More of the same…
As the books close on 2025, most budgets and plans for 2026 are complete. These planning cycles typically make a variety of baseline assumptions, that the macro environment will look similar to the year prior, that we will experience ‘relative’ geopolitical stability and, critically, that customer priorities and purchasing patterns will remain intact. In most years these are reasonable assumptions and the year plays out largely as anticipated.
Bull cases: AI productivity; M&A frenzy
For boards, CEOs, finance, business and sales leadership, 2026 feels like it has an outsized risk of surprise. Many forget that volatility has two tails and, of course, one of the “tail risks” is of a blowoff market top, an upside surge as the bubble reaches its crescendo (to mix a metaphor) and the bears capitulate. The FT referred to “fully invested bears” this week, which sounds like another way of saying something very similar.
There is a real probability of this scenario, with many elements of US policy clearly stimulative and monetary policy easing despite inflationary pressure. I do pity Fed policy makers in the face of conflicting mandates. A key element to this thesis is the disappearing regulatory framework around bank mergers. For almost all of the information services ecosystem, banks remain the largest customer segment and an upside surprise in markets, driven by M&A and/or driven by AI adoption is possible. The US bank landscape is ripe for consolidation, which would see first order effects at the Investment banks and later impacts on the firms merging, as their costs can be efficiently spread over a larger asset base.
Such a bullish outcome would become far more likely if early evidence emerges of productivity improvements driven by AI, validating growth / revenue assumptions in the technology space and the macro bull case that US GDP and productivity growth can return to 90s levels. This case is predicated on AI driving the type of productivity gains we haven’t seen since PC adoption showed up in the figures in the mid 90s. The question is whether we are in another early 1990s ‘productivity paradox’ (early years saw little signs of productivity growth) and the surge is yet to come, this is why it takes two views to make a market…
Or…April 2000 beckons
At the other end of the fat tailed distribution is calamity. That we’re nearer the end of the party and some unknown event or actors remove the punch bowl, markets falter as rosy assumptions prove untenable and the US market rediscovers the equity risk premium.
Calamity could equally come from a geopolitical accident. A border clash in Finland or the Baltics, a Chinese blockade of Taiwan. Of course we could encounter something closer to an unknown unknown. Markets do not price for these outcomes, nor to the commodities price spike or disruption to global supply chains.
It’s worth remembering that no western government would be starting a conflict with decent fiscal headroom (perhaps Germany aside) so we would likely feel an equity market meltdown with a parallel surge in rates. It is difficult to imagine the traditional bid and “flight to safety” for US treasury markets alongside a surge in issuance. I’d expect returns to look more like 2022, where balanced portfolios saw poor returns in both major public asset classes as equities fell and rate rises hurt FI portfolios.
While the first (upside) scenario will lead to changes in outcomes and some increase in champagne consumption, this second scenario is more important from a risk management perspective, for small firms, it may even be existential.
CEO: implications and planning
A major change in the macro environment has a number of implications. Firstly, it will hit funding and valuations. There is plenty of dry powder in the PEVC space, the question is whether management teams will be happy with a sudden plunge in their valuation. Such a market will also bring to light nasty down round protection from savvier early investors.
Beyond the financial engineering, a slowdown hits sales and revenue. Salaries don’t fall, but revenue growth does. Customer projects are delayed as fear replaces greed, purchasing patterns elongate, negotiations get harder, price points fall. In this environment it is critical that CEOs react fast, focusing on roles that are going to immediately impact growth.
Cash burn, do what you need to do.
For firms with reasonable operating cash flows, the challenge is simply to determine how to manage the slowdown. Whether to decelerate hiring and capex, how much to map to your changed environment, how much to drive on regardless. For early stage firms, you need to work with your investors to determine what cash burn rate feels appropriate, your 2026 plan would likely need a significant overhaul with a re-evaluation of priorities.
Selling in a downturn
Customer priorities change with macro regimes. Management teams with strong visibility into their revenue may ‘look through’ the volatility, they may even use the disruption as an opportunity to make acquisitions of weaker competitors (in general, buyers in 2009 were rewarded handsomely). In general, however, downturns push out sales cycle timeframes, reduce operating income and bring a far greater focus to costs. You need to react to this in a few different ways.
Know your product.
It is important that vendors understand how their products are perceived by their customers. Tools that support reductions in TCO (productivity enhancement, headcount reduction, automation) will remain popular, while procurement teams will focus on ‘nice to have’ or low usage products as immediate cost savings. You do not want to be the fourth new research tool. Renewals, value perception and customer satisfaction become a strategic imperative.
If your message has focused on driving growth, supporting new business lines, changing the paradigm, or even alpha then you’ll need to rethink this, focusing firstly on how your customer segment is reacting to their new macro reality. Much of the change will come down to customer mindset – fear replaces greed. Risk management replaces alpha. The volatility of your returns in this period will drive performance charts for ten years, so for a Buyside example this pivot to risk management is an easy and obvious message.
Adjust your message.
There are two principal options here. The first, which is product dependent, is to change your message to supporting TCO or risk management. If your product has the ability to displace incumbent solutions, if it is a cheaper solution to an existing requirement, then great news.
The power of the COO waxes and wanes through the cycle, when times are great they recede into the background, when bear markets arrive their mandate for cost discipline changes things drastically, much greater operational disruption can be tolerated in the name of efficiency. They’re a counter cyclical bellwether and in a bear market you need to know what they are working on. Be their ally, not the victim.
The second option is to understand the customer better and their new focus. Perhaps a regulatory change is being pushed through that simply needs to get done. Perhaps the board has ring fenced the AI spend and this is the year for enterprise adoption. Executive engagement with your key customers needs to understand where the opportunities lie and focus there.
I remember a 2009 article from HBR “In a downturn, provoke your customers”. The takeaway was not to bait them until they swore at you, but to focus on the “if I were you, I wouldn’t be able to sleep, wondering how I was going to solve X”. Of course you offer a solution to X. What doesn’t change, what is a cyclical constant is the value of strong customer relationships and providing advice, not just order forms. Firms with the best relationships will trim their sails and adjust their messages the fastest.
The other reason it’s good to go back and re-read that article is because the reality of 2009 comes through in the writing. It leaps off the page that customer behaviors altered radically and suddenly for many firms, they had no real precedent. I can see that risk again, after a long period of growth and complacency.
Healthy, if painful, beware below.
Bear markets are cleansing and help restore some sanity to valuations and to expectations. They are disorientating at first, as your expectations adjust and as client behaviors reset. They require a different toolkit and certainly different messaging and mindset.
There is no law that says markets must go up and to the right, that customer budgets will continue to expand to adopt new tech, these are bull market phenomena. They’re certainly an easier environment to operate in but founders, investors and management teams need a toolkit and a plan for every scenario. I hope 2026 is another strong year but there is a non-trivial chance it is not. That its volatile, that existing investment premises do not hold and that we see a consolidation in markets and a change in “all in on AI” behaviors. In this environment, it’s wise if leadership teams have at least considered these scenarios, have spent some time on the “what if” and are ready to adjust.
