"Wood Sister's" 2026 Outlook: An Upgraded Version of "Reaganomics," U.S. stocks continue their "golden age," and a stronger dollar suppresses gold.

"Wood Sister's" 2026 Outlook: An Upgraded Version of "Reaganomics," U.S. stocks continue their "golden age," and a stronger dollar suppresses gold.

ARK Invest founder Cathie Wood (“Muzhu Jie”) released her latest macro outlook in the 2026 New Year’s letter to investors, describing the next three years as “Reaganomics on steroids.” She pointed out that with deregulation, tax cuts, sound monetary policy, and innovative technologies converging, the U.S. stock market is about to usher in another “golden age.” The imminent surge in the U.S. dollar may put an end to gold’s upward momentum.

Specifically, Cathie Wood believes that while real GDP has continued to grow over the past three years, the underlying U.S. economy has experienced a rolling recession and is now like a “coiled spring,” poised for a strong rebound in the coming years. She emphasized that with David Sacks becoming the first AI and crypto “czar” to lead deregulation and the effective corporate tax rate heading towards 10%, U.S. economic growth will benefit from a significant policy dividend.

On the macro level, Wood forecasts that driven by a productivity boom, inflation will be further controlled, and may even turn negative. She expects U.S. nominal GDP growth to remain in the 6%–8% range in the next few years, mainly fueled by productivity gains rather than inflation.

Regarding market impact, Wood predicts the U.S. will gain a relative advantage in investment returns, driving a sharp rise in the dollar, similar to its near doubling in the 1980s. She warns that even though gold prices have surged in recent years, a strong dollar will suppress gold, while Bitcoin, due to its supply mechanism and low asset correlation, will show distinct price action from gold.

On the question of market valuations, Wood does not believe an AI bubble has formed. She points out that although price-to-earnings ratios are historically high, technological drivers like AI and robotics will unleash productivity, enabling company earnings growth to absorb high valuations. The market may see positive returns even as valuations compress, similar to the bull market in the latter half of the 1990s.

The original investor letter is as follows:

Happy New Year to ARK investors and other supporters! We greatly appreciate your support.

As I have outlined in this letter, there are indeed many reasons for investors to remain optimistic! We hope you enjoy our discussion. From the perspective of economic history, we are at a pivotal moment.A Coiled Spring

Despite continued growth in U.S. real Gross Domestic Product (GDP) over the past three years, the underlying structure of the U.S. economy has undergone a rolling recession that has morphed into a tightly compressed spring, perhaps positioned for a strong rebound in the coming years. In response to COVID-related supply shocks, the Fed increased the federal funds rate from 0.25% in March 2022 to 5.5% by July 2023, a record jump of 22-fold over 16 months. This rate hike pushed housing, manufacturing, non-AI-related capital expenditure, as well as America’s middle and lower-income groups into recession, as shown below.

Measured by existing home sales, the housing market dropped 40% from an annualized 5.9 million in January 2021 to 3.5 million in October 2023. The last time this level appeared was November 2010, and in the past two years, used home sales have hovered around this number. This shows how tightly compressed the spring is: Current existing home sales mirror early 1980s levels, when the U.S. population was about 35% smaller than now.



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



Meanwhile, capital expenditures measured by non-defense capital goods (excluding aircraft) peaked in mid-2022, and have since rebounded regardless of technology influence. In fact, since the tech and telecom bubble burst, it took over 20 years for this capital expenditure index to break through, until 2021 when COVID supply shocks accelerated both digital and physical investment. What was once a spending ceiling now seems a floor, as AI, robotics, storage, blockchain, and multi-omics sequencing platforms are ready for a golden age. Following the $70 billion spending peak of the late-1990s tech/telecom bubble that lasted 20 years, this could be the strongest capital expenditure cycle in history, as shown below. We believe the AI bubble is far from imminent!



Meanwhile, University of Michigan data shows that middle/lower income confidence has dropped to its lowest since the early 1980s. At that time, double-digit inflation and high rates eroded purchasing power, pushing the U.S. into back-to-back recessions. As shown below, even high-income confidence has declined in recent months. In our view, consumer confidence is one of the most tightly compressed "springs" with the greatest rebound potential.

Deregulation, Lower Taxes, Lower Inflation, and Lower Rates

Thanks to deregulation, lower taxes (including tariffs), reduced inflation and interest rates, America’s rolling recession of recent years could quickly reverse in the next year and beyond.

