2026 INVESTMENT OUTLOOK

Executive Summary

The investment case for 2026 rests on a fundamental tension: corporate earnings remain robust and are projected to grow 12–15%, while equity valuations sit near the upper quartile of their 10-year range on a forward P/E basis. This creates an environment in which returns are more likely to be driven by earnings delivery rather than multiple expansion, representing a shift from the valuation-driven gains of recent years.

Three structural forces dominate the outlook. First, the AI infrastructure buildout has reached a scale that is difficult to compare with prior capital investment cycles. Based on announced guidance from major hyperscalers, aggregate capital expenditure may approach or exceed $600 billion in 2026, representing approximately 1.9% of U.S. GDP. Second, monetary policy is transitioning toward neutral, with the Federal Reserve’s December dot plot indicating one additional 25 basis point cut in 2026, bringing the terminal rate to approximately 3.25–3.50%. Third, fiscal policy remains expansionary, supported by depreciation incentives that are expected to sustain business investment.

Our base case projects the S&P 500 reaching approximately 7,400–7,600 by year-end 2026, implying total returns of 8–12% including dividends. This outlook is predicated on consensus EPS of approximately $306–312, representing 12–15% growth; a forward P/E multiple of 22–24x, broadly in line with current levels; and continued economic expansion without a recession. The risk-reward profile remains asymmetric: upside is constrained by elevated valuations, while downside scenarios involving earnings disappointment, inflation persistence, or policy missteps could result in drawdowns of 15–20%.

KSE Investment Approach

The market environment described above has direct implications for how we position capital. In a regime where returns are increasingly dependent on earnings delivery rather than multiple expansion, security selection and risk management become paramount.

KSE Capital Management employs a concentrated, research-intensive approach focused on identifying companies with durable competitive advantages, strong free cash flow generation, and management teams with demonstrated capital allocation discipline. We seek businesses where intrinsic value can be estimated with reasonable confidence and where current prices offer an adequate margin of safety relative to our assessment of downside scenarios.

Given the elevated concentration of earnings growth among large-cap technology names, we maintain a disciplined approach to position sizing and sector exposure. While we recognize the fundamental strength of leading technology franchises, we are mindful that index-level outcomes are increasingly sensitive to a narrow cohort of companies. Our portfolio construction process explicitly considers correlation risk and scenario-weighted drawdown potential alongside expected returns.

Macroeconomic Framework

U.S. Growth: Resilience Amid Crosscurrents

The U.S. economy has demonstrated notable resilience. The World Bank’s January 2026 Global Economic Prospects report revised U.S. 2026 GDP growth upward to 2.2% from 1.6% in its prior forecast, reflecting stronger-than-expected domestic demand and continued technology investment. The IMF projects 2.0% growth, while the Federal Reserve’s Summary of Economic Projections indicates 2.3%. We estimate growth in the range of 2.0–2.4%, with risks modestly skewed to the downside due to tariff effects and labor market softening.

Consumption dynamics remain bifurcated. Higher-income households, supported by asset price appreciation, continue to drive spending. Lower-income cohorts face pressure from elevated price levels and rising credit delinquencies. This divergence creates sector-specific opportunities but also vulnerability should labor market conditions deteriorate materially.

Private investment is increasingly technology-driven. In the first half of 2025, IT equipment investment contributed a substantial share of GDP growth, reflecting the early stages of an AI-driven capital expenditure cycle spanning semiconductors, data centers, power generation, and industrial equipment. Competitive dynamics and adoption curves suggest this investment intensity is likely to persist.

Monetary Policy: Approaching Neutral

The Federal Reserve has reduced policy rates by approximately 175 basis points since September 2024, bringing the federal funds rate to 3.50–3.75%. The December 2025 FOMC meeting highlighted divergence among policymakers, underscoring the challenge of balancing inflation that remains above target with a gradually softening labor market.

The December dot plot suggests one additional 25 basis point cut in 2026, resulting in a median year-end rate of 3.25–3.50%. This path is more hawkish than market expectations earlier in the cycle. While leadership changes in 2026 introduce uncertainty, we expect institutional continuity to limit abrupt policy shifts.

Corporate Earnings Analysis

Earnings Growth: Concentration Risk

Consensus expectations remain constructive. Available data indicate projected S&P 500 EPS growth of approximately 12–15% in 2026, implying earnings of roughly $306–312. Revenue growth of 7–8% supports this outlook, consistent with nominal GDP expansion and productivity gains.

