In her latest 2026 New Year's letter to investors, ARK Invest founder Cathie Cathie Wood released her macroeconomic outlook, comparing the next three years to "Reaganomics on steroids." She points out that with the convergence of deregulation, tax cuts, sound monetary policy, and innovative technologies, the US stock market will usher in another "golden age," while the upcoming surge in the US dollar may bring an end to the upward trend in gold prices.
Specifically, Cathie Wood believes that despite continuous growth in real GDP over the past three years, the US economy has actually experienced a rolling recession and is currently in a "coiled spring" state, poised for a strong rebound in the coming years. She particularly emphasizes that with David Sacks becoming the first AI and cryptocurrency czar to lead deregulation and the effective corporate tax rate moving towards 10%, the US economy will receive significant policy dividends.
At the macro level, Wood predicts that inflation will be further controlled, and may even turn negative, driven by a productivity boom. She expects the U.S. nominal GDP growth rate to remain in the 6% to 8% range over the next few years, primarily driven by productivity gains rather than inflation.
Regarding market impact, Wood predicts that the relative advantage of US investment returns will drive the dollar significantly higher, repeating the near doubling of the dollar seen in the 1980s. She warns that despite gold prices rising sharply in recent years, a stronger dollar will suppress gold prices, while Bitcoin, due to its supply mechanism and low asset correlation, will exhibit a different trajectory than gold.
Regarding the market valuation issue that investors are concerned about, Wood does not believe that an AI bubble has formed. She pointed out that although the current price-to-earnings ratio is at a historical high, as technologies such as AI and robotics drive explosive productivity growth, corporate profit growth will digest the high valuations. The market may achieve positive returns while the price-to-earnings ratio compresses, similar to the bull market path of the mid-to-late 1990s.
The following is the original text of the letter to investors:
Happy New Year to ARK's investors and other supporters! We are very grateful for your support.
As I explained in this letter, we truly believe that investors have many reasons to remain optimistic! Hopefully, you enjoy our discussion. From an economic history perspective, we are at a crucial juncture.
A spring poised to burst forth
Despite sustained growth in U.S. real GDP over the past three years, the underlying structure of the U.S. economy has undergone a rolling recession, gradually evolving into a tightly compressed spring that may rebound strongly in the coming years. In response to the supply shock related to the COVID-19 pandemic, the Federal Reserve drastically increased the federal funds rate from 0.25% in March 2022 to 5.5% over the 16 months ending July 2023—a record increase of 22 times. This rate hike pushed housing, manufacturing, non-AI-related capital spending, and low- and middle-income groups in the U.S. into recession, as shown in the following figure.
Measured by existing home sales, the housing market has fallen 40% from an annualized rate of 5.9 million units in January 2021 to 3.5 million units in October 2023. This level was last seen in November 2010, and existing home sales have fluctuated around it for the past two years. This demonstrates how tightly the spring has been compressed: current existing home sales levels are comparable to those of the early 1980s, when the U.S. population was about 35% smaller.
According to the U.S. Purchasing Managers' Index (PMI), the manufacturing sector has been in contraction for approximately three consecutive years. Based on this diffusion index, 50 is the dividing line between expansion and contraction, as shown in the figure below.
Meanwhile, capital expenditure, measured by non-defense capital goods (excluding aircraft), peaked in mid-2022 and has since returned to that level, regardless of technological influences. In fact, this capital expenditure metric had struggled for over 20 years since the bursting of the tech and telecom bubble, until 2021 when the COVID-19-related supply shock forced both digital and physical investments to accelerate. What was once the upper limit of spending appears to have become the lower limit, as artificial intelligence, robotics, energy storage, blockchain technology, and multi-omics sequencing platforms are poised for a golden age. Following the tech and telecom bubble of the 1990s, a peak of approximately $70 billion in spending lasted for 20 years; now, as the chart below illustrates, this may be the strongest capital expenditure cycle in history. We believe the AI bubble is still a long way off!
