BRANSTAD: Hi everyone. Thank you for joining us today for the Thrivent Asset Management 2026 Market Outlook. I'm Jeff Branstad, portfolio manager for Thrivent’s Model Portfolios. Joining me on our panel today is Steve Lowe, our chief investment officer, Kent White our head of fixed income and David Spangler our head of mixed assets.

Steve, turning to 2026, what are the main themes you expect to see play out?

LOWE: Yeah, I expect artificial intelligence to continue to drive markets, particularly equity markets. I think markets will be a lot less forgiving of this large scale capital spending we've seen by large-cap tech and others without really a clear path to monetization of AI, and they need to demonstrate strong earnings growth. And, you know, so they can kind of grow into these very rich valuations.

Yeah, I think markets as always are going to be focused on the economy and especially the labor market, which shows signs of slowing and also how AI is impacting jobs. There are signs it's impacting especially entry level jobs. But also AI could boost productivity which should boost growth. And then there's, you know, deregulation and tax cuts. We still have deficit spending and a strong capital investment cycle that should aid economic growth.

You know I think large-cap will continue to lead. But markets should broaden out beyond these large-cap tech names, particularly if the economy grows at a solid rate. And then also rates and the Fed always keeps the markets, you know, the Fed will remain key driver of markets. And I expect the Fed to lower further in 2026.

BRANSTAD: So, Kent, thinking about those main themes then what's your outlook for the economy in 2026.

WHITE: We're looking for growth to moderate somewhat from its 2025 rate. Still remain decent. Likely somewhere in the 1.75 to 2% range. Steve just mentioned AI continuing to drive the equity markets. We also think it will continue to be a factor driving the economy, too. So especially given still large cap-ex spending levels from these big AI firms.

We also have a lot of fiscal policy stimulus that would begin to take effect next year, providing a further boost to growth. And in terms of potential headwinds, I mean, I think one of the things that we need to look at and keep an eye on is consumer spending, especially as it accounts for nearly 70% of GDP.

BRANSTAD: The labor market has shown signs of softening. In this past year. We've seen reduced hiring, rising layoff announcements. And while unemployment is still relatively low, it has definitely been rising. So, David, my question for you is what are your expectations in regards to the labor market, for the coming year?

SPANGER: Yeah. And that's going to be pretty key for 2026. What we know is, you know, that both the demand and supply for labor is down. The growth in jobs has been in areas like private education, health services, social assistance, leisure, industries and government. 
Where is manufacturing? It's had five straight months of declines, and in fact, 100,000 less jobs over the last year within manufacturing. So, we're seeing cracks and unemployment that are a little disconcerting.

At the same time, however, there are some positives, and the positives coming into 2026 is that we have, presumably, a more easy monetary policy. We should have a little bit easier financial conditions. We would expect to see lending become a little less restrictive and supportive of business. And there's a lot of good tax policy out of the tax bills from earlier this year.

LOWE: The interesting thing is, job jobless claims are not that high. They've been very steady for quite a while. So, you're not really seeing it show up in there. But layoff announcements are starting to increase. So maybe that'll hit with somewhat of a lag. And hiring has definitely slowed down.

BRANSTAD: Consumer spending has held up relatively well. Overall, David, do you think that can continue in 2026?

SPANGLER: I do, I do think it can continue to 2026. And we know that prices are quite high. The levels are high. We've had a lot of free money over the last number of years. And that's pushed up certain areas of the of the, the consumer spend money like housing, autos. But in general, the higher end of the, sort of income distribution is doing relatively well. And they're continuing to spend. We know that the lower end is hurting.

Early signs of holiday spending seem to be relatively good. We've had some good retail earnings reports. Not every obviously retail company is doing well, but many are. And there's been some solid reports there. You know, we're also coming in with monetary easing and easier bank lending, fiscal supports and stimulus. An election year. Yes. Generally pro cyclical policies are pursued during an election year as well. All of that, I think can help with the consumer.

If jobs start to fall off and roll over, then we, you know, that will impact, consumer spending. And that's an important area to keep an eye on. But in general, I think the consumer is reasonably well supported coming into 2026.

