CONSUMER WATCH
Consumer momentum continued in December after a chilly November
In December, total credit and debit card spending per household increased 1.8% year-over-year (YoY), up from 1.3% YoY in November, according to Bank of America aggregated card data.
Meanwhile, seasonally-adjusted (SA) spending growth per household rose 0.5% month-over-month (MoM), following the flat reading in November. Looking across 2025, consumers ended on solid footing despite some slippage in the first half of the year.
Spending behavior showed a distinctly “K-shaped” pattern in the second half of 2025. This continued into December, with lower-income households increasing their three-month average card spending just 0.4% YoY, while those with higher incomes saw a 2.4% gain. While the gap remains around 2 percentage points (pp), it has been relatively stable over the past six months. (…)
Higher tax refunds in 2026 are likely to provide an important boost, temporarily bolstering discretionary spending growth, in our view. The One Big Beautiful Bill Act (OBBBA) included several tax benefits that should drive larger refunds this year (as will the fact that the Internal Revenue Service (IRS) did not adjust withholdings last year). These changes included an increase in the standard deduction, new deductions for tip and overtime income, and a rise in the state and local tax (SALT) deduction cap.
BofA Global Research estimates that refunds in 2026 could be about $65bn higher than 2025, a rise of 18%. The majority of these payments will be made between February and April.
While higher earners may possibly get the biggest boost, lower-income households won’t be left out entirely.
Some lower- and middle-income households should gain, given they are more likely to work in sectors such as leisure and hospitality, in which tips and overtime can drive earnings. But, at the same time, the changes to SALT, which increased the cap on state and local tax deductions, will likely benefit higher-income households.
In fact, the non-partisan Tax Policy Center has estimated that the largest impact on cash income in 2026 from the OBBBA will likely benefit people with the highest incomes.
However, importantly, while the largest absolute benefits from OBBBA in 2026 are expected to accrue to higher-income households, the proportional impact on spending may still be greater for lower-income households.
In Bank of America internal deposit data, we find that refunds as a share of average monthly spending are significantly larger for lower-income households than for middle- or higher-income households. So even if the growth in refunds was fairly uniform across the income distribution, as it was in 2025, it could still boost lower- income household spending – and take some pressure off their discretionary “nice-to-have” spending budgets.
US Productivity Accelerates to Fastest Pace in Two Years
US labor productivity accelerated in the third quarter to the strongest pace in two years, adding to evidence that efficiency gains are suppressing inflationary pressures from wages.
Productivity, or nonfarm employee output per hour, soared at a 4.9% annualized rate after an upwardly revised 4.1% advance in the second quarter, data from the Bureau of Labor Statistics showed Thursday.
US economic growth powered ahead in the third quarter at the fastest pace since 2023, despite a slowing labor market. Unit labor costs — what businesses pay employees to produce one unit of output — dropped 1.9%, following a decrease in the prior quarter. That marked the first back-to-back declines since 2019. (…)
Federal Reserve officials can take comfort in continued efficiency gains because they limit wage-driven inflationary pressures. Labor costs are the biggest expense for many businesses, so companies turn to new technology and equipment to improve worker efficiency. (…)
In addition to helping contain labor costs, the resurgence in productivity in mid-2025 suggests companies are attempting to mitigate the impact of higher duties on imported goods. It also highlights how companies can use technology to get by with lean staffing. (…)
The productivity report showed output in the third quarter increased an annualized 5.4% after advancing at a 5.2% rate in the prior three months.
Hours worked rose 0.5% in the third quarter, while hourly compensation, unadjusted for inflation, increased an annualized 2.9%. After adjusting for inflation, worker compensation declined at a 0.2% pace.
From Ed Yardeni:
Wells Fargo:
The solid outturn reinforces that the underlying trend in productivity remains stronger than the prior cycle (2.0% since the end of 2019 versus 1.5% from 2007-2019) and should help to allay concerns over the current state of inflation.
Retail Crowd’s Buying Power Signals More Gains for US Stocks
Retail traders have extended a buying spree into the new year, following a record-setting performance in 2025, an analysis from JPMorgan Securities’ Arun Jain shows. Purchases in the first four trading days of January hit the second-highest level in almost eight months, the firm’s data showed, while daily buying was consistently above the 85th percentile of observations, underscoring unusually strong conviction.
That confidence has helped stabilize markets during recent pullbacks. Considering the group’s growing influence on Wall Street, if retail traders keep snapping up equities, gains in the US stock market are likely to persist.
“Markets have been seemingly more driven by flows of funds than valuations, so — as long as individual investors are willing and able to commit money to stocks — that’s a positive sign for broad markets,” said Steve Sosnick, chief strategist at Interactive Brokers.
So far, the signal is flashing green. Since the start of the year, retail investors have bought about $10.1 billion of US equities — mainly via exchange-traded funds — far exceeding the 12-month weekly average of roughly $6.5 billion, JPMorgan data showed.
