Investment Outlook 2026 - GAMCO Annual Meeting - Gabelli CIO of Growth Howard Ward

Speaker A: Howard Ward, our CIO of growth, kicking us off as Yoshi does. Thank you, Chris. So today we're going to do, uh, the economic outlook. First of all, Artemis ii, made in America by America's great aerospace contractors and took astronauts farther into space than anybody has ever gone. Blast off and lift off. The crew of Artemis 2 now bound for the moon. Humanity's next great voyage begins. This is American engineering and know how.

Speaker B: Roger.

Speaker A: Roll pitch Innovation Houston now controlling the

Speaker B: flight of integrity on the Artemis 2 mission. Around.

Speaker A: Integrity, AMT high.

Speaker B: AMT high on time. Passing 30 seconds into the flights. Integrity passes the ultimate Eagle target. Milestone. Mission Control, Houston seeing good performance. Space launch system core stage integrity three miles in altitude, traveling more than 1200 miles per hour.

Speaker A: Uh, just as Artemis is lifting off, we think the US Economy is starting to lift off as well. And we're going to talk about that today. But first, first part of our presentation, we have to address the war, because war and stocks have a theme over a period of years, and we're going to take a quick look at that. However, Memorial Day is coming up very quickly. It's just over a week away. And since I'm going to talk about war, Memorial Day is a week ahead. We're going to look for a few good men. These are the Gabelli veterans. Tony Bancroft, are you here? Tony Bancroft, United States Marine Corps. Ned Wagner, United States Army. John Juback. I don't believe John is here. Peter Terrapin, are you here, Peter? Anyway, shout out to our veterans with Memorial Day coming up. Uh, now what I'm going to show you is very quickly a series of graphs showing the stock market during periods of conflict, during periods of war. The first slide here is sort of symbolic of all of them. At the outbreak of hostilities, the stock market sells off, but ultimately grinds higher and ends the war at a much higher level. Here's World War II. You can see the low in 1942. The Korean War once again, the dip and the rally. The Vietnam War. The dip and the rally interrupted in 1974 by the OPEC oil embargo. The 734 oil, oil and borrow was the result of retaliation against the United States for helping Israel with the Yom Kippur War. Kuwait invades Iraq. I can still remember seeing George Herbert Walker Bush standing on the front lawn of his house in Kennebunkport, Maine, saying, the United States of America fears no one. Al Qaeda and Taliban. We went hunting for them in Afghanistan 2001-2014. The dip in 20089 was unrelated to the war. That was the great financial crisis. Similarly, Iraq, the great financial crisis interrupted what had been an ongoing rally in that market. Here we are in Iran. First month market sells off. Second month, April. Who would have thought that becomes the best performing month for the stock market since 2020, up over 10%. So now let's talk about the economy. Trend line growth for the GDP has been slowing over the years. It's been slowing because our labor force growth has slowed and productivity has slowed. So we have a 50 year trend line growth of 2.8% real GDP, but over the last 20 years that has slowed to 2.1%. We look at the forecast for this year, 2026, it's 2.1% right on that trend line, the same as 25, which was a slowdown from 2.8% in 2024 to that 2.1% trend line. Consumer sentiment, this is a University of Michigan survey, is at a record low. Now mind you, this is sentiment, this is not spending intentions, it's not financial conditions, it's how does the consumer feel. The consumers are not feeling very good right now, primarily because of higher prices. Inflation is up so 2.7% inflation in 2025, the expectation has been for 3.3%. For 2026, I think that number is heading higher. Just uh, this week we got the trailing twelve month CPI for the twelve months ended in April and it's up to 3.8%. Unemployment is up. Another reason why consumer might not be feeling so good, but it's only up a little bit. 4.3% is where we are now. The expectation is that that will go to 4.5. Actually I don't think we're going to get to 4.5 because the economy's already really beginning to behave better. The labor markets are very stable. Housing affordability however, remains near record lows. And again, something that consumers don't like. You recall that during the pandemic we had a rush to buy houses and escape the cities and we had extremely low mortgage rates, propped up housing prices. Housing prices have stayed higher and interest