Investment Strategy

Will Agriculture continue to lag?

Agricultural commodities were hampered by ample global supplies in 2025, which marked the second consecutive year of underperformance against the broader Bloomberg Commodity Index. Since the global supply disruptions of 2022 that resulted in a rapid appreciation of grain prices, the index has struggled to show life. As seen in Chart 1 below, performances of the heaviest-weighted members have been relatively muted and gradually drifted lower in recent years.

Chart 1. Performance of key agricultural commoditiesSources: Bloomberg and Wells Fargo Investment Institute. Daily data is from December 31, 2022 – January 2, 2026. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

We believe ample global supply, driven by an easing of supply disruptions stemming from the Russia-Ukraine war and strong harvests in Latin America, are key culprits behind the broad weakness in agriculture prices. Additionally, weaker demand for U.S. exports amid U.S.-China trade tensions contributed to excess supplies in the short term and were strong headwinds last year. Despite the federal government's announced $12 billion aid package for farmers, and China's promise to buy more U.S. soybeans, we do not expect a material change in the global oversupply.

As seen in Chart 2, U.S. farmers have struggled with profitability amid rising input costs (red dashed line) and declining prices (purple line). While the proposed federal aid package could help ease a portion of this financial strain in the near term, it may not fully address the impacts of strong harvests elsewhere in the globe driving prices lower or uncertainties around demand for U.S. exports. As stated by the National Association of Wheat Growers, the recent stimulus measures “do not come close to making wheat farmers whole for the per-acre losses experienced in 2025”. Additionally, while China has resumed purchases of U.S. agricultural products, the agreed-upon annual purchases of 25 million metric tons of soybeans are actually slightly below the quantity purchased annually between 2020 and 2024.

Chart 2. Costs for U.S. farmers continue to rise despite weak crop pricesSources: Bloomberg, U.S. Department of Agriculture, and Wells Fargo Investment Institute. Monthly data is from January 2020 – November 2025.

We suspect that these challenges impacting profitability could eventually drive U.S. farmers to trim supply growth in the years to come. As it stands, the U.S. remains a key producer of agricultural commodities, accounting for roughly 31% of global corn production, 28% of global soybean production, and 7% of global wheat production. Therefore, if U.S. producers were to begin curbing output growth, we believe it could be a tailwind for moderately improving prices and sector performance.

Weighing these uncertainties around U.S. farmers and future U.S. production growth against headwinds of strong harvests elsewhere in the globe leads us to remain neutral on the Agriculture sector. We see the potential for improved sector performance and outperformances by select commodities that have experienced unique supply challenges. However, ample global supply and evolving trade policies temper our expectations for the Agriculture sector to outperform relative to the broader Bloomberg Commodity Total Return Index. Therefore, we remain neutral on the Agriculture sector and see better opportunities in our favorably rated sectors, Precious Metals and Industrial Metals.

How does Venezuela impact our Energy sector guidance?

Venezuelan President Maduro was arrested and extradited to the U.S. Does this news change our tactical outlook (6 – 18 months) for the S&P 500 Energy sector? In short, no. Additional thoughts follow.

At an estimated 300 billion barrels¹, Venezuela holds the largest proven oil reserves in the world. However, and as we previously noted in the December 22, 2025 Investment Strategy Report, “Venezuela’s oil – is it a concern?”, Venezuela’s crude oil production has been hampered by sanctions and underinvestment and has been in long-term decline (see Chart 3). President Trump suggested that this could change as he stated, “We’re going to have our very large United States oil companies…go in, spend billions of dollars, (and) fix the badly broken (oil) infrastructure…”.² On the first U.S. trading day after the news broke, energy stocks — especially those thought to benefit from potential access to Venezuela’s oil — rallied.