Deregulation is unleashing innovation in multiple industries, especially AI and digital assets, spearheaded by the first "AI and Crypto Czar," David Sacks. Lower tips, overtime, and social security taxes will bring substantial tax refunds to U.S. consumers this quarter, potentially boosting real disposable income from about 2% annualized growth in H2 2025 to about 8.3% this quarter. Meanwhile, accelerated depreciation for manufacturing facilities, equipment, software, and domestic R&D is expected to lower effective corporate tax rates to near 10% (see below), making tax refund amounts grow substantially. 10% is among the lowest global rates.

For example, any company building a U.S. manufacturing plant before the end of 2028 can fully depreciate its construction in the first year, rather than over 30–40 years. Equipment, software, and domestic R&D also qualify for 100% year-one depreciation. This cash flow incentive was made permanent in last year’s budget, retroactive to January 1, 2025.



In recent years, inflation measured by the Consumer Price Index (CPI) has stubbornly hovered between 2% and 3%, but for several reasons shown below, inflation will likely drop to an unexpectedly low level—or negative. First, West Texas Intermediate (WTI) crude has fallen about 53% since its post-COVID March 8, 2022 high of $124/barrel, and is down about 22% year over year.



Since peaking in Oct 2022, new single-family home prices are down about 15%. Meanwhile, the inflation rate of existing single-family homes—based on a three-month moving average—has declined from 24% year-over-year after the post-COVID June 2021 peak, to about 1.3% now, as shown below.



In Q4, to digest nearly 500,000 of new single-family inventory (see below, the highest since before the 2007–08 global financial crisis), top three homebuilders slashed prices: Lennar –10%, KB Homes –7%, DR Horton –3%, year-over-year. These price cuts will have a lagged impact on CPI in coming years.



Finally, one of the strongest disinflationary forces, nonfarm productivity, is rising amid the sustained recession, up 1.9% YoY in Q3. Compared to 3.2% wage growth per hour, soaring productivity has reduced unit labor cost inflation to 1.2%, as below. There’s no 1970s-style cost-push inflation here!



This improvement is also validated: According to Truflation's inflation measure, the annual rate has recently dropped to 1.7%, nearly 100 bps below CPI data from the Bureau of Labor Statistics (BLS), as shown below.

Productivity Boom

Indeed, if our research on tech-driven disruptive innovation is correct, nonfarm productivity growth should accelerate to 4–6% annually, further reducing unit labor cost inflation amid cyclical and secular forces. The convergence of today’s major innovation platforms—AI, robotics, energy storage, public blockchain, and multi-omics—will drive productivity to new sustainable highs and generate massive wealth.

Productivity gains can also correct significant global geoeconomic imbalances. Companies can allocate productivity windfalls to one or more of four strategic avenues: expanding profit margins, increasing R&D/investment, raising compensation, and/or lowering prices. In China, higher productivity can be channeled into increased wages/profit margins, helping the economy escape structural overinvestment. Since acceding to the WTO in 2001, China’s investment as a percent of GDP has averaged 40%, almost twice the U.S. (see chart below). Higher wages would shift China towards a consumption-driven economy, avoiding the commoditization path.



In the short term, tech-powered productivity growth may keep U.S. job growth subdued, push unemployment rates from 4.4% to above 5.0%, and prompt the Fed to cut rates further. Then, deregulation and other fiscal stimuli should amplify low-rate impacts, accelerating GDP growth in H2 2026. Meanwhile, inflation may stay muted due to falling oil/housing/tariff costs and productivity-driven declines in unit labor costs.

Strikingly, AI training costs are falling 75% annually, while inference costs (running AI apps/models) are dropping up to 99% per year (by some metrics). Such unprecedented tech cost declines should trigger explosive unit increases. Thus, we expect U.S. nominal GDP growth to remain in the 6%–8% range in coming years, driven by 5%–7% productivity growth, 1% labor growth, and –2% to +1% inflation.

The deflationary effects of AI and the other four innovation platforms will compound, generating an economic environment that echoes the half-century before 1929, when combustion engines, electricity, and telephones drove the last great technological revolution. Back then, short-term rates tracked nominal GDP growth, while long-term rates reacted to the deflationary undercurrent of technological booms, producing a yield curve inverted about 100 basis points on average, as shown below.

Other New Year Thoughts

Gold’s Rally vs. Bitcoin’s Decline

In 2025, gold surged 65%, while Bitcoin fell 6%. Many observers attribute gold’s leap from $1,600/oz to $4,300/oz since the October 2022 U.S. bear market—a 166% rise—to inflation risk. Another explanation is that global wealth growth (MSCI World Index up 93%) is outrunning global gold supply, which grows at about 1.8% per year. In other words, the incremental demand for gold exceeds its supply growth. Interestingly, Bitcoin rose 360% over the same period, while its supply grew only about 1.3% per year. Notably, gold and Bitcoin miners respond very differently to price signals: Gold miners increase output, while Bitcoin cannot. Mathematically, Bitcoin will grow about 0.82% per year for the next two years, then slow to about 0.41% per year.