Retail inflows in 2025 were nearly double the five-year average, surpassing the prior record set in 2021 by 17% and exceeding 2024 levels by almost 60%, the bank’s data show. December alone marked the largest monthly buying spree since the post–Liberation Day buy-the-dip episode in April. (…)
Single-stock trading cooled starting in May, but ETF buying continued apace, helping to keep overall equity demand elevated.
One in two US households own stocks and the percentage of households’ net worth tied to the stock market is over 30%, marking an all-time high, according to Barclays’ global head of equities tactical strategies Alexander Altmann. Citadel Securities said individual investors now account for 21% of trading volume in US stocks and roughly 60% of customer volume at Options Clearing Corp., the biggest equity derivatives clearing organization. (…)
“The buy-the-dip strategy has worked extraordinarily well for a wide swath of investors for a long period of time,” Sosnick said. “It’s reasonable to expect that it will remain a popular strategy until it stops working, as all ‘foolproof’ strategies eventually do.”
One notable shift was into precious metals. Retail investors bought more shares of SPDR Gold Shares ETF (GLD) in 2025 than in the prior five years combined, JPMorgan’s Jain wrote. The fund climbed about 64% in 2025, fueled by rising gold prices and heavy central-bank buying as heightened geopolitical risks stoked investor demand.
Retail enthusiasm has also spilled over into derivatives. Options activity rebounded sharply after a holiday pause, with individual investors buying call options in 35 of the past 36 weeks, according to Scott Rubner, Citadel Securities’ head of equity and equity derivatives strategy.
“The defining feature of retail activity in 2025 was persistent bullishness and after earning more than $20 billion in options on our platform over the course of the year, retail investors enter January armed with capital to deploy,” Rubner wrote in a note to clients Tuesday.
Citadel Securities expects that dynamic to continue this year, particularly in buzzy retail themes like quantum computing, robotics and automation, as well as space travel.
It’s fitting here to reprint part of Richard Bernstein’s 2026: Boring is beautiful:
2025 was a historic year for speculation across the financial markets. The economy is healthy, and the banking system is functioning well, so the Fed’s rate cuts and the anticipation of future rate cuts have resulted in excess liquidity that the economy simply can’t absorb, and excess liquidity and leverage form the life blood of speculation.
Whether it was the equity market’s emphasis of AI, SPACs, and Meme stocks, the fixed-income market’s near-record narrow credit spreads, individual investors’ record use of options and levered ETFs, or the hoarding of cryptocurrencies, speculation was rampant in 2025. (…)
When sports betting is considered a new asset class, as it apparently is today, it’s easy to argue that speculation is dominating investors’ thoughts. Historically, it’s been prudent to keep portfolios simple and boring as speculation reaches a crescendo because boring suddenly becomes beautiful when speculation subsides.
- US investors’ equity allocation is at an all-time high GS
AI CORNER
DeepSeek’s AI gains traction in developing nations, Microsoft report says
DeepSeek, the Chinese tech startup that rivals OpenAI‘s ChatGPT, has been gaining ground in many developing nations in a trend that could narrow the gap of artificial intelligence adoption with advanced economies, a new report suggested.
In the Thursday report, researchers from Microsoft said global adoption of generative AI tools reached 16.3% of the world’s population in the three months to December, up from 15.1% in the previous three months.
Yet the divide of AI adoption in developed and developing countries is widening, the report noted, with AI adoption across what Microsoft characterizes as the global north growing nearly twice as fast as in the global south. (…)
Countries that invested early and consistently in digital infrastructure and AI led in terms of shares of users, including the United Arab Emirates, Singapore, France and Spain, according to the report. Some of Microsoft’s figures overlapped with the findings of a Pew Research Center survey published in October that mapped which countries are more excited than concerned about AI. In both reports, for instance, South Korea stood out in its embrace of AI. (…)
His researchers found that the rise of Chinese startup DeepSeek, which was founded in 2023, has fueled wider AI adoption across the developing world given its free and “open source” models – with key components available for anyone to access and modify. (…)
DeepSeek offers a free‑to‑use chatbot on web and mobile, and has also given developers global access to modify and build on its core engine. Its lack of subscription fees has “lowered the barrier for millions of users, especially in price‑sensitive regions,” Microsoft’s report said.
“This combination of openness and affordability allowed DeepSeek to gain traction in markets underserved by Western AI platforms,” the report added. “DeepSeek’s rise shows that global AI adoption is shaped as much by access and availability as by model quality.”
Developed countries including Australia, Germany and the U.S. have sought to limit the use of DeepSeek over alleged security risks. Microsoft last year banned its own employees from using DeepSeek. Adoption of DeepSeek remained low in North America and Europe, the report found, but it surged in its home country China, as well as Russia, Iran, Cuba, Belarus – places where U.S. services face restrictions or where foreign tech access is limited.
In many places, DeepSeek’s prevalence correlated with it being a default chatbot on widely available phones made by Chinese tech companies like Huawei.
DeepSeek’s market share in China was 89%, the report estimated. That’s followed by Belarus’s 56% and Cuba’s 49%, both of which also had low AI adoption more broadly. In Russia, its market share was around 43%.
