ARK Invest's Cathie Wood Predicts 'Reaganomics on Steroids' and Strong U.S. Market Growth by 2026

ARK Invest founder Cathie Wood, also known as "Woodie," released a macro outlook in her latest 2026 New Year letter to investors, comparing the next three years to "Reaganomics on steroids."

She pointed out that with deregulation, tax cuts, prudent monetary policy, and the integration of innovative technologies, the U.S. stock market will enter another "golden age," while an impending surge in the U.S. dollar may bring an end to the upward momentum in gold prices.

Specifically, Cathie Wood believes that although real GDP has continued to grow over the past three years, the U.S. underlying economy has actually experienced a rolling recession and is currently in a "coiled spring" state, with the potential for a strong rebound in the coming years.

She emphasized in particular that the U.S. economy will gain significant policy benefits as David Sacks takes on the role of the first AI and cryptocurrency czar to lead deregulation, and as corporate effective tax rates move toward 10%.

On a macro level, Wood predicts that inflation will be further controlled, and may even turn negative, driven by a boom in productivity.

She expects that the U.S. nominal GDP growth rate will remain within the range of 6% to 8% in the coming years, primarily driven by productivity improvements rather than inflation.

In terms of market impact, Wood predicts that the relative advantage of U.S. investment returns will drive a significant appreciation of the U.S. dollar, replaying the scenario from the 1980s when the dollar nearly doubled in value.

She warned that despite the significant rise in gold prices over the past few years, a stronger U.S. dollar will suppress gold prices. Meanwhile, Bitcoin, due to its supply mechanism and low asset correlation, will exhibit a different trend compared to gold.

Regarding the market valuation concerns of investors, Wood does not believe that an AI bubble has already 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 a surge in productivity, corporate earnings growth will justify the high valuations. The market could potentially deliver positive returns even as the price-to-earnings ratio contracts, following a bullish trajectory similar to that seen toward the late 1990s.

Here is the original letter to investors:

Happy New Year to ARK's investors and supporters! We are very grateful for your support.

As I have outlined in this letter, we truly believe there are many reasons for investors to remain optimistic! We hope you enjoyed our discussion. From the perspective of economic history, we are at an important moment.

Although the U.S. real gross domestic product (GDP) has continued to grow over the past three years, the underlying structure of the U.S. economy has experienced a rolling recession, gradually transforming into a spring compressed to its limit, which may strongly rebound in the coming years.

To respond to supply shocks related to the COVID-19 pandemic, the Federal Reserve raised the federal funds rate from 0.25% in March 2022 to 5.5% over a period of 16 months through July 2023, marking a record increase of 22 times.

This interest rate hike has pushed housing, manufacturing, capital expenditures unrelated to artificial intelligence, and middle- to low-income groups in the U.S. into a recession, as shown in the figure below.

Measured by the sales volume of second-hand homes, the housing market declined by 40% from an annualized level 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 in the past two years, used home sales have fluctuated around this level.

This indicates how tightly the spring has been compressed: the current level of existing home sales is comparable to that of the early 1980s, when the U.S. population was about 35% smaller than it is now.

Measured by the U.S. Purchasing Managers' Index (PMI), manufacturing has been in a contractionary state for about three consecutive years. According to this diffusion index, 50 is the threshold between expansion and contraction, as shown in the following chart.

Meanwhile, capital spending measured by non-defense capital goods (excluding aircraft) peaked in mid-2022, and since then, the spending level has returned to that peak, regardless of the impact of technology.

In fact, this capital expenditure indicator has struggled for more than 20 years to break through since the bursting of the technology and telecom bubble, until 2021, when pandemic-related supply shocks forced both digital and physical investments to accelerate rapidly.

The previous spending ceiling seems to have turned into a spending floor, as artificial intelligence, robotics, energy storage, blockchain technology, and multi-omics sequencing platforms are all ready and are about to enter a golden age.

After a 20-year spending peak of about $700 billion following the technology and telecom bubble of the 1990s, we are now likely experiencing the strongest capital expenditure cycle in history, as illustrated below. We believe, however, that the emergence of an AI bubble is still far off!