We maintain our neutral tactical rating of the S&P 500 Energy sector for various reasons. Any opportunities that U.S. oil companies have with increased access to and reduced operating risk in Venezuela are shrouded in the political uncertainties about how soon — and under what conditions — U.S. companies may access the Venezuelan fields. Even in the most transparent operating conditions, production likely will require significant investment and time to realize. Additionally, any potential long-term relative performance benefit to the sector will likely be diminished by the headwind that additional supply has on oil prices. In the near term, we expect the Energy sector to be hamstrung by a well-supplied global oil market and our forecast for only modest upside to oil prices by year-end 2026.

Chart 3. Venezuela oil productionSources: Bloomberg and Wells Fargo Investment Institute. Monthly data is from January 1963 – November 2025.

¹ According to the U.S. Energy Information Administration.

² Ben Lefebvre, Zack Colman, James Bikales, “Trump Admin Sends Tough Private Message to Oil Companies on Venezuela,” Politico, January 3, 2026.

Reaffirming opportunities in RMBS

RMBS displayed positive absolute returns in 2025 (+8.6%) and 2.3% excess returns over Treasury securities.³ We have maintained a favorable view of the RBMS sub-sector since June 13, 2024. As was the case then, this sub-sector is still offering yields that are relatively more attractive than those of IG Corporate Securities (also with a favorable rating), when considering the spread level over Treasury yields (reflective of market participants’ view of risk).

We believe that the RMBS sub-sector is still well-positioned to provide risk-adjusted excess return this year, particularly as we expect Treasury yields to trade in a tight range in 2026. Additionally, RMBS has historically offered higher credit quality and better liquidity than other areas within fixed income, especially when bond-market volatility increases. For now, we feel comfortable maintaining a favorable view on RMBS; however, there are risks of spreads widening, especially if the Federal Reserve decides to sell mortgages from its balance sheet, but that is not our base case.

We believe that supply in the agency RMBS market will slow slightly this year in comparison with the past few years. We expect that demand will remain mixed, with U.S. banks and foreign investors remaining mostly on the sidelines but with opportunities emerging for money managers to step in and absorb supply as marginal buyers. Currently, prepayment risk also remains relatively low since higher mortgage rates have slowed the traditional refinancing activity. So, we have no major concerns about prepayment and reinvestment risks offsetting still-attractive RMBS valuations (see Chart 4).

Finally, there are several policy considerations (risks) in 2026 ranging from reform in government sponsored enterprises (Freddie Mac and Fannie Mae) to changes in how credit scores are calculated and also the potential for a housing crisis declaration, but the market seems to be shrugging off these known unknowns at this time.

Chart 4. RMBS valuations are attractive relative to IG corporatesSources: Bloomberg and Wells Fargo Investment Institute as January 6, 2026. The yield to worst is calculated by making worst-case scenario assumptions by calculating returns that would be received if provisions, including prepayment, call, or sinking fund are used by the issuer. Effective duration is a measure of interest rate risk when valuing bonds with embedded options. Yield per unit of duration is expressed by yield-to-worst divided by the effective duration. Indexes represented are the Bloomberg U.S. Mortgage-Backed Securities (RMBS) Index, Bloomberg U.S. Corporate Bond Index and Bloomberg U.S. Aggregate Bond Index. An index is not available for direct investment. Past performance is no guarantee of future results.

³ RMBS represented by the Bloomberg U.S. Mortgage Backed Securities Index, Treasury securities represented by the Bloomberg U.S. Treasury Index.

Building momentum in M&A

Following a second-quarter 2025 slowdown related to global trade policy uncertainty, the recovery in M&A activity continued to gain momentum throughout the remainder of the year. Shown in Chart 5, deal activity hit a cycle low in the first quarter of 2023 at $759 billion. Yet, since that time, U.S. dollar volumes have increased steadily, reaching a recent high-water mark of $1.8 trillion in the fourth quarter of 2025, exceeding the lofty quarterly volumes reached in 2021. While volumes increased significantly in 2025, the number of deals has remained relatively rangebound between 14,000 and 15,000 per quarter. These dynamics highlight that the rising volumes have been driven by larger deals (in dollar terms), primarily in the Information Technology and Industrials sectors.⁴ While larger deals may have carried the load in 2025, we anticipate that lower interest rates, moderate inflation, and accelerating economic growth in the year ahead should provide a favorable backdrop for broader participation overall. Moreover, as the administration’s policies become more in focus, we expect potentially fewer regulatory roadblocks, which may pave the way for further gains in activity.

