Institutional Investor (II): Looking back at 2025, which market developments most reshaped your strategic outlook?
Christian Dery: Several developments in 2025 have meaningfully reshaped our strategic outlook for 2026. First, the AI investment cycle has transitioned from a narrative into a tangible capex super-cycle. Not only has it driven a large share of US equity performance, but it is increasingly global, with specialized firms in Japan, Korea, China, Taiwan and Europe all contributing to the datacenter and infrastructure buildout. This is pushing us to think more in terms of an AI-driven capex and productivity regime rather than a narrow “US tech” story.
Second, the US policy and liquidity backdrop has turned more supportive than we would typically expect at this stage in the cycle. We have record announced stock buybacks, the Federal Reserve is priced to ease, and the Administration’s policies – tax cuts, full expensing of capex and deregulation – remain stimulative, with several measures taking effect in 2026. An additional spending bill ahead of the midterms is also possible as policymakers look to run the economy hot.
Finally, these same forces require a more nuanced view of risk. The AI buildout has important implications not just for equities but also for commodities such as copper, silver and natural gas. At the same time, many existing business models and moats are exposed to disruption; we see particular vulnerability in legacy IT services and other information-heavy industries, where AI can compress margins and fee pools. Against a backdrop where much of the optimism is already reflected in headline indices, that dispersion – between beneficiaries of the AI capex cycle and those whose economics are being eroded – is central to how we are framing opportunities in 2026.
II: How did the surprises of 2025 test CFM’s models and risk framework, and how did you respond?
Christian Dery: CFM was founded in 1991 and has experienced many “surprises” over this time frame, and 2025 was no exception. Rather than anchoring on a single headline, the main challenge for us was the persistence and clustering of regime shifts across macro, policy and microstructure – moves that were faster and more correlated than a typical historical sample would suggest.
We start from the premise that markets do not follow stable statistical patterns over time and that large, unexpected moves occur more frequently than traditional models would imply. Our research platform is designed to produce de-correlated ideas at scale that capture repeatable effects across the broad set of markets and instruments we trade. As a result, the level of diversity in a given portfolio is high, and we expect that to help insulate our portfolios from individual surprise events over time.
II: There’s been intense debate around Federal Reserve politics and leadership. What are your expectations for the next Fed Chair, and how do you see interest-rate policy evolving?
Christian Dery: CFM was founded in 1991 and has experienced many “surprises” over this time frame, and 2025 was no exception. Rather than anchoring on a single headline, the main challenge for us was the persistence and clustering of regime shifts across macro, policy and microstructure – moves that were faster and more correlated than a typical historical sample would suggest.
We start from the premise that markets do not follow stable statistical patterns over time and that large, unexpected moves occur more frequently than traditional models would imply. Our research platform is designed to produce de-correlated ideas at scale that capture repeatable effects across the broad set of markets and instruments we trade. As a result, the level of diversity in a given portfolio is high, and we expect that to help insulate our portfolios from individual surprise events over time.
At the same time, we recognize that we run a business and that out-of-model risks are real. Our Market Risk Committee meets regularly to identify these emergent risks and assess how they could impact the performance of our strategies. We never override individual signals or models; in the rare instances where intervention is required, we adjust our volatility forecasts and risk budgets to better reflect a rapidly evolving environment, which in turn scales our exposures in a systematic way. As a systematic manager, we like writing rules and codifying decisions, and ideally these infrequent, out-of-model decisions form the basis of new research and ideas that can eventually be captured algorithmically.
II: Investor appetite for leading quantitative managers has surged this year. What’s driving the appeal of quant strategies in the current environment?
Christian Dery: Demand for strategies that can deliver attractive, de-correlated return streams remains high. Well-run systematic managers can construct and deploy return streams with these characteristics at scale, across many markets and instruments, in a way that is difficult to replicate with traditional discretionary approaches.
Indexing and passive investment have been very successful, particularly in US market-capitalization-weighted indices. If we look at the composition of the S&P 500, a large percentage of index returns and earnings growth has come from the technology sector, and this has been particularly elevated since the introduction of ChatGPT in November 2022. US equities are at record highs and ownership is now, to a significant extent, a concentrated macro bet that AI will be profitable.
Against this backdrop, investors are increasingly aware of concentration and thematic risk in their core equity allocations. Leading quantitative managers can offer differentiated, equity-like return streams that are not dependent on the same AI-heavy indices, as well as exposures across other asset classes and styles. At the start of 2026, we see investors looking to systematic strategies to add diversification, reduce reliance on a single macro narrative, and access a broader opportunity set than is available through passive benchmarks alone.