Meanwhile, data from the University of Michigan shows that confidence among middle- and low-income people has fallen to its lowest level since the early 1980s.

At that time, two-digit inflation and high interest rates severely weakened purchasing power and pushed the U.S. economy into a prolonged recession.

In addition, as shown in the figure below, confidence among high-income individuals has also declined in recent months. In our view, consumer confidence is one of the most compressed and potentially most resilient "springs" at present.

Thanks to the combined effects of deregulation, reduced taxes (including tariffs), inflation, and interest rates, the rolling recession experienced by the United States in recent years may rapidly and dramatically reverse in the coming year and beyond.

Regulatory relaxation is unleashing innovation across various fields, particularly in the areas of artificial intelligence and digital assets, led by David Sacks, the first "AI and Cryptocurrency Czar."

At the same time, reductions in tips, overtime pay, and social security taxes will result in significant tax refunds for American consumers this quarter, which could push the annualized growth rate of real disposable income to about 8.3% from around 2% in the second half of 2025.

In addition, as manufacturing facilities, equipment, software, and domestic R&D expenditures benefit from accelerated depreciation, the effective tax rate for enterprises will be pushed down to nearly 10% (as shown in the figure below). The scale of corporate tax refunds is expected to rise significantly, and 10% is among the lowest tax rates globally.

For example, any company that begins construction of a manufacturing plant in the United States by the end of 2028 will be able to fully depreciate the building in the first year it is put into use, rather than depreciating it over 30 to 40 years as was previously the case.

Equipment, software, and domestic R&D expenditures can also be fully depreciated at 100% in the first year. This cash flow incentive policy was permanently established in last year's budget and is retroactively applicable as of January 1, 2025.

In recent years, inflation measured by the consumer price index (CPI) has stubbornly remained within the 2% to 3% range. However, for several reasons illustrated in the chart below, inflation is likely to decline to surprisingly low levels in the coming years—potentially even turning negative.

First, the price of West Texas Intermediate (WTI) crude oil has fallen by about 53% from its post-pandemic high of approximately $124 per barrel on March 8, 2022, and is currently down by about 22% compared to the same period last year.

Since peaking in October 2022, the sales prices of newly built single-family homes have fallen by about 15%. Meanwhile, the inflation rate for existing single-family home prices—based on a three-month moving average—has dropped from approximately 24% year-over-year at its post-pandemic peak in June 2021 to about 1.3%, as shown in the chart below.

In the fourth quarter, in order to absorb a new single-family home inventory of nearly 500,000 units (as shown in the chart below, the highest level since before the global financial crisis in October 2007), the three major homebuilders significantly reduced home prices. The year-over-year price declines were: Lennar by 10%, KB Homes by 7%, and DR Horton by 3%.

The impact of these price declines will be reflected with a lag in the consumer price index (CPI) over the coming years.

Finally, nonfarm productivity, one of the most powerful forces in curbing inflation, rose against the backdrop of a continuous economic slowdown, increasing by 1.9% year-on-year in the third quarter.

In sharp contrast to the 3.2% increase in hourly wages, productivity gains have brought the unit labor cost inflation rate down to 1.2%, as shown below. Cost-push inflation of the kind seen in the 1970s is absent from this figure!

This improvement has also been verified: according to the inflation rate measured by Truflation, it has recently declined year-over-year to 1.7%, 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 CPI.

In fact, if our research on technology-driven disruptive innovations is correct, over the coming years, influenced by both cyclical and long-term factors, nonfarm productivity growth should accelerate to 4-6% annually, thereby further reducing inflation in unit labor costs.

The convergence of the major innovation platforms currently under development—artificial intelligence, robotics, energy storage, public blockchain technology, and multi-omics technologies—has the potential not only to drive productivity growth to a new and sustainable high, but also to create substantial wealth.

Improvements in productivity may also help correct significant geo-economic imbalances in the global economy.

Companies can direct the benefits from increased productivity toward one or more of the following four strategic directions: expanding profit margins, increasing investment in R&D and other areas, raising wages, and/or lowering prices.

