Externalities Through 2026

In our previous report, we explored the concept of “Externalities,” a term utilized across various disciplines including economics and philosophy, to describe factors external to an organization that can significantly influence its internal operations. As this is particularly relevant in highly regulated environments, we’ve categorized these Externalities into three distinct types: Invariants, which are predictable and recur on a fixed schedule such as presidential elections; Variations, which are cyclical but occur at irregular intervals (be intentional or unintentional), like the passing of government budgets; and Atmospherics, which are unexpected and non-cyclical events, such as geopolitical incidents, news headlines, etc. This classification helps in understanding how different types of external events can impact organizational dynamics as well as help shape its planning.

However, for an organization to effectively plan, it first needs to gain an understanding of the environment in which it is currently operating (including how we got here), and then layer that with an understanding of how that environment may change, as well as how it may remain the same, over the next several years. In order to do this, we believe that a healthy perspective on certain cycles is critical. A few examples of these cycles include Election, Budgeting, Legislative, and Economic cycles.

Each cycle will invariably have its own set of Invariants, Variations, and Atmospherics. Let’s take a look at some of the examples we mentioned earlier, as well as some new ones. and consider them through the end of 2026—a rolling 3-year view is typically sufficient time to get a sense of cycle starts and stops, trends, transitions, and so on. From an Invariants perspective, we know that 2024 is an election year, including Presidential and Congressional elections. Though we cannot predict the outcomes, we can anticipate certain facts. For example, President Biden has the option to run for a second term, and the current 118th Congress will transition to the 119th Congress, with 33 Senate seats and all 435 House seats up for election. As the saying goes, ‘all politics are local,’ changes at the state and district levels can have a direct impact on an organization’s planning. This is especially true as we cast our view further out and take note of the fact that another Congressional election will occur in November of 2026.

Now, let’s consider how certain Variations start to play into cycles such as Elections and how they also ripple into other cycles. One such Variation is the passing of the U.S. federal budget. Although there is a set schedule for when it is “supposed” to be passed, it has not been passed on time since fiscal year 1997 (FY97), resulting in the need

for multiple Continuing Resolutions (CRs) every year. This can have many implications for organizations within highly regulated spaces. Of particular note is the fact that, while under a CR, all funding for government programs is limited to the previous fiscal year’s amount, and no new programs or contracts can start until the budget is finally passed. Additionally, because the budget and its associated processes do not exist in isolation, the implications for both government and industry processes can be significant. Without attempting to be predictive but rather as a thought experiment, if we consider the average number of CRs passed each year over the last ten years—which is 4.1—we can begin to get a sense of what might be in store through 2026.

Inseparable from these kinds of Invariants and Variations is what ultimately emerges on a daily, weekly, monthly, yearly basis in the form of Atmospherics. These kinds of events are usually a telling sign of the environment an organization is currently in (e.g. heightened security environment due to news around the Russia/Ukraine war), but can also lend insight to issues which may have staying power over the course of multiple years. Two very significant Atmospherics which have taken shape recently are the White House’ CHIPS and Science Act and the shifts taking place in the U.S. Defense Industrial Base resulting in the release of the first-ever National Defense Industrial Strategy (NDIS).

The CHIPS and Science Act is a U.S. federal law which is aimed at revitalizing America’s semiconductor industry through nearly $53 billion in funding for domestic chip manufacturing, research, and workforce development. It establishes a 25% tax credit for semiconductor manufacturing investments and is part of a strategy to strengthen supply chains, enhance national security, and maintain technological leadership. The National Defense Industrial Strategy is DoD’s guide for strengthening the U.S. defense industrial base over the next three to five years, with a focus on resilient supply chains, skilled workforce development, flexible acquisition practices, and economic deterrence. It aims to modernize the defense industrial ecosystem, ensuring it can meet the demands of national security in an increasingly competitive global landscape. The strategy emphasizes the importance of public-private partnerships and international cooperation to maintain a technological edge and deter potential adversaries​.

While both of these Atmospherics warrant their own analysis/report, the implications these two topics alone will have on the U.S. economy, monetary + fiscal policy, innovation, and political shifts through 2026 are potentially staggering.

Looking toward 2026, organizations face the imperative to navigate regulatory shifts, economic fluctuations, and rapid technological changes. Strategic agility, robust risk management, and proactive adaptation strategies are essential. To fully realize their potential, organizations must focus on flexible planning, continuous monitoring of trends, and forming strategic alliances.

AI, particularly Large Language Models (LLMs), will increasingly influence various sectors. Supporting these AI systems, vector and graph databases are set to be vital for integrating and managing extensive data efficiently, ensuring robust and accurate knowledge systems.

The semiconductor industry, critical for AI’s hardware needs, is poised for rapid evolution. Innovations in microelectronics, potentially spurred by breakthroughs in material science, will necessitate maintaining cost competitiveness while managing investments and wages. This will challenge policymakers to rebuild a reliable semiconductor industry, while ensuring prudent use of taxpayer money as the silicon race heats up.

A “CHIPS 2.0” initiative might become a necessity to address challenges posed by limited capital and labor resources, aiming to balance leading-edge chips development with the broad application of more mature semiconductor nodes.

Rebuilding a robust local supply chain in the face of aging infrastructure and transport disruptions will be crucial. The supply chain will need investments in capacity that is smaller, faster, and more flexible, while dealing with upstream input requirements like raw minerals and radiation-hardened materials.

With Gen Z set to overtake the Baby Boomers inside the workforce, strategic workforce adaptations will be crucial. This shift will likely catalyze changes in labor dynamics, emphasizing the importance of automation and upskilling in collaboration with academic institutions.

Blockchain technology, recovering from the “crypto-winter” downturn, could significantly impact the semiconductor and energy sectors due to increased demand for ASIC chips and electric power. This resurgence will intertwine with energy considerations, where nuclear power may gain interest if supported by legislative frameworks. Environmental considerations will follow, particularly as the green transition and electric vehicles (EVs) require a renewed energy infrastructure.

Global connectivity enhancements through 5G and satellite constellations like Starlink will necessitate data protection measures. This progression highlights the need for a robust, flexible supply chain to meet these technological and regulatory challenges.