BRANSTAD: People in, the upper income tiers have generally been doing quite well. But those in middle and lower income tiers haven't really been keeping up. How does the spending differ between people in those income tiers?

LOWE: Yeah, it's interesting because results for consumer companies are kind of bifurcated using luxury brands do really well. But you're also seeing discounters do well. And what's happening is people are shifting to discount stores and to dollar stores where sales are up significantly, dine in and some fast casual restaurants are losing sales as people shift to less expensive meals like fast food.

BRANSTAD: Kent, what are your expectations for the Fed, given the state of the economy, specifically the labor market and inflation, their dual mandate?

WHITE: My view on the Fed at the moment is largely driven by some of the recent weakness that we've seen in the labor markets, despite inflation still running above the Fed's target. However, given that many components of underlying inflation appear to be easing, and the Fed's view that some of the elevated inflation levels that we're seeing are due to tariffs and will be somewhat temporary, I think they will air to the side of caution and pay more attention to their employment mandate.

Which means the Fed is likely to continue its mid-cycle rate cuts to move closer to a more neutral and less restrictive policy rate. I think we're likely to see probably one more cut at the in early 2026 before they pause. Of course, that could change and we could see deeper cuts if we were to see a little bit more concerning signs of weakness in the labor markets. But that's currently not our base case.

BRANSTAD: Given what we've discussed on the economy in the Fed so far, what are your expectations, Kent, for interest rates?

WHITE: So, I think if we were only get one more rate cut from the Fed in 2026, that might be a bit of a disappointment for the market as it's been pricing in nearly three more cuts through the end of next year. So, rates would likely see some upward pressure to this potential outcome just getting priced in.

So, we think 10-year rates are probably likely to trade in a range from the high threes to somewhere in the 4.35-ish area during 2026.

LOWE: You're right, I think markets have been very sensitive to rates lately. When rates go up are they expect the Fed not to cut. They've sold off and vice versa when it looks more dovish.

BRANSTAD: How about the yield curve?

WHITE: Yeah. So, on the yield curve, we think the front end of the Treasury curve is likely to be mostly anchored to expectations of what the Fed is going to be doing with their policy rate. We also believe that there's room for the 30-year U.S. Treasury yield to compress versus the front end. So, we've had steepener trades on through most of 2025.

We now find a little bit of a flattening trade to be a bit more compelling than we had in the past. So, at the front end is generally considered like 2- to 3-year type U.S. Treasuries and then the back end, the 30-year. So the relationship between the 2-year and the 3-year is as the 30-year might be moving lower. That's relative to the 2-year.

BRANSTAD: The curve will flatten.

WHITE: Right. And if the 30-year moves up relative to the two, that's called steepening. So, during 2025 we saw the twos/30s curve go from like 20 basis points was pretty flat to as high as 120 basis points. So, right now it's sitting right there, you know, during the month of December it's been around 100 basis points.

BRANSTAD: And how do you take advantage of that?

WHITE: So, we are underweight 30-year Treasuries. So, that helped our performance quite a bit. Now with the 30-year being a little bit more attractive, we could overweight or get at least neutral the 30-year part of the curve.
So that would be a flattener when we're a little bit more overweight the longer dated maturities.

BRANSTAD: How does that impact your view on credit markets then, especially considering that we're entering the year with pretty richly valued, versus history.

WHITE: Right. So, with regard to credit spreads, you know, we've been at, credit spreads or the excess yield that you get over U.S. Treasuries. So those levels right now are at or near historical tights across virtually every fixed income asset class. And we just don't think there's much room to generate excess returns in 2026 from these levels.

So, it'll be mostly a year in which we just earn our yield, which isn't necessarily a bad thing given where yields are today. So, however, just we just need to be a little bit more selective about where we're getting that yield or that excess yield. And we feel better being in some of the higher quality assets in fixed income at this point.

BRANSTAD: Do you have any concerns about private credit?

WHITE: Yeah, I do have some concerns not only about the asset class, but also about the impact private credit could have on the broader public markets in case we see any further weakness there. My primary concern or concerns are that we have seen significant growth in that space. When combined with leveraged loans, this market is now twice the size of the traditional high yield market.

Yeah. So we're also seeing some early signs of stress in the market with rising defaults and other elevated stress indicators in that market.