In China, increasing the wages of more productive employees and/or improving profit margins can help the economy overcome structural problems caused by excessive investment.

Since joining the World Trade Organization (WTO) in 2001, China's investment as a share of GDP has averaged about 40%, nearly twice that of the United States, as shown in the figure below. Increasing wages will help shift China's economy toward a consumption-driven model and away from its current goods-oriented path.

However, in the short term, productivity gains driven by technology may continue to slow U.S. employment growth, causing the unemployment rate to rise above 5.0% from 4.4%, and prompting the Federal Reserve to continue cutting interest rates.

Subsequently, regulatory easing and other fiscal stimulus measures are expected to amplify the effects of low interest rates and accelerate GDP growth in the second half of 2026.

Meanwhile, inflation may continue to slow down, not only due to the decline in oil prices, housing prices, and tariffs, but also thanks to technological advances that boost productivity and reduce unit labor costs.

Surprisingly, the cost of training artificial intelligence is decreasing by 75% annually, while the cost of AI inference (i.e., the cost of running AI application models) is declining by as much as 99% per year (according to some benchmark data).

The unprecedented decline in the costs of various technologies should drive a surge in their unit growth.

Therefore, we expect the U.S. nominal GDP growth rate to remain within the range of 6% to 8% over the next few years. This will mainly be driven by a 5% to 7% increase in productivity, a 1% increase in labor force, and an inflation rate ranging from -2% to +1%.

The deflationary effects brought about by the five major innovation platforms, including artificial intelligence, will continue to accumulate and shape an economic environment similar to that during the 50 years up to 1929, when the last major technological revolution was driven by the internal combustion engine, electricity, and the telephone.

During that period, short-term interest rates moved in line with nominal GDP growth, while long-term interest rates responded 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 following chart.

Rise in Gold Prices and Fall in Bitcoin Prices

During 2025, the price of gold increased by 65%, while the price of Bitcoin decreased by 6%.

Many observers attribute the surge in gold prices from $1,600 per ounce to $2,300, a 166% increase since the end of the U.S. stock market bear market in October 2022, to inflation risks.

However, another explanation is that global wealth growth (as exemplified by a 93% increase in the MSCI Global Equity Index) has outpaced the annualized growth rate of global gold supply, which is approximately 1.8%.

In other words, the incremental demand for gold may have exceeded its supply growth. Interestingly, during the same period, the price of Bitcoin increased by 360%, while its annualized supply growth rate was only about 1.3%.

It is worth noting that gold and Bitcoin miners may respond very differently to these price signals: gold miners can respond by increasing gold production, while Bitcoin cannot do so.

According to mathematical calculations, Bitcoin will increase by approximately 0.82% each year over the next two years, after which its growth rate will slow down to about 0.41% per year.

Measured by the ratio of gold price to M2 money supply, the gold price has only once exceeded this level in the past 125 years, during the Great Depression in the early 1930s. At that time, the gold price was fixed at $20.67 per ounce, while the M2 money supply fell by about 30% (as shown in the figure below).

Recently, the ratio of gold to M2 has surpassed the previous peak, which occurred in 1980 when inflation rates and interest rates surged into double digits. In other words, historically speaking, gold prices have reached an extremely high level.

As can also be seen from the figure below, the long-term decline in this ratio is closely related to the strong returns of the stock market. According to the research by Ibbotson and Sinquefield, since 1926, the annualized compound return of stocks has been approximately 10%.

After the ratio reached two major long-term peaks in 1934 and 1980, stock prices measured by the Dow Jones Industrial Average (DJIA) achieved returns of 670% and 1015% over the 35-year period ending in 1969 and the 21-year period ending in 2001, corresponding to annualized returns of 6% and 12%, respectively.

It is worth noting that the annualized returns for small-cap stocks were 12% and 13%, respectively.

Another important consideration for asset allocators is the low correlation of Bitcoin returns relative to gold returns and to the returns of other major asset classes since 2020, as shown in the table below.

