A rotation into undervalued and interest-sensitive sectors may shape market performance in 2026 as utilities, industrials and real estate benefit from cooling inflation, expected rate cuts and surging demand tied to AI-related infrastructure. At the same time, small- and mid-cap companies may regain momentum as the breadth of the market widens.
BNN Bloomberg spoke with Brett Ewing, senior financial advisor and chief market strategist at First Franklin Financial Services, who said next year may reward active investors willing to look beyond mega-cap AI names and position for a shift in monetary policy and sector leadership.
Key Takeaways
- Cooling inflation and expected U.S. rate cuts may support interest-sensitive sectors in 2026.
- AI remains part of portfolios, but its multi-year dominance may ease after a healthy correction.
- Utilities and industrials may benefit from record power demand tied to AI infrastructure build-out.
- Small- and mid-cap stocks are showing early outperformance and may gain further as market breadth improves.
- Pro-business policies, easing tariff pressures and improved clarity on inflation may encourage renewed corporate investment.
Read the full transcript below:
ROGER: We are just a few weeks shy of the new year, and our next guest thinks 2026 will be a year in which investors perform well in sectors like utilities, industrials and real estate. Let’s get more on this from Brett Ewing. He is senior financial advisor and chief market strategist at First Franklin Financial Services. Brett, thanks as always for joining us.
BRETT: Yes, thanks for having me, Roger.
ROGER: What I’m not seeing there is what everybody, of course, is talking about: AI. Why are you looking at those other areas? And why are you not too sure about AI?
BRETT: Just to be clear, we do like AI. We will stay invested in 2026. But I do feel some of the sheen has been washed off the AI trade. I think it’s a healthy correction that we’ve seen in AI. Whether it’s clarity on the debt situation, clarity on the special-purpose vehicles or the depreciation issues—these are all good things to get out there and have transparency on.Having said that, I do believe there are other areas of the market—interest-sensitive areas—that are going to outperform on a relative basis. I think the honeymoon is kind of over in that trade on a relative basis. AI has dominated the field over the last 24 months, but there are other areas of the market that are ready to roll.
ROGER: You’re not saying AI is going anywhere. And you’re looking at one defensive and two cyclicals. Let’s start with utilities. What are you liking there?
BRETT: The power demands forecasted in this country are record. It’s an amazing amount of energy we’re going to need to put all of this AI computing to work. We feel utilities are in a great place to expand their operations, and they’re doing that actively. We believe that’s a good area.Also, they’re very interest-rate sensitive, so rates should be coming down. Our forecast for rates next year is a little more aggressive than what the market is pricing in. We believe there will be over four cuts next year.
ROGER: With utilities being tied to AI, could any correction in AI spill over into utilities?
BRETT: We’re seeing the infrastructure forecast continue in the AI trade, and we believe the utilities—these are long-term projects. They’ve been implemented over the last couple of years, and we see a pipeline of that for the next three to five years.
ROGER: Looking at the Fed now, there’s been talk we’ll see a cut. Do you think we’ll see more after that?
BRETT: I do. Our forecast right now is a cut in December, and we believe there will be a minimum of four cuts in 2026.
ROGER: Why so aggressive? What makes you think that?
BRETT: We just had our inflation report come out this morning. One of the largest components is shelter. If you look at the month-over-month change, it is 0.01. We believe that component is going to continue to cool across the board. The way we’ve seen inflation cooling, we think that trend is intact.
ROGER: It’s still running around three per cent. It’s been near that level for how long now—closing in on a year and a half? Two years? Where do you think it’s heading?
BRETT: I think it’s heading south, Roger. Every leading indicator I’m looking at with our research team suggests inflation won’t be a problem next year. We believe AI increases productivity. In our calls, productivity actually increases quite a bit in 2026 and has very deflationary pressure—even with growth. So we’re in the low-inflation camp for 2026.
ROGER: One last note: everybody likes to talk about the Mag 7 and AI, but you’re also seeing opportunities in small caps?
BRETT: I do. If you buy into what I’m saying about inflation and interest-rate cuts, we love interest-sensitive areas of the market. I can’t think of a better one than small- and mid-cap companies as an asset class.And Roger, we’ve already seen this trend. It’s happening already, and people aren’t talking about it enough. The S&P 500 bottomed on April 9. Since that bottom, we’ve rallied tremendously in the S&P 500. But guess what’s beating the S&P 500 as of today? The Russell 2000. The Russell 2000 is outperforming the S&P 500 coming out of that big correction we had in April. We think that trend is intact and will keep running. The breadth of the market—our call is that it expands throughout 2026.
ROGER: What’s giving you that confidence?
BRETT: I think lower rates are helping. I think the tax bill is out of the way. The tariff conversation is a fade. And I believe we have good pro-business policies with deregulation. It’s game on. Everyone has incentives to start capex investing as we move through 2026.
ROGER: And with tariffs—have businesses adjusted to them? Are they absorbing the impact?
BRETT: I think so. I think it’s worked itself through the system. I think by the first quarter—we’ve had a lot of data not coming out due to government shutdown—but I think by the first quarter we’ll have a lot more clarity on the effects of tariffs. We’ll be able to quantify it more clearly. But right now, listening to earnings calls and retailers, we believe it has filtered through the system.
ROGER: On that note, Brett, we’ll wrap it up. Thanks for joining us.
BRETT: Thanks for having me, Roger. Have a good one!
ROGER: You too. That’s Brett Ewing. He is senior financial advisor and chief market strategist at First Franklin Financial Services.
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This BNN Bloomberg summary and transcript of the Dec. 5, 2025 interview with Brett Ewing are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.