LOWE: Yeah, I agree, it's, a lot of money has flowed into private credit over the past several years. And, you know, the yield you're getting or the valuation looks a little bit rich to me.

BRANSTAD: Why have investors been looking more to private credit than instead of traditional public credit?

LOWE: I think part of it is just simply diversification away from public markets, but also for the yield. The issue is, though, that, there's sort of this rating arbitrage in private credit. You know, there's they go to smaller rating agencies and get higher rated credit. And the Bank of International Settlements just commented on this. So, in other words, they can get kind of, a triple C yield with a B rating in the private credit market.

BRANSTAD: Let's turn to equities next. David. Equity market returns have obviously been pretty solid for for quite a while now. But valuations are rich. And the returns have typically been pretty concentrated. What's your outlook for equities in 2026?

SPANGLER: Well I think in general our outlook for 2026 is relatively constructive overall for the markets. We have a very good setup. We have lower, you know, inflation. We have an accommodative Fed. We have a stable consumer spending, strong, corporate balance sheets and solid earnings as well.

So, I think that some of the cyclical areas could see some support. I don't necessarily think that that means that small-caps in and of themselves will have outperformance relative to the rest of the market. But I do think that there are some cyclical areas like industrials, financials, health care and some consumer discretionary that could do that could do a little bit better at coming into 2026.

What I would watch for, though, is the capital spending of the largest companies and whether the markets begin to question the eventual payoff of those, because if we do see the largest companies, the AI-related companies rollover, it can bring the whole market with them, and they may underperform the rest of the market.

LOWE: Yeah. I think that's going to be a key focus for the market. You know, throughout 2026, you know, they have to start showing that they're making money off of their investments. So, do you expect small-caps to do better on a relative basis? Not necessarily outperform but better than they have in the past?

SPANGLER: They can do better because there's a lot of fiscal support as we come into 2026 that, you know, small businesses will have accelerated depreciation in some cases 100% depreciation. There should be good investment by smaller companies. And I think that that can support that area of the market.

One of the things too, is that it doesn't take really a lot of money to flow into small-caps. A lot of that market is now in private equity. And we don't see companies coming out public. And when they do come out public, they come out as large-caps. They just skip right over. And so I think the reality is, is that longer term, structurally small-caps have, you know, headwinds.

BRANSTAD: Steve, what's your outlook for earnings for the coming year?

LOWE: Positive. Earnings have been an important story for the equity market over the last year. They've been strong. Most companies are beating expectations. And if you look at the 2025 earnings are expected to increase about 12% or so despite tariffs and despite uncertainty spiking earlier this year. And next year, 2026 is expected to come in stronger, even at about 15% growth. And that's in good part largely due to profit margins expanding. And you could look at revisions from analysts. And those have been very positive. They've been raising earnings estimates through through the year.

You know, the one concern I have is that earnings, you know, like the overall market are very concentrated. You know the top ten stocks account for about 30% or so of earnings growth. You know and excluding tech, earnings growth is lower. It's about 9%. But that's still you know solid. And we are seeing some broadening with tech earnings starting to slow because as they get larger and larger it gets a little bit harder to maintain the same growth rate.

BRANSTAD: International equity markets outperformed in 2025. However, a lot of that was at the start of the year, through early April, basically before the administration started to ease up on the tariffs. Do you think there's any chance of them outperforming in 2026, David?

SPANGLER: They certainly could. They certainly could. But if we sort of think about how international performed relative to domestic, last year it was generally as you mentioned, through April, and it was for a number of reasons. One was we had a devaluing dollar. So, we price domestic and international in dollars. So, a dollar depreciation is makes the the international perform better relative to domestic.

Also too, there was a lot of positive expectations from announcements in Germany that they were going to suspend their their debt limits and that they were going to spend more on military. But also on infrastructure.

But on balance, what I, what I think is that in the growth in the United States still remains relatively strong. We have a lot of fiscal supports and monetary supports in the U.S., and there's a lot of longer term impediments within the particularly the European areas, markets. Emerging markets can continue to perform well.