II: Geopolitical tensions have become a central concern for investors. How are global risks influencing your investment decisions, and what’s your broader view on the geopolitical landscape today?
Christian Dery: Geopolitical risk is one of the key categories of “out-of-model” risk we monitor, and it features regularly in our Market Risk Committee discussions. The focus of those discussions is on how different scenarios could affect market dynamics – volatility, liquidity, correlations and risk premia – and, in turn, the performance of CFM’s strategies. When warranted, this can translate into adjustments to our volatility forecasts and risk budgets, so that our overall level of risk-taking is consistent with a more uncertain geopolitical backdrop, while still respecting the integrity of our models.
As a systematic manager, an ongoing area of research is how to capture sentiment, including geopolitical sentiment, in a robust and scalable way. CFM recently established a machine learning lab headed by domain experts, and we are investing in generative AI technology. We are finding many use cases in rich sentiment and context extraction – including geopolitical sentiment – as well as in classification problems, tokenizing a broad set of prediction problems, risk management, automated research and productivity improvements such as coding. Over time, we see these tools helping us to better read and quantify the impact of geopolitical developments across assets, and to incorporate that information into our investment process in a systematic manner.
More broadly, we see today’s geopolitical landscape as one characterized by greater fragmentation, more frequent policy intervention and a higher likelihood of abrupt regime changes. For a firm like CFM, that reinforces the importance of diversification, disciplined risk management and continued investment in research to ensure our models and infrastructure can adapt to a more complex and noisy world.
II: As 2026 unfolds, where should investors focus their attention?
Christian Dery: Equity market concentration remains a key issue going into 2026, with the overall direction of market‑capitalization‑weighted indices still heavily dictated by whether AI ultimately proves to be as profitable as markets currently discount. The AI theme now has deep linkages into foreign equities, private markets and commodities, so the bet is broader than just a handful of US mega caps. Investors should be thinking carefully about their equity exposures and looking for markets and strategies that offer cheaper valuations and a more balanced risk profile than the AI‑heavy indices that have led over the past few years.
At the same time, the macro backdrop is becoming more complex. The New York Fed estimates around a 25% probability of recession in 2026 and betting market odds are closer to 35%. The Treasury Secretary has noted that several sectors of the US economy already appear to be in recession. With midterm elections in late 2026, we can expect the Administration to continue to “run the economy hot”. How the growth–inflation mix evolves will be important to watch, particularly with employment data softening and tariffs increasing costs for US households and corporates.
We also have an unstable trade equilibrium with China and a shifting market structure, with market participants shortening time frames and engaging in more speculative behavior. Investors should expect these forces to continue contributing to bouts of volatility and dislocation.
Where does this leave investors as 2026 unfolds? Equities are at record highs, credit spreads are at or near record tights, and the US economy is still performing reasonably well, with real growth around 2%, unemployment in the mid‑4s and inflation running around 3%. It is likely to be a tougher environment than 2025. We think investors should be considering equity‑like exposures that are not overly concentrated in AI‑heavy indices, and strategies that add genuine diversification to traditional stock‑bond portfolios. Precious metals are, in our view, good candidates to hedge policy uncertainty and fiscal recklessness. Finally, bonds may prove to be effective diversifiers again in 2026, particularly if the US slows; outright yield levels remain compelling relative to many risk assets, including equities.
II: There’s been intense debate around Federal Reserve politics and leadership. What are your expectations for the next Fed Chair, and how do you see interest-rate policy evolving?
Christian Dery: The Federal Reserve is currently priced to cut more aggressively than its peers through the end of 2026, which would take the federal funds rate closer to 3%. That path, if realized, would be supportive for risk assets and, all else equal, a headwind for the dollar.
The composition of the FOMC is also shifting as the Administration replaces Governors with more dovish picks, including the incoming Chair in May 2026. Prediction markets currently suggest Kevin Hassett—a relatively dovish candidate—as the favorite. Taken together, this points to a Fed leadership that is likely to be more tolerant of inflation modestly above target and more focused on supporting growth and employment than on delivering an aggressively restrictive stance.
On the balance sheet side, the Fed is stopping its runoff in part because reserves in the financial system have fallen below levels considered “ample”, exacerbating pressures in funding markets and de‑anchoring the overnight rate. In practical terms, halting quantitative tightening is a form of easing, and it reinforces the signal from the expected rate‑cutting path.