It is worth noting that the correlation between Bitcoin and gold is even lower than that between the S&P 500 index and bonds. In other words, for asset allocators seeking higher risk-adjusted returns in the coming years, Bitcoin should be an excellent choice for diversification.

U.S. Dollar Outlook

In recent years, a popular saying has been the end of American exceptionalism. The U.S. dollar fell by the most in the first half of the year since 1973, and its annual decline was the largest since 2017.

Last year, measured by the U.S. Dollar Index (DXY), the dollar fell 11% in the first half of the year and declined 9% for the full year. If our forecasts regarding fiscal policy, monetary policy, deregulation, and technological breakthroughs led by the U.S. are correct, then the return on investment in the U.S. will improve relative to other regions of the world, thereby pushing up the value of the dollar.

The policies of the Trump administration are very similar to those of the Reagan era in the early 1980s, when the exchange rate of the U.S. dollar nearly doubled, as shown in the chart below.

Artificial Intelligence Hype

As shown, the rapid development of artificial intelligence is driving capital expenditures to the highest level since the late 1990s.

In 2025, investments in data center systems (including computing, networking, and storage equipment) increased by 47%, reaching nearly $500 billion. This is expected to grow by another 20% in 2026, reaching approximately $600 billion, significantly surpassing the long-term trend of $150 to $200 billion annually in the decade before the launch of ChatGPT.

Such a massive investment scale inevitably raises the question: "What is the return on this investment, and where will it be reflected?"

In addition to semiconductors and large, publicly traded cloud companies, AI-native companies that are not yet publicly traded also benefit from growth and investment returns.

AI companies are among the fastest-growing businesses in history. Our research shows that consumers are adopting AI at twice the speed they adopted the internet in the 1990s, as shown below.

According to reports, by the end of 2025, OpenAI and Anthropic will achieve annualized revenues of $20 billion and $9 billion, respectively, representing increases of 12.5 times and 90 times compared to $1.6 billion and $100 million in the same period last year!

There are rumors that both companies are considering initial public offerings (IPOs) within the next one or two years to raise funds for the large-scale investments required to support their product models.

As Fidji Simo, CEO of OpenAI's Applied Division, said: "The capabilities of AI models far exceed the levels most people experience in their daily lives, and 2026 will be the year that bridges this gap. Leaders in the AI field will be the companies that can translate cutting-edge research into products that are genuinely useful for individuals, businesses, and developers."

This year, with user experiences becoming more human-centered, intuitive, and integrated, we can expect significant progress in this field.

ChatGPTHealth is an early example; it is a dedicated section within the ChatGPT platform that is committed to helping users improve their health based on their personal health data.

In enterprises, many artificial intelligence applications are still in early stages, hindered by bureaucracy, inertia, and/or prerequisites such as reorganizing and building data infrastructure, leading to slow progress.

By 2026, organizations may realize that they need to train models using their own data and iterate quickly, or risk being left behind by more ambitious competitors.

AI-driven application cases should be able to provide immediate and excellent customer service, accelerate product launch cycles, and help startups create more value with fewer resources.

The market valuation is too high.

Many investors are concerned about the high valuation of the stock market, which is currently at a historical high, as shown in the chart below.

Our own valuation assumptions are that the price-to-earnings ratio (P/E) will retreat to around 20 times, which is approximately the average over the past 35 years. Some of the most notable bull markets have occurred alongside a compression in the P/E ratio.

For example, from mid-October 1993 to mid-November 1997, the S&P 500 index had an annualized return of 21%, and its price-to-earnings ratio dropped from 36 times to 10 times.

Similarly, from July 2002 to October 2007, the S&P 500 index delivered an annualized return of 14%, while its price-to-earnings ratio fell from 21 times to 17 times. Given our expectation that real GDP growth will be driven by productivity gains and slowing inflation, the same dynamic should reoccur in this market cycle, and possibly with even greater significance.

As always, I would like to express my sincere gratitude to ARK's investors and supporters, as well as to Dan, Will, Katie, and Keith for helping me write this lengthy New Year's message!

Cathy