seek.

TREX is also a serial repurchaser of its own stock. The company authorized a $50 million share repurchase program late last year, following a similar program the previous year. In fact, buybacks feature prominently across our portfolio:

• TDW: $500M repurchase authorized August 2025

• VAL: ~$75M repurchased in the most recent quarter; ~$600M program ongoing

• STZ: $4B buyback announced April 2025; $600M completed

• LEN: $5B authorized January 2024; $4B completed

• ZTS: $6B authorized August 2024; $1.5B used as of September 2025

• ABNB: $6B authorized August 2025; $3.7B repurchased

Aggressive buybacks signal management confidence and amplify per-share value creation.

Maybe the Most Exciting Position in the Portfolio

We have written frequently about Rivian over the past year, and for good reason. The company’s long-term entrepreneurial mindset continues to impress, with a clear internal focus on building its own full tech stack and optimizing third-party relationships.

Several developments stand out. Rivian outlined a tangible roadmap for its next-generation autonomy platform, supported by millions of miles of real-world data. The decision to develop its own in-house autonomy chip, the Rivian Autonomy Platform (RAP1), signals a deeper commitment to vertical integration and long-term control of its technology stack and creates the possibility of new revenue streams beyond vehicle sales.

As Forbes put it, “Rivian is now a tech company that also makes cars.”

Progress on manufacturing has also continued, including the Georgia plant and early work on improving internal efficiency through automation and robotics. These efforts may one day extend beyond Rivian’s own operations, but more importantly, they reflect a culture that is constantly working to reduce dependency on third parties and build durable internal capabilities.

Looking ahead, the R2 model represents a pivotal moment. Building vehicles at scale is extraordinarily difficult, but Rivian has laid much of the groundwork quietly over the past several years. Partnerships with Volkswagen and Amazon have strengthened the balance sheet and expanded strategic options. Autonomy, software, and manufacturing efficiency are converging in a way that gives us increasing confidence in Rivian’s trajectory through 2026 and 2027.

At its core, our investment thesis remains centered on Rivian’s DNA. It starts with leadership (CEO RJ Scaringe continues to impress; you can listen to a recent and informative interview with him at Stratechery here), but it extends to an organization that thinks long-term, reinvests aggressively, and consistently works to control its own destiny. That mindset has mattered in every successful emerging growth company we have studied, and we believe it matters here.

A Note About the Federal Reserve

In September, we wrote about attempts by the Trump Administration to erode the independence of the Federal Reserve. That effort suddenly returned this month with the revelation that the Department of Justice had opened a criminal investigation into Federal Reserve Chairman Jerome Powell, following a threat from Trump to sue him earlier in the year.

We view this as a politically motivated attempt to pressure the Federal Reserve. As Senator Lisa Murkowski stated, “It’s clear the administration’s investigation is nothing more than an attempt at coercion.” Senator Thom Tillis echoed similar concerns, warning that the credibility of the Department of Justice itself is now in question and pledging to oppose nominees to the Fed until the investigation is resolved.

Our own view remains unchanged. Politicizing the Fed is a dangerous experiment in economic governance, and this particular effort is unlikely to succeed. The pushback from within the President’s own party suggests the administration has overplayed its hand.

We also continue to monitor, and are still digesting, other recent developments, including military action in Venezuela and aggressive immigration enforcement domestically. For the moment, we will simply reiterate what we wrote earlier this year, “Ultimately, not everything is a pure economic exercise, and we should not ignore the human impact of these actions, at home or abroad.”

On Our Desk

Lastly, a couple of quick notes:

• Novo Nordisk (NYS: NVO) and oral GLP-1 drugs: Novo has now obtained U.S. approval for the first swallowable GLP-1 medication. Given that the previous formulation required self-injection, and nearly a quarter of all U.S. adults experience trypanophobia (the fear of needles), we suspect this approval could well expand the potential customer base. You can read more about our thoughts on NVO at the end of our letter here.

• Warren Buffett as an American Role Model: The Atlantic recently ran a lengthy and thoughtful profile of Buffett well worth your time to better understand a legendary investor. You can find the profile here.

Closing Thoughts

Our playbook over the next two to three years remains straightforward: maintain exposure to high-quality anchors, while selectively adding businesses that are operationally strong, financially disciplined, and trading at attractive valuations. Tangible value today becomes increasingly important as AI-driven growth slows and expectations shift.

As the cycle matures, we expect capital to increasingly move toward companies with durable cash flows, disciplined balance sheets, and management teams focused on shareholder value, not just promises of tomorrow. We believe that shift is already underway.

At GDS Investments, we remain committed to owning foundationally strong businesses and holding them patiently. We will continue to implement that strategy and pursue opportunities on your behalf.

With warm regards,

Glenn