rates have gone up, making housing affordability very low. There's also a real housing shortage because we lost about 700,000 housing tradesmen coming out of the great financial crisis. The people are, uh, just not there. All the tradesmen are not there to build houses the way that we used to. Opec, um, not opec. Oil prices are high. And this is really the biggest issue that we face looking at the stock market and what the risk is to the stock market over the next 12 months, it's oil prices remaining elevated. If they remain elevated through the summer, the news is going to continue to deteriorate. Already the stock markets are becoming increasingly sensitive to the swings in the price of oil. You see this mostly or mostly in Japan. Japan is very dependent on energy that they import. It's about 80% plus of their energy needs is imported energy. But all is not gloom and doom. Capex to the rescue. We have some headlines from the Wall street journal here from May 1. AI investments drive rebound in US growth Caterpillar lifts outlook citing AI led building boom US saves the Trump Economy. That's a Wall Street Journal op ed piece. So let's look at the capex. Capex is going to be about $1.2 trillion this year. That's up 13% from 2025. 2025 was also a good year for capex, up 19%. If you look at 2026 intentions compared to 24, that's a 34% increase in capex. And yes, a lot of this is driven by AI. Here are the five biggest capex spenders for this year. They're all big technology names. Amazon, Microsoft, Alphabet, Meta and Oracle. $770 billion of CapEx, of which about 70% or 540 billion will be spent here in the United States. Obba, one big beautiful act, or beautiful bill if you prefer, was passed, uh, in order to stimulate capital spending by providing additional tax breaks for the companies that spend the money. And so what used to take, in the case of manufacturing structures, 39 years to fully depreciate or to write off, you can now do that 100% in one year. And you see for equipment, domestic research and development and software, all of those expenses can be completely written off in the first year. You no longer have to wait 1, 2, 3, 4, 5 or in the case of structures, 39 years. We also are getting fiscal stimulus this year. The tariffs are lower because you recall the courts, um, said a lot of those tariffs that were implemented were illegal. So they've had to roll those back. So if they don't change them, if they leave them where they are now, that will free up $266 billion. We have lower individual taxes. That's also part of that OBBA bill, $190 billion benefit and we have the depreciation from the CapEx. That's lowering the tax bill of those companies by about $200 billion. So lots of fiscal stimulus coming in as well. Resulting manufacturers at the beginning of this year turned optimistic. The Orders have picked up. And look at the way that chart took a sharp turn higher right at the turn of the year as the orders started coming in. So there are a number of signs of accelerating growth. I'm listing 10. Unemployment claims are falling. Manufacturing PMIs are rising. Capital goods orders are surging. We have record payroll employment. We have record household wealth. Manufacturing employment is turning up. We have non residential construction employment is turning up. Class 8 truck orders are rising. Retail sales are turning up. And we have this historic capex expansion which we've just talked about. So now brief, uh, section on our fiscal matters. We've talked about this in the past. We keep kicking the can down the road when it comes to our debt. Since 1980, when debt was as a percentage of GDP only 1.4%, we've managed to increase that to 5.8% of GDP. Um, the debt has gone, the annual deficit has gone from $110 billion to $1.9 trillion. Um, when we look at the last two years plus projections for this year, you see about a 10% increase in gross debt. But if you look at the bottom line here, that's the net interest paid. You see that over the two years that's actually up 19% even though the actual annual deficit is only up, um, uh, a little bit over the last two years. Uh, and spending as a percentage of GDP really hasn't changed much, but the interest cost is rising a lot because a lot of our debt was originally issued at some of those very low interest rates of recent history. And as that is coming due, it is getting rolled over at much higher rates. And that's resulting in the interest costs rising. And the projection is that $1 trillion interest bill will be hitting $2 trillion in about 10 years. When we look at that debt to GDP and compare ourselves to others, in this case we're