Finally, the broader policy mix matters for the yield curve. The Administration has a clear interest in keeping long‑end rates contained given the deteriorating fiscal picture. Issuance is already shifting toward the short end, including bills, and, interestingly, Stephen Miran has floated the idea of reducing regulatory capital charges on Treasuries to zero. That would encourage banks to increase purchases of longer‑dated Treasuries and help fund the fiscal deficit, though at the risk of crowding out credit extension to the broader economy.
The bottom line is that we expect a dovish Fed and an overall supportive policy backdrop into 2026, with a bias toward lower policy rates, a slower or halted balance sheet runoff, and ongoing efforts to manage term premia at the long end of the curve.
II: Last year, every conversation seemed to revolve around monetizing AI platforms. How has your view on the commercial trajectory of AI shifted over the past 12 months?
Christian Dery: Owning the hyperscalers has been an exceptional investment for decades, underpinned by strong fundamentals. Much of the valuation expansion has come from earnings consistently surprising to the upside, as these firms benefited from asset‑light businesses such as software, where marginal costs approach zero. Over the past 12 months, our view has evolved as it has become clearer that generative AI is different: it requires substantial capital expenditure and may not exhibit the same scaling properties as traditional software.
We have seen this pattern before. History is full of disruptive technologies that delivered enormous societal benefits but ultimately proved to have relatively low profit margins: canals, railways and, more recently, the fiber‑optic buildout that enabled the modern internet. Many of those companies went bankrupt when the first technology bubble deflated, but society was left with the infrastructure. That analogy is increasingly relevant to the current AI investment cycle.
That said, generative AI is a genuinely disruptive, general‑purpose technology and CFM is excited about its potential applications. Heading into 2026, it is clear that the AI investment cycle will continue. For investors, the shift over the past year has been from a broad enthusiasm about “owning AI” to a more discriminating focus on where value will actually accrue. In our view, investors should concentrate on parts of the value chain that stand to benefit directly from the buildout and capex spending. Achieving durable profitability at the application layer, via scalable end‑user use cases, looks more challenging than many initially hoped.
The AI theme is not isolated to the United States. The impact is global. If we look at the inputs that go into data‑center construction—racks, servers, cabling, batteries, transformers, natural‑gas generators, fire systems, memory, switches, cooling and so on—many components require specialized manufacturing and are sourced globally. One of the best‑performing markets in 2025 was South Korea, dominated by chip and memory manufacturers, which are key inputs into the data‑center buildout.
Into 2026, investors need to pay close attention to the emerging linkages and competitive disruption created by this technology. In 2025, markets moved quickly to reprice the equity of firms facing competitive pressure from large language models. Business models tied to repetitive tasks and high automation potential are at risk; that spans areas such as legal services, software development, customer service and call centers, content and media, parts of education and healthcare administration, marketing, selected financial services, and elements of research and consulting. LLMs are a general‑purpose technology and can erode competitive moats rapidly.
Investors also need to be mindful of the cost side of the buildout. Insatiable demand for memory, for example, has led to large price increases, which further inflate the cost of AI infrastructure and, in a reflexive way, can erode its potential profitability. Those cost pressures spill over into sectors outside AI that use memory in their products—PCs and gaming consoles are likely to become more expensive. We see enduring value in the “pick‑and‑shovel” businesses that supply the buildout with specialized inputs and have genuine pricing power. Overall, our view has shifted from a relatively broad AI enthusiasm to a more cautious, value‑chain‑specific perspective, with a strong emphasis on input providers, capex beneficiaries and the careful assessment of disruption risks across sectors.
Disclaimer:
Any statements regarding market events, future events or other similar statements constitute only subjective views, are based upon expectations or beliefs, involve inherent risks and uncertainties and should therefore not be relied on. Future evidence and actual results could differ materially from those set forth, contemplated by or underlying these statements. In light of these risks and uncertainties, there can be no assurance that these statements are or will prove to be accurate or complete in any way. All opinions and estimates included in this document constitute judgments of CFM as at the date of this document and are subject to change without notice. CFM accepts no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. CFM does not give any representation or warranty as to the reliability or accuracy of the information contained in this document. The information provided in this document is general information only and does not constitute investment or other advice. The content of this document does not constitute an offer or solicitation to subscribe for any security or interest.
