The AI plot thickens: Chinese scientists have unveiled an optical computing chip that outperformed Nvidia’s (NASDAQ:NVDA) top GPU by over a hundredfold in speed and energy efficiency—particularly for generative tasks such as video production and image synthesis. (Incidentally, YRI is working with a Korean media company that will use AI to synthesize Dr Ed’s speech in various languages.)
One of our sage accounts observed that AI may be indirectly boosting productivity:
“I have posited in the past that part of what can only be called the streamlining of corporate America might be corporations studying their workflows to determine where AI could be utilized and discovering that in fact, many of the services could be jettisoned entirely. In short, corporations may be focusing their management on profit rather than ancillary societal contributions.” (Thanks, Lee Hoffman.)
Meanwhile, we expect productivity growth to continue booming in 2026, as it did in 2025. If so, the bull market in stocks should broaden to the S&P 500’s Impressive-493, i.e., to the users of AI, rather than remaining concentrated among AI producers such as the S&P 500 Magnificent-7.
The upward slope of the forward earnings of the Impressive-493 steepened significantly in 2025 (chart). The forward earnings of this composite rose about 10% this year. That’s half as much as the increase in the Mag-7’s forward earnings, but we expect that increasing competition in the AI space will benefit the Impressive-493 while weighing on the Mag-7.
Meanwhile, S&P 500 forward earnings per share rose to yet another record high, of $313.86, during the week of December 25 (chart). The forward P/E is at 22.1. We expect forward earnings to rise about 10% to $350 by the end of 2026, pushing the S&P 500 up by about 10% to 7,700, with the forward P/E remaining around 22.0.
Now let’s review the mixed messages from some of the contrarian indicators we monitor. November’s Index survey showed that 52% of respondents expect that stock prices will be higher in 12 months. That’s a very high reading. From a contrarian perspective, this may be a bearish sign.
The 12-month average of this series is positively correlated with the forward P/E of the S&P 500 (chart). Both might remain higher for longer if consumers and investors believe, as we do, that a recession over the remainder of the Roaring 2020s is unlikely, as it has not materialized so far this decade.
Stock market euphoria is evident in record net inflows into equity ETFs. This might appear to be a bearish signal from a contrarian perspective. However, a big chunk of the funds going into equity ETFs is coming out of equity mutual funds (chart). Equity ETFs’ net inflows are on track to exceed a record $1.5 trillion this year, but equity mutual funds’ net outflows are likely to total a record $500 billion this year.
The US dollar’s weakness in 2025 was widely attributed to net capital outflows from the US to foreign capital markets, especially foreign equity markets. The Treasury’s data belie this notion. Indeed, over the past 12 months through October, foreign private purchases of US equities rose to a record $714 billion (chart).
The three-month annualized sum rose to almost $1.0 trillion. Historically, heavy foreign buying of US equities has been a bearish signal from a contrarian perspective. The signal certainly hasn’t worked recently.
The bull-bear ratios we track show mixed readings, one more bullish than average and one more bearish (chart). Taken together, they are neither bullish nor bearish currently.