comparing ourselves to Europe, the EU 27 countries, plus the UK 28 countries. We are the third worst of those 28 countries when it comes to looking at our debt to gdp. So this really is something we cannot ignore. It's not a problem today, probably won't be a problem in five years, but in 10 years that could be another matter m altogether. Monetary policy the Kevin Wash era begins. Today is the last day of Jay Powell's term as Chairman of the Fed. So technically Kevin, uh, Walsh becomes the Fed Chairman tomorrow. Trump. This is, uh, obviously Trump with uh, with Powell, who he calls too late Powell because he thinks that Powell's been too late to cut rates. And I don't Think that's a fair uh, look at the work that he has done. We're going to look at that in a minute. But first, these two guys have a bad relationship right now because Powell's not cutting rates and Trump wants him to. So Trump is calling him one of the dumbest and most destructive people in government and an American disgrace. He's calling him a total and complete moron. He's calling him a major loser. And he says that his termination cannot come fast enough. Well now it's here. He's no longer Fed chair but he can stay on as a member of the Fed until January of 2028. So here's what he's actually done. He actually has been cutting rates. He's cut rates six times, uh, over the last two years for 175 basis points of cuts. Three times in 2024, three times in 2025. So that's why I think saying he's too late Powell, maybe that's not fair. If anything he was very too late to raise interest rates coming uh, out of the pandemic. So who is Kevin Marsh? He's a very smart guy. That's who he is. He's 56 years old. I'm not going to let his youth and inexperience, I'm m not going to hold that against him. Um, he's very bright. Stanford University, Harvard Law School, cum laude, Morgan Stanley, uh, 1996-2002 MA that he did there, uh, 2002 appointed by George Bush to be his special economic advisor. And then in 2006 Bush appointed him as a member of the Fed Board of Governors. He resigned seven years before his term ended because he was a real inflation hawk, one of the hawkiest of them all. And he had an upset, he was upset with Bernanke. He didn't want to do QE2 and he quit over that and joined the Stan Druckenmiller's family office, uh, where he's been hanging out uh, for the last 15 years. And you could do a lot worse than hanging out with Stan druckenmiller uh, for 15 years as he's one of the top investors um, of the generation. Um, so Kevin was confirmed just yesterday as chairman of the Fed for the next four years and to a 14 year term uh, on the board. Um, every Fed chair is controversial. Uh, I don't care who you want to look at, they're all controversial. It's a very difficult job with the big lags of monetary policy makes it especially tough. So um, we wish him well. Question is, is it going to be the hawk that he was for most of his time, or is he going to be the Dove? Is he going to disappoint the President or not? Is he going to stand up for the bond market? The thing is, inflation is 3.8% in the last 12 months. It's going to be really difficult to convince the other members of the Fed board to cut rates. It's probably not going to happen, so we'll see what plays out. That first meeting is in June. Private credit jitters have some people concerned this year. Maybe this is a big deal. Doesn't look like a big deal to us. Private credit is only 3.5% of the corporate borrowing market. Um, so it's just not really big enough to create any kind of systemic risk. Yes, there are issues within private credit itself. 2.5% of the issues defaulted last year. That number may go up to 5% this year. But 5% of a market that's only 3.5% of the total corporate market doesn't seem systemic to me. So the tariffs, what's the report card? Because, as you may recall, I have a certain point of view on this, which is biased and negative. I didn't want to interject my views on this, So I asked ChatGPT for a report card on the tariffs. And you could all do the same thing. You get probably the same result. Well, here's the result. Uh, the inflation impact. It added 80 basis points to inflation, so it gives it a D. The trade balance was hardly changed, so that's a d. We lost 89,000 manufacturing jobs, so that's a D. Reduced import, so that's a B minus. Revenue raised is an A, but that was before the court required them to refund a lot of the tariffs. Um, Yesterday I asked ChatGPT what their current grade would be for that, and it's a D plus. Um, the net economic impact is a C minus. Who paid the tariffs? 90% Americans. That's a D. Excuse me, but you're not Evan.