In Syria and Iran, DeepSeek’s market share reached around 23% and 25%, respectively, the report added. In many African countries including Ethiopia, Zimbabwe, Uganda and Niger, DeepSeek’s market share was between 11% to 14%.
“Open‑source AI can function as a geopolitical instrument, extending Chinese influence in areas where Western platforms cannot easily operate,” the report said.
Politics aside, the Microsoft report has other important info:
- Global adoption of artificial intelligence continued to rise in the second half of 2025, increasing by 1.2 percentage points [to 16.3%] compared to the first half of the year, with roughly one in six people worldwide now using generative AI tools, remarkable progress for a technology that only recently entered mainstream use.
- Despite progress in AI adoption, the data shows a widening divide: adoption in the Global North grew nearly twice as fast as in the Global South. As a result, 24.7 percent of the working age population in the Global North is now using these tools, compared to only 14.1 percent in the Global South.
- Countries that have invested early in digital infrastructure, AI skilling, and government adoption, such as the United Arab Emirates, Singapore, Norway, Ireland, France, and Spain, continue to lead.
- The second half of the year in the United States shows that leadership in innovation and infrastructure, while critical, does not by themselves lead to broad AI adoption. The U.S. leads in both AI infrastructure and frontier model development, but it fell from 23rd to 24th place in AI usage among the working age population, with a 28.3 percent usage rate. It lags far behind smaller, more highly digitized and AI-focused economies.
- South Korea stands out as the clearest end-of-year success story. It surged seven spots in the global rankings, climbing from 25th to 18th, driven by government policies, improved frontier model capabilities in the Korean language, and consumer-facing features that resonated with the population. Generative AI is now used in schools, workplaces, and public services, and South Korea has become one of ChatGPT’s fastest-growing markets, leading OpenAI to open an office in Seoul.
- The United States maintained strong usage in absolute numbers [28.3%], but dropped from 23rd to 24th place, reflecting the fact that a smaller proportion of the US population uses AI compared to several smaller highly digitized nations.
AI Diffusion Over Time by Country
- DeepSeek has clearly lowered entry barriers for millions, suggesting that the next billion AI users may emerge not from traditional tech hubs but from the Global South, enabled by open-source innovation.
A fantasy M&A guide to buying Greenland The process might be thought of as analogous to one company buying another
Buying and selling countries sounds like the kind of thing that would only happen in a board game. Yet US President Donald Trump is considering making a bid for Greenland, the White House confirmed on Wednesday.
Imagine, for a moment, that the US does indeed think it can acquire Greenland from current owner Denmark in some kind of commercial transaction. The process might then be thought of as analogous to one company buying another. In this case, it would be an unsolicited bid, perhaps like the one Paramount Skydance has made to derail Netflix’s acquisition of media outfit Warner Bros Discovery.
The first question is what Greenland is worth. Finance students will recall two ways to approach that in an M&A scenario.
One is “intrinsic valuation”. The American Action Forum, a think-tank, totted up Greenland’s barely tapped mineral reserves at market prices, applied a probability weighting of sorts, and arrived at $186bn. Double that to factor in the value of owning a region critical in a theoretical war with Russia, and call it $370bn.
Alternatively there’s “relative valuation”, which calls upon similar past transactions. Using the same price per square mile as 1803’s Louisiana Purchase, and converting it into today’s money based on historic inflation rates, the price is a measly $300mn. But use instead the 1917 purchase of the comparatively tiny Virgin Islands, also formerly Danish, and that rises to a heady $3.8tn.
In this case, what matters isn’t valuation maths but effective negotiation — the other element of M&A. What does it take to get enough of the right people to agree to a change of control?
Since Denmark says Greenland has the right to declare full independence, there’s a theoretical path for its 57,000 residents to voluntarily embark on a process, no doubt a convoluted one, of swapping Danish rule for American stewardship. Seen in this light, buying Greenland would actually be quite a lot like buying a company: convince enough shareholders to back your offer, and the prize is yours.
The US could offer each resident US citizenship and a welcome bonus of $1mn, and the total cost would be some $57bn, increasing the US national debt by just 0.1 per cent. Elon Musk, who has expressed support for a union, could even throw in free Teslas for all.
The catch is that a US-Greenland merger is actually less like a straight takeover and more like a cash and stock deal, where the “stock” involves becoming American. Just as in an M&A battle — think of Netflix offering a slug of stock to WBD — the question is not just about the sums on offer but the attractiveness of the acquirer’s shares.
There, Trump has a problem. The US is rich and mighty. But as role models go, it is a flawed one, with lower life expectancy than peers, healthcare twice as expensive as Denmark’s, and a gun homicide rate 65 times higher.
A poll by Verian found 85 per cent of Greenlanders would rather not turn American. Besides, the US is run by a government that thinks countries can be traded like companies. That alone makes it a tough sell.
Not so crazy scenario per Reuters:
Trump considers paying “Greenlanders” $10,000 – $100,000 per person to join the U.S. and support secession from Denmark — Reuters
Sounds like a low bid.
The irony is Trump being even interested in buying anything with “green” in it…