Earnings growth remains concentrated among large-cap technology and communications companies, which account for a disproportionate share of projected index growth. As a result, index-level outcomes are increasingly sensitive to performance within a narrow group of firms. Sustained earnings delivery from these companies is therefore critical to the broader market outlook.

Margins have remained resilient despite tariff pressures. Companies have absorbed costs through efficiency gains, supply chain adjustments, and selective price increases, limiting margin compression to date.

Valuation: Elevated with Limited Margin of Safety

The S&P 500 trades at approximately 22x forward earnings, placing valuations in the upper range of recent history. Trailing multiples are similarly elevated by historical standards. While elevated valuations do not imply an imminent correction, they do embed optimistic assumptions regarding earnings growth, policy support, and productivity gains.

At current levels, markets are priced for a high degree of earnings delivery. A modest earnings shortfall or valuation compression could result in meaningful downside. This asymmetry supports a disciplined approach to risk management and position sizing.

The AI Infrastructure Cycle

Capital Deployment at Unusual Scale

The AI infrastructure buildout has reached a scale that is unusual by historical standards. Based on announced capital expenditure guidance from Meta, Microsoft, Alphabet, and Amazon, aggregate hyperscaler capex may approach or exceed $600 billion in 2026, representing a substantial increase from prior years. A significant portion of this spending is directed toward AI-related infrastructure rather than traditional cloud investment.

When viewed relative to U.S. GDP, current technology capex approaches levels associated with prior large-scale infrastructure initiatives. While historical comparisons are imperfect, the magnitude of current investment underscores the importance of AI-related assumptions embedded in market valuations.

Monetisation Risk

Industry data and public disclosures suggest a meaningful gap between infrastructure investment and realized returns. While management commentary indicates confidence in demand visibility, the timeline for monetization remains uncertain. Elevated capital intensity and increasing reliance on debt financing heighten sensitivity to changes in growth expectations.

Fixed Income Positioning

Rates and Duration

With the 10-year Treasury yield near 4.0%, real yields remain positive by historical standards. Medium-duration, high-quality fixed income offers an attractive balance between income generation and interest rate risk. Investors heavily allocated to cash face reinvestment risk as policy rates normalize.

Credit Quality

Credit spreads remain compressed, offering limited compensation for incremental risk. An emphasis on higher-quality issuers with resilient balance sheets is warranted, particularly given rising leverage in select sectors tied to capital-intensive investment cycles.

Key Risk Factors

Key risks include valuation compression, AI monetization disappointment, inflation persistence, political and policy uncertainty, labor market deterioration, and long-term fiscal sustainability concerns. Each of these factors could independently or collectively challenge current market assumptions.

Portfolio Considerations

A moderate-risk portfolio may maintain equity exposure broadly in the range of 55–65%, depending on investor objectives and constraints. Equity exposure should emphasize companies with durable earnings profiles and clear paths to return on invested capital.

Fixed income allocations of approximately 25–35% can serve as portfolio ballast, favoring high-quality, medium-duration securities. Alternatives, including gold and select private market exposures, may enhance diversification for investors with appropriate liquidity tolerance. A modest cash allocation provides flexibility in periods of market stress.

Important Disclosures

This document is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation of an offer to purchase any securities or interests in any fund or investment vehicle managed by KSE Capital Management LLC (“KSE”). Any such offer or solicitation may only be made pursuant to the Confidential Private Placement Memorandum and related subscription documents (collectively, the “Offering Documents”), which contain important information concerning investment risks, fees, and other material terms.

Interests in KSE Secure LP are offered solely to investors who qualify as “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933. Prospective investors should carefully review the Offering Documents in their entirety and consult with their own legal, tax, and financial advisors prior to making any investment decision.

Interests in the fund have not been registered under the Securities Act of 1933 or any state securities laws and are subject to significant restrictions on transfer. There is no public market for interests in the fund, and none is expected to develop. Investors should be prepared to bear the economic risk of their investment for an indefinite period and be able to withstand a total loss of their investment.

The views and projections expressed herein are based on publicly available information and reflect analysis as of January 2026. Such views are subject to change without notice and should not be construed as a guarantee of future performance. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. Forward-looking statements are inherently uncertain, and actual outcomes may differ materially from those expressed or implied.

KSE Capital Management LLC is registered as an Exempt Reporting Adviser with the U.S. Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940. Registration does not imply any particular level of skill or training.