Gold from a Long-Term Perspective

Measured by market cap/M2 money supply, gold’s price has only exceeded this level once in the past 125 years—during the early 1930s Great Depression, when gold was fixed at $20.67/oz and M2 collapsed by about 30% (see below). Recently, gold’s ratio to M2 exceeded the previous high in 1980, when inflation and interest rates soared into double digits. In other words, gold is at historically high levels.

The chart below further shows that the long-term decline in this ratio coincides with robust stock market returns. Ibbotson and Sinquefield found that since 1926, stocks have compounded at about 10% annually. After the ratio peaked in 1934 and 1980, Dow Jones Industrial Average returns were 670% and 1,015% over the next 35 and 21 years, for annualized returns of 6% and 12%. Notably, small-cap returns were 12% and 13%, respectively.



Another factor for asset allocators is that Bitcoin’s returns are less correlated with gold and other major asset classes since 2020, as shown below. Notably, Bitcoin’s correlation with gold is even lower than S&P 500’s with bonds. For those seeking higher-risk returns over the next few years, Bitcoin should be a solid diversification choice.



The Dollar Outlook

In recent years, it’s popular to claim the end of “U.S. exceptionalism,” as the dollar saw its biggest first-half drop since 1973 and its largest annual drop since 2017. Last year, the trade-weighted Dollar Index (DXY) fell 11% in H1 and 9% for the year. If our forecasts pan out on fiscal/monetary policy, deregulation, and U.S.-led tech breakthroughs, America’s investment returns will outpace the world, so the dollar should rise. Trump’s policies mirror the Reaganomics era of the early 1980s, when the dollar nearly doubled, as shown below.



AI Hype

As shown below, the boom in AI is driving capital spending to its highest since the late 1990s. In 2025, investment in data center systems (computing, networking, storage) grew 47% to nearly $500 billion, and is expected to rise 20% more in 2026 to about $600 billion—far above the pre-ChatGPT trend of $150–200 billion per year over the prior decade. Such vast investment begs the question: “Where is the return? Where will it show up?”



In addition to semiconductors and publicly listed large cloud companies, unlisted AI-native companies have benefited from growth and return on investment. AI companies are among the fastest-growing in history. Our research shows that consumer adoption of AI is happening twice as fast as in the 1990s Internet revolution, as below.



Reportedly, by end-2025, OpenAI and Anthropic's annualized revenue will reach $20 billion and $9 billion, respectively—up 12.5x and 90x from the prior year’s $1.6 billion and $100 million! Rumor has it both are considering IPOs in the next year or two to fund massive investments needed for their model products.

As OpenAI’s Head of Applications Fidji Simo said: “AI models are far more capable than most people experience in daily life, but 2026 will be the year to close that gap. The AI leaders will be those who can turn cutting-edge research into products that are genuinely useful for individuals, businesses, and developers.” This year, as user experiences get more human, intuitive, and integrated, we expect real breakthroughs. ChatGPT Health is an early example—a dedicated area on the ChatGPT platform to use users’ health data to improve their wellness.

In companies, many AI applications are still in early stages, held back by bureaucracy, organizational inertia, and/or the need to build/rebuild data infrastructure. By 2026, many organizations may realize they need to leverage their own data to train models and iterate quickly, or risk getting left behind by more aggressive competitors. AI-driven applications should provide instant and superior client service, faster product launches, and help startups do more with less.

Market Overvaluation

Many investors worry about stock market overvaluation, with current multiples at historical highs, as shown below. Our own assumption is that P/E ratios will revert to about 20x, the average of the past 35 years. Some of the strongest bull markets have coincided with compressed P/Es. For example, from Oct 1993 to Nov 1997, the S&P 500 annualized 21% returns while its P/E dropped from 36x to 10x. Similarly, from July 2002 to Oct 2007, S&P annualized 14% while P/E went from 21x to 17x. Given our expectation for real GDP growth driven by productivity and cooling inflation, similar dynamics should play out in this cycle, perhaps even more dramatically.



As always, thanks to ARK’s investors and other supporters, and special thanks to Dan, Will, Katie, and Keith for helping compose this lengthy New Year's letter!

Cathie

Risk Warning and DisclaimerThe market bears risk; investment needs caution. This text does not constitute personal investment advice and does not take into account any individual user's special investment objectives, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this text suit their situation. Invest accordingly at your own risk.