Meanwhile, data from the University of Michigan shows that confidence among low- and middle-income earners has fallen to its lowest point since the early 1980s. At that time, double-digit inflation and high interest rates severely weakened purchasing power and plunged the U.S. economy into a prolonged recession. Furthermore, as shown in the chart below, confidence among high-income earners has also declined in recent months. In our view, consumer confidence is currently one of the most tightly compressed "springs" with the greatest potential for rebound.
Deregulation, while lowering taxes, inflation, and interest rates.
Thanks to a combination of factors, including deregulation, tax cuts (including tariffs), inflation, and interest rates, the rolling recession that the United States has experienced in recent years may reverse rapidly and dramatically in the coming year and beyond.
Deregulation is unleashing innovation across various sectors, particularly in artificial intelligence and digital assets, spearheaded by David Sacks, the first "AI and cryptocurrency czar." Meanwhile, reductions in tip, overtime pay, and Social Security taxes will generate substantial tax refunds for US consumers this quarter, potentially pushing the annualized growth rate of real disposable income from approximately 2% in the second half of 2025 to approximately 8.3% this quarter. Furthermore, with accelerated depreciation on manufacturing facilities, equipment, software, and domestic R&D spending, the effective tax rate for businesses will be reduced to close to 10% (as shown in the chart below), leading to a significant increase in corporate tax refunds. At 10%, one of the lowest tax rates globally.
For example, any company that begins construction on a manufacturing plant in the U.S. before the end of 2028 can depreciate the entire value of the building in the first year it is operational, instead of over 30 to 40 years as in the past. Equipment, software, and domestic R&D expenditures can also be depreciated 100% in the first year. This cash flow incentive was permanently established in last year's budget and is retroactive to January 1, 2025.
For the past few years, inflation, as measured by the Consumer Price Index (CPI), has stubbornly hovered between 2% and 3%, but in the coming years, for several reasons as shown in the chart below, inflation is likely to fall to a surprisingly low level—or even negative. First, West Texas Intermediate (WTI) crude oil prices have fallen by about 53% since their post-COVID-19 high of around $124 per barrel on March 8, 2022, and are currently down about 22% year-over-year.
Since peaking in October 2022, the sales price of newly built detached homes has fallen by about 15%; meanwhile, the inflation rate of existing detached home prices—based on a three-month moving average—has fallen to about 1.3% year-over-year from a peak of about 24% in June 2021 after the COVID-19 pandemic, as shown in the chart below.
In the fourth quarter, to absorb nearly 500,000 new single-family homes in inventory (as shown in the chart below, the highest level since before the global financial crisis in October 2007), the three major homebuilders significantly lowered their prices, with year-on-year declines of -10% for Lennar, -7% for KBHomes, and -3% for DRHorton. The effects of these price declines will be reflected in the Consumer Price Index (CPI) with a lag over the next few years.
Finally, nonfarm productivity, one of the most powerful forces curbing inflation, bucked the trend of continued recession, growing by 1.9% year-on-year in the third quarter. In stark contrast to the 3.2% increase in hourly wages, this productivity improvement has reduced the unit labor cost inflation rate to 1.2%, as shown below. This figure does not reflect the cost-push inflation seen in the 1970s!
This improvement has also been validated: the inflation rate, as measured by Truflation, has recently fallen to 1.7% year-over-year, as shown in the chart below, which is nearly 100 basis points (bps) lower than the inflation rate calculated by the U.S. Bureau of Labor Statistics (BLS) based on the CPI.
Productivity boom
In fact, if our research on technology-driven disruptive innovation is correct, then in the coming years, influenced by both cyclical and long-term factors, non-agricultural productivity growth should accelerate to 4-6% annually, thereby further reducing inflation per unit of labor costs. The convergence of currently developing major innovation platforms—artificial intelligence, robotics, energy storage, public blockchain technology, and multi-omics technologies—not only promises to drive productivity growth to new sustainable highs but also holds the potential to create enormous wealth.