And so I think on balance, yes, international can perform well. I think it will be more in the emerging market areas, less in the developed. So, the way we sort of think about it is, you know, you can have overall international perform well, but you want to be able to pick your areas in areas maybe more in the emerging markets and less in the developed areas.

BRANSTAD: With the strong performance of equity markets in 2025, they were the key drivers for any performance within a mixed asset portfolio. What's the role of fixed income in diversified portfolios like that?

WHITE: So, the role of fixed fixed income has historically been to provide a buffer in periods when equities sell off, fixed income should provide yield or some excess return to offset those those equity declines. So, right now fixed income has, I believe, has definitely returned to its traditional role in a diversified portfolio after an extended period where it wasn't performing the way it was supposed to. And this was mostly during the period of extremely low interest rates, where you're only getting paid 1 or 2% in Treasuries. And that's not enough of a yield cushion to really offset any equity weakness. So, with yields now back to levels we hadn't seen since 2008, the yields are much more attractive to allocate to fixed income.

BRANSTAD: Okay. So let's, let's know think a little more positively. And what are some things that could go right and result in a better 2026 than what you're expecting? David.

SPANGLER: So, we could see enhanced productivity and more than what might be expected within the markets. I think with the enhanced productivity, that could be a, you know, strong support to the overall, economic growth in, to the markets than a more significant reduction, I think, in tariff uncertainty that would really help out medium and smaller sized companies in particular, who find it much more difficult to be able to handle the tariff changes.

BRANSTAD: Kent, what do you see that could be a positive driver?

WHITE: Yeah. I think, just to reiterate what David just said, regarding tariff uncertainty, I mean, we've had a lot of policy uncertainty in 2025. So, especially on the policy front, whether it's tax or tariff, just waiting to see what that was going to look like.

BRANSTAD: Steve?

LOWE: Yeah, for me, it's the the economy. I think there are a lot of positives that are supporting growth right now. The Fed is most likely to cut rates. You know, banks are easing lending standards. You saw this very large amount of cap-ex spending and artificial intelligence. And more broadly, cap-ex is expanding too, because of the tax law changes that allow for up to 100% of full depreciation in the first year. And we still have deficit spending. That's a tailwind. And I think most importantly, productivity is increasing, expected to increase further supporting economic growth.

BRANSTAD: Let’s finish up by going through our mixed asset positioning. Steve, could you start and kind of give us the broadly how are you positioned?

LOWE: Yeah. So big picture. We're moderately overweight equities and underweight fixed income versus you know our peers or benchmark. So we're fairly close to home. But we have a positive view of the market.

BRANSTAD: David how about in equities?

SPANGLER: You know as Steve just mentioned overweight generally in equities. We're overweight a little bit in public equity. But we're also overweight in in private equity as well within the fund. So total equity is a reasonable overweight to equity. And I think that's a solid place to be coming into 2026 with the all the economic, fiscal and monetary supports.

We're underweight international. But within international we're underweight Europe or underweight developed overall but neutral or a little bit overweight within EM. And I think that that too is a good place as we come into 2026. And then we're overweight growth. Generally we're not, you know, a lot overweight growth. But we're overweight growth. And we're overweight large-caps, a little bit overweight mid-caps and then small-caps generally neutral a little bit underweight in within small-caps. And I think that while we've had a lot of returns coming from large-cap growth, I think we'll continue to see reasonable returns coming from that area of the market and that they can still lead in a positive economic and monetary environment.

BRANSTAD: Okay. Thanks, Kent. How about on the fixed income side?

WHITE: Mainly due to valuations in the credit markets, we're continuing to maintain an up in quality bias broadly across fixed income and even within the different asset classes in our portfolios. We're also modestly short duration right now with the expectation that rates do have a little bit of room to move higher from here. And as I mentioned earlier, we do find some more value now in extending out the curve, I think keeping on that steepener bias where you're overweight the 2-year and underweight the 30-year, there's enough of a yield pick up over 100 basis points right now to, you could really lag if you're underweight the back end too much. That's a lot of yield to give up. So, we are extending out the curve a little bit more than we did during 2025.

BRANSTAD: All right. Thank you for all of your insights today everyone. And thank you for providing your outlook for 2026. And thank you for joining us today. We hope to see you again next time. Goodbye.