Six-Seven

by Mark Oelschlager of Oelschlager Investments, 1/14/26

If you’ve been around anyone under the age of 25 lately, you have likely been exposed to the “Six-Seven” phenomenon, whereby kids react excitedly upon hearing or seeing the numbers 6 and 7 in sequence. It can come from anywhere at any time - a teacher reading numbers, a football score, a seemingly harmless estimate by an unwitting individual (“about 6 or 7”) – but once the fire is lit it sends kids into a frenzy, with them enthusiastically repeating “6-7, 6-7!” while quickly moving their hands up and down. It’s remarkable how frequently this occurs and how quickly it can become tiresome. We know people that have banned the phrase in their house. The craze apparently originated from a line in a rap song and a subsequent video post by an NBA player and grew out of control from there. Perhaps in a few weeks it will be considered passe by those that determine such things. We can hope.

Stocks, as measured by the S&P 500, eked out a modest gain in the quarter, making 2025 another year of 15%+ returns – the sixth such year in the past - you guessed it - seven. This has been an incredible run for stocks, propelled by rising corporate profit margins and a healthy economy. There hasn’t been an extended bear market in over 15 years, which we believe has fostered a buy-the-dip mentality and engendered complacency among some market participants, as evidenced by overly bullish positioning, high interest in expensive stocks, and a willingness to look the other way on issues that would ordinarily raise concern.

Despite the consumer finally showing signs of fatigue, GDP continues to grow at a strong rate, a slowly rising unemployment rate notwithstanding. It’s possible that the historically massive investment in artificial intelligence has been propping up the economy. The AI trade showed some cracks in the quarter though. The corporate bonds of some heavy investors in AI infrastructure sold off, signaling that it may be time for them to exercise some spending discipline. Some AI equity plays fell out of favor as well, after huge upswings. CoreWeave fell by about half, while Oracle and Soundhound gave back about 1/3 of their value in the quarter. But many AI stocks have continued their ascent, as the momentum trade exhibited some volatility but stayed intact. According to Empirical Research Partners, other than what occurred in 1999, the current nine-month relative return of momentum stocks is unprecedented in the last 70 years. In other words, the winners have kept winning to an almost unprecedented degree.

The characteristics of the winning stocks have been noteworthy. In some parts of the market, companies with negative earnings, fast sales growth, less stability, or low interest coverage have not just outperformed but done so to an unusually large degree, based on data from Empirical. What’s interesting about this is that historically, each of these factors tend to augur underperformance. It’s counterintuitive, but yes, rapid sales growth at a company, on average, leads to subpar prospective returns. So, this has been a very unusual time in terms of the makeup of some winning stocks. The flip side is that the factors that usually work, such as valuation, have not worked as well – at least in some segments, such as technology.

The rapid rise in the share prices of unprofitable tech companies has stalled but has yet to fall off a cliff. The current price action reminds us of the “disruptive innovation” funds in 2021. Like the unprofitable tech companies of 2025, these funds enjoyed a swift climb that was followed by a significant but not back-breaking correction and some sideways volatility. Then in late 2021 and early 2022, these funds collapsed. We think the unprofitable tech companies of today may suffer a similar fate in 2026.

We wrote on multiple occasions this year about the phenomenon of floundering companies shifting their strategy to that of cryptocurrency treasury, thereby seemingly creating billions of dollars of value purely through this change in strategy. Not surprisingly, that game appears to be in the process of ending, as many of these stocks fell by 50% or more in the fourth quarter, while Bitcoin lost about 24%.

The Federal Reserve enacted two more rate cuts in the quarter in spite of inflation that remains above target. The consensus is that there will be more cuts in 2026, as Chair Powell gives way to his yet-to-be-named successor, who is almost surely to be highly dovish (i.e. favorable to cutting rates), as he or she will be nominated by President Trump, a vocal proponent of easier monetary policy.