Productivity gains could also correct significant geoeconomic imbalances in the global economy. Companies can channel the benefits of increased productivity into one or more of four strategic directions: expanding profit margins, increasing R&D and other investments, raising wages, and/or lowering prices. In China, raising wages for more productive employees and/or increasing profit margins could help the economy escape the structural problem of over-investment. Since joining the World Trade Organization (WTO) in 2001, China's investment as a percentage of GDP has averaged approximately 40%, almost twice that of the United States, as shown in the figure below. Higher wages will drive China's economy towards a consumption-driven transformation, moving away from a commoditized path.
However, in the short term, technology-driven productivity gains are likely to continue slowing U.S. job growth, causing the unemployment rate to rise from 4.4% to over 5.0%, and prompting the Federal Reserve to continue cutting interest rates. Subsequently, deregulation and other fiscal stimulus measures should amplify the effects of low interest rates and accelerate GDP growth in the second half of 2026. Meanwhile, inflation is likely to continue to slow, driven not only by lower oil prices, housing prices, and tariffs, but also by technological advancements that drive productivity gains and lower unit labor costs.
Surprisingly, AI training costs are declining by 75% annually, while AI inference costs (i.e., the cost of running AI application models) are falling by a staggering 99% annually (based on some benchmark data). This unprecedented decline in the costs of various technologies should drive a surge in their unit growth. Therefore, we expect US nominal GDP growth to remain in the 6% to 8% range over the next few years, primarily driven by 5% to 7% productivity growth, 1% labor force growth, and inflation of -2% to +1%.
The deflationary effects of artificial intelligence and the other four major innovation platforms will accumulate, shaping an economic environment similar to the last major technological revolution, which last occurred over 50 years up to 1929, driven by the internal combustion engine, electricity, and telephone. During that period, short-term interest rates grew in tandem with nominal GDP, while long-term interest rates reacted to the deflationary undercurrents accompanying the technological boom, causing the yield curve to invert by an average of about 100 basis points, as shown in the figure below.
Other New Year Reflections
Gold prices rise while Bitcoin prices fall
During 2025, gold prices rose by 65%, while Bitcoin prices fell by 6%. Many observers attribute the surge in gold prices from $1,600 to $4,300 per ounce—a 166% increase—since the end of the US stock market bear market in October 2022, to inflationary risks. However, another explanation is that global wealth growth (exemplified by the 93% increase in the MSCI World Equity Index) outpaced the approximately 1.8% annualized growth rate of global gold supply. In other words, the increase in gold demand may have exceeded its supply growth. Interestingly, during the same period, Bitcoin prices rose by 360%, while its supply grew at an annualized rate of only about 1.3%. It is worth noting that gold and Bitcoin miners may react very differently to these price signals: gold miners will respond by increasing gold production, while Bitcoin cannot. Mathematically, Bitcoin will grow at approximately 0.82% annually for the next two years, after which its growth rate will slow to approximately 0.41% annually.
Looking at gold prices from a long-term perspective
Measured by the ratio of market capitalization to M2 money supply, gold prices have only exceeded this level once in the past 125 years: during the Great Depression of the early 1930s. At that time, gold prices were fixed at $20.67 per ounce, while the M2 money supply plummeted by approximately 30% (as shown in the chart below). Recently, the gold-to-M2 ratio has surpassed its previous peak, which occurred in 1980 when inflation and interest rates soared to double digits. In other words, historically, gold prices have reached extremely high levels.
The chart below also shows that the long-term decline in this ratio is closely related to the robust returns of the stock market. According to research by Ibbotson and Sinquefield, the compound annual return on stocks has been approximately 10% since 1926. After reaching two major long-term peaks in 1934 and 1980, stock prices, as measured by the Dow Jones Industrial Average (DJIA), achieved returns of 670% and 1015% over 35 years and 21 years, respectively, ending in 1969 and 2001, equivalent to annualized returns of 6% and 12%. Notably, small-cap stocks achieved annualized returns of 12% and 13%, respectively.
