Hall Capital “Market Views” Newsletter January 2026

This is the 63rd edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

The Bifurcated Economy
- is being driven by one thing

Your favorite football team may have missed the playoffs. Your hairline or golf handicap may not be where you’d like them to be. But if you’re receiving this letter, chances are you’re doing just fine financially. And thanks to you in the “investor class” the economy is doing just fine as well.

Record stock and home values have created a powerful tailwind for households that both own homes and hold meaningful stock market investments. Meanwhile, most Americans continue to struggle under consumer prices that are roughly 25% higher than in 2020. This is the “K‑shaped” economy.

Two‑thirds of U.S. households (those earning under $100k) own only 10% of stock market wealth. By contrast, the top 10% of earners (those making over $210k) own well over two‑thirds of the market, and this group accounts for roughly half of all consumer spending. The $8 trillion increase in stock market wealth in 2025 alone fueled additional spending by the investor class, creating a meaningful wealth effect that boosted GDP.

That wealth effect depends on the stock market. And the stock market depends on corporate profit growth. Corporate profit growth is correlated to GDP growth. In 2025, the rapid expansion of artificial intelligence infrastructure, was responsible, according to JP Morgan, for roughly two‑thirds of GDP growth in the first half of the year.

Thus, the single biggest driver of the increasingly bifurcated economy: AI.

Investing in a Bifurcated Economy
- requires a bifurcated portfolio

The U.S. economic engine appears poised to continue moving forward into 2026, supported by five major stimuli:

Massive tax refunds. As much as $150 billion is expected in April due to the new tax bill.
A supportive Federal Reserve. The current Chair has already been reducing rates, and with a new Chair selected by Trump with an eye toward even lower rates, at least one or two additional cuts seem likely.
Continuation of the wealth effect. Higher asset values are generating an estimated $180 billion in additional consumer spending.
Continued AI investment. Plans call for more AI infrastructure spending in 2026; four companies alone invested roughly $350 billion in 2025.
Above‑trend productivity growth. Productivity growth turned up post COVID.

With GDP currently expanding in absolute terms at roughly $1.4 trillion per year—and with tax refunds plus AI spending alone adding about $0.5 trillion—derailing the economy would require more than tariffs.

Notwithstanding the positive outlook for the US economy, consumer sentiment- driven my no doubt by those who are not in the market - remains weak. Manufacturing, housing, and many consumer goods sectors are soft. Unemployment is rising. The stock market could correct for any number of reasons, reversing the wealth effect. And inflation remains closer to 3% than the Fed’s 2% target.

What’s an investor to do?

A “bifurcated portfolio” may look different for some given their personal risk tolerances, but here is what I am doing: keeping most of the portfolio in the Focus List, which includes several AI companies, and balancing out the rest with alternatives and a modest level of short to intermediate fixed income.

Focus List

The Focus List is designed as an “evergreen,” durable portfolio with built‑in downside protection characteristics. The FL held up better than the S&P 500 in all down years since inception 15 years ago. This list has also outperformed in most up years providing an above average return over a long period of both up and down markets. We believe this is because, on average, these companies have:

stronger competitive positions
stronger balance sheets
less variable earnings
valuations (P/E on normalized earnings) below the market average

Note I didn’t mention anything about growth. We consider growth too, but it is subsidiary to the other factors. That is because future growth is so speculative. A balance sheet, variability of earnings, and P/E are known factors. Admittedly competitive position is highly qualitative. Competitive position carries the most weight in determining a stock’s value and is something we spend the most time trying to evaluate.

Alternatives

In addition to our gold position, we are focused on three asset‑backed partnerships. We know these management teams well and stay in close contact. All three funds are heavily collateralized, use little to no leverage, and have returns uncorrelated with the stock market.

1. Short‑term loans to commercial real estate

Property types: apartments, warehouses, retail (almost no office)
Loan‑to‑value: 65%
Expected return: 8%

2. Trust‑deed equity in owner‑occupied homes

Purchased at a 28% discount to appraised value
Fund receives a disproportionately higher share of appreciation
Fund equity ahead of owner equity: 30%
Expected return: 10%, mostly long‑term capital gain

3. Loans to founders of late‑stage, venture‑backed companies

Loan‑to‑collateral: 25%
Expected return: 18%, mostly long‑term capital gain

In Summary

We are staying the course with a conservatively constructed stock portfolio concentrated in competitively strong companies selling at reasonable valuations along with some uncorrelated balance to manage the macro risk.

While not alternatives, a modest position in short to intermediate term fixed income serves a purpose. But no long bonds.

Focus List

The list and performance can be obtained only by contacting our office.

Follow Up – from our letter one year ago

"Likely scenario: Like “the wall”, the tariff campaign promise will only partially be fulfilled and not to a degree that will damage world trade materially."
- Partially fulfilled relative to Liberation Day and, yes, partial damage to trade.

"Trump is not an idealogue. If the strategy is not working and is therefore making him look bad, he will back off."
- There were numerous reversals and watered down tariffs across various countries.

"So, again, as with “the wall”, there WILL be deportations and much fanfare on the progress of ridding the country of “criminals, rapists, and drug dealers”. This exodus will not be large enough or fast enough to set the economy back materially."
- This appears to have borne out.

"Repositioning for a "Trump Trade" or a "Harris Trade" is folly. (This was from the Q3 of last year, but now that we have a change of administration a follow up is more relevant.)"
- Regarding potential "Trump trades", Energy (XLE) returned less than half the S&P 500, Financials (XLF) were in line, but Bitcoin was off -6% and Trump Media & Tech Group (DJT) sank -61%

NOTE: Now in addition to ALL our quarterly letters, on our website is a tab with just the Follow Ups.

About HALL CAPITAL

HALL CAPITAL, LLC is a registered investment advisor and was formed by Principals from Arcturus Capital in 2010.
For more information, contact Donald Hall 626 578 5700 x101 dhall@hallcapitalmanagement.com

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