Speaker C: True.

Speaker A: Where's Evan?

Speaker B: Elsewhere.

Speaker A: So you don't know? Sure. Oh, good. You meant Joaquin.

Speaker B: Proper introductions were not made.

Speaker A: What's he doing here? Uh, he's helping me write an algorithm. So, uh, we can beat the stock market.

Speaker C: Why?

Speaker A: Uh, so we can get rich, buy cool cars and get girls. But mostly the girls. Some things never change. They want to get rich so they can get cool cars and get girls. They're riding Algos. They're not picking stocks. They're riding Algos. Algos create volatility. And the computer generated algos are 70 to 80%, sometimes more of the average daily volume on the New York Stock Exchange. So we get these violent moves in the market and one day to the next may be completely different. It's not the fund managers, the, that are doing this, it's not the mutual fund guys, it's a different group and they really hold the market, uh, hostage day to day. So once again, April 2026, the best month since 2020. Why? Because we have strong earnings, we have a sound Fed policy, we have an accelerating economy, and we have this innovation. It's called AI but there's a lot more to innovation. There's a lot more innovation than just A.I. s and P. Earnings look strong. This is probably the most important chart that we have in the whole table. It's the strong earnings last year up 13.5%. This year the expectation is now 21%. When the year started, the expectation was 13%. Three months ago the expectation was 17%. But we got the reports for the first quarter and the earnings were actually up 27%. So now the expectation for the full year is up to 21% with another gain of 13 plus percent next year. That is very powerful, powerful medicine for the stock market. There are a number of reasons that stocks may decline, but expecting higher earnings is not one of them. Are stocks cheap? No, they're not. And they haven't been cheap for a few years. But the market has continued to go up. You've seen this chart now for the 32 years that I've been giving it to you. The long term investor in stocks does the best, up 10.3% for the last 30 years, edging out gold for the 10 year period as well, but not by much. Gold was up a whopping 65% last year. Is Caesar here? Caesar. Congratulations to Caesar, wherever he is. Anyway, um, you want to be patient in stocks, record household net worth. I want you to look at that graph. Just look at it. You know what that looks like? That looks like a graph of the stock market. There's the 48 years of the stock market, of the S and p. I picked 48 years because that's the span of my career. And I think, God, wasn't I lucky to be able to enjoy that kind of a stock market during my 48 years thus far career. But then I thought, well, let's see what happens. Let's see how lucky I was. Let's go back even farther. Let's go back another 50 years and see what happened. It was even better. This includes the Depression. This is from 1927 on. 11.1% nominal, 7.5% real. Whoa, whoa. Don't fight the trend of the stock market. Get those good companies. This is the bull. The bull says, don't look at me. I don't have to prove anything. Just look at the record. Don't look at me. And the bear says, the burden of proof is on me.

Speaker C: This webcast is an excerpt from the GAMCO Annual meeting held on May 15, 2026. GAMCO is providing these links as a matter of general information. We do not intend for these links to be a complete description of any security or company, nor is it a research report with respect to any of the companies mentioned herein. The analyst's views are subject to change at any time based on market and other conditions. The information in this posting represents the opinions of the analyst and is not intended to be a forecast of future events, a, uh, guarantee of future results, or investment advice. Views expressed are those of the analyst and may differ from those of other GAMCO officers, analysts, other employees, or of the firm as a whole. Because the investment personnel at GAMCO and our affiliates make individual investment decisions with respect to the client accounts that they manage, these accounts may have transactions inconsistent with the information contained in this posting. Certain GAMCO personnel may know the substance of the posting prior to its posting. This webcast is not an offer to sell any security, nor is it a solicitation of an offer to buy any security. Stocks are subject to market economic and business risks that cause their prices to fluctuate. When you sell shares, they may be worth less than what you paid for them. For more information, a, uh, prospectus or summary prospectus, visit our website@gabelli.com or call 800-GABELLI or email infogabelli.com.