For asset allocators, another important consideration is the low correlation between Bitcoin's returns and those of gold, as well as its returns with other major asset classes since 2020, as shown in the table below. Notably, Bitcoin's correlation with gold is even lower than the correlation between the S&P 500 and bonds. In other words, for asset allocators seeking higher risk-reward ratios in the coming years, Bitcoin should be a good diversification option.
US Dollar Outlook
In recent years, a popular narrative has been the end of American exceptionalism, with the dollar experiencing its biggest first-half drop since 1973 and its biggest full-year decline since 2017. Last year, measured by the trade-weighted dollar index (DXY), the dollar fell 11% in the first half and 9% for the year. If our predictions regarding fiscal policy, monetary policy, deregulation, and U.S.-led technological breakthroughs are correct, then U.S. investment returns will be higher relative to the rest of the world, thus pushing up the dollar's exchange rate. The Trump administration's policies mirror those of the Reagan era in the early 1980s, when the dollar nearly doubled, as shown in the chart below.
Artificial intelligence hype
As shown below, the booming development of artificial intelligence is driving capital expenditures to their highest level since the late 1990s. Investment in data center systems (including computing, networking, and storage devices) grew by 47% to nearly $500 billion in 2025, and is projected to grow by another 20% to approximately $600 billion in 2026, far exceeding the long-term trend of $150 billion to $200 billion annually in the decade before ChatGPT's launch. Such a massive scale of investment inevitably raises the question: "What will be the return on this investment, and where will it be reflected?"
Beyond semiconductors and large publicly traded cloud companies, unlisted AI-native businesses are also benefiting from growth and ROI. AI companies are among the fastest-growing sectors in history. Our research shows that consumers are adopting AI at twice the rate they adopted the internet in the 1990s, as illustrated below.
According to reports, by the end of 2025, OpenAI and Anthropic's annualized revenue will reach $20 billion and $9 billion respectively, representing a 12.5-fold and 90-fold increase compared to $1.6 billion and $100 million in the same period last year! Rumors suggest that both companies are considering initial public offerings (IPOs) within the next year or two to raise funds for the large-scale investments needed to support their product models.
As Fidji Simo, CEO of OpenAI's Applications Division, stated, "AI models are capable of far more than most people experience in their daily lives, and 2026 is the year to bridge that gap. Leaders in AI will be those companies that can translate cutting-edge research into products that are truly useful to individuals, businesses, and developers." This year, with user experiences becoming more human-centered, intuitive, and integrated, we expect to make substantial progress in this area. ChatGPTHealth is an early example; it's a section within the ChatGPT platform dedicated to helping users improve their health based on their personal health data.
Within enterprises, many AI applications are still in their early stages, hampered by bureaucracy, ingrained thinking, and/or preconditions such as restructuring and rebuilding data infrastructure, resulting in slow progress. By 2026, organizations may realize they need to leverage their own data to train models and iterate rapidly, or risk falling behind more aggressive competitors. AI-driven use cases should deliver immediate and superior customer service, faster product launches, and help startups create more value with fewer resources.
Market valuation is too high
Many investors are concerned that stock market valuations are too high, currently at historical highs, as shown in the chart below. Our own valuation assumption is that the price-to-earnings ratio (P/E) will fall back to around 20 times the average of the past 35 years. Some of the most significant bull markets have been accompanied by P/E compression. For example, from mid-October 1993 to mid-November 1997, the S&P 500 annualized return was 21%, and its P/E ratio fell from 36 to 10. Similarly, from July 2002 to October 2007, the S&P 500 annualized return was 14%, and its P/E ratio fell from 21 to 17. Given our expectation that real GDP growth will be driven by productivity gains and slowing inflation, the same dynamics should be repeated in this market cycle, and perhaps even more pronounced.
As always, I am very grateful to ARK's investors and other supporters, and I would also like to thank Dan, Will, Katie and Keith for helping me write this long New Year's message!
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