Generally, in mergers, the acquirer offers to pay a premium to the target company’s current stock price. While much of the spread (between offering price and current price) typically converges shortly after the announcement, a portion of the premium often persists and is dependent on the successful completion of the merger. Most Merger Arbitrage sub-strategies attempt to capture this post-announcement spread. Given our positive outlook for M&A activity, we remain favorable on Merger Arbitrage sub-strategies. Yet, we continue to monitor risks that may limit further gains in deal activity going forward. Most notably, potential bouts of economic uncertainty could derail corporate-leader confidence and lead to fewer deal announcements over time.

Chart 5. M&A volumes and deal count on quarterly basis (2020 - 2025)Sources: Bloomberg and Wells Fargo Investment Institute. Data as of December 31, 2025.

⁴ Citi Executive M&A Summary, November 2025 edition.

Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

Cash Alternatives and Fixed Income

Equities

Real Assets

Alternative Investments**

Source: Wells Fargo Investment Institute, January 12, 2026.

*Tactical horizon is 6-18 months

**Alternative investments are not appropriate for all investors. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. Please see end of report for important definitions and disclosures.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. Although Treasuries are considered free from credit risk, they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Investing in silver, gold, or other precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry.

In addition to the risks associated with investment in debt securities, investments in mortgage-backed and asset-backed securities will be subject to prepayment, extension and call risks. Changes in prepayments may significantly affect yield, average life and expected maturity. Extension risk is the risk that rising interest rates will slow the rate at which mortgages are prepaid. Call risk is the risk that If called prior to maturity, similar yielding investments may not be available for the Fund to purchase. These risks may be heightened for longer maturity and duration securities.

Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing.

Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Real estate investments have special risks, including possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

Bloomberg Commodity Index is comprised of 22 exchange-traded futures on physical commodities and represents 20 commodities weighted to account for economic significance and market liquidity.

Bloomberg Commodity Total Return Index reflects the returns that are potentially available through an unleveraged investment in the futures contracts on 19 physical commodities comprising the Index plus the rate of interest that could be earned on cash collateral invested in specified Treasury Bills. The Index is a rolling index rebalancing annually.

Bloomberg U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.

Bloomberg U.S. Corporate Bond Index includes publicly issued U.S. corporate and Yankee debentures and secured notes that meet specified maturity, liquidity, and quality requirements.

Bloomberg U.S. MBS Index measures the performance of investment grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA and FHLMC.

Bloomberg U.S. Treasury Index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more.

Bloomberg U.S. Mortgage Backed Securities (MBS) Index includes agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).

M&A Deal volumes - Deal volumes are shown for all global merger and acquisition deals collected by Bloomberg during the selected time frames shown. Bloomberg collects M&A deal data primarily from public news wires, company filings, press releases, and direct disclosures from involved parties such as companies, advisors, or legal firms. For each deal, Bloomberg reviews official sources and may also receive private submissions from advisors or companies. The data is not sourced from third-party providers like PitchBook or GlobalData. If a data point is submitted privately, Bloomberg may not be able to share the original documentation, but public sources are always referenced where available.

USDA Crop Farm Prices Paid and Received Indexes: Represent National Agricultural Statistics Service estimates on the prices farmers receive for agricultural commodities. The estimates reflects sales of all classes and grades of the respective agricultural commodities and are used to compute cash receipts and value of production. Prices paid indexes represent production inputs (fuel, electricity, seeds, pesticides, fertilizers, and so forth. Data is indexed to 100 as of 2011.

An index is unmanaged and not available for direct investment.

Investment Grade bonds - A rating that indicates that a bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

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