Our 2026 Market Outlook

Hi friends. Over the past three years, I've shared fairly optimistic market outlooks each January. And in each of those years, I expected stocks to move higher, and they did. We had three outstanding years in a row. As we head into 2026, my outlook is more cautious, not pessimistic, but cautious. Today I want to walk through three reasons for that caution, and then, more importantly, explain how we are prepared for whatever the market gives us this year.

First, let's talk about the length of the current bull market. As of January 7th, this bull market has lasted 1,183 days, which is nearly 200 days longer than the average bull market going back to 1928. The total return during this current run has been about 90%. That's not extreme relative to history, but it is well above the median bull market return of roughly 77% and approaching the long-term average of 114%. Long bull markets don't end simply because they're old, but history tells us that risk tends to rise as markets mature.

Second, we're entering year two of the four-year presidential cycle, which has historically been the weakest year for stocks. Since 1928, the S&P 500 has posted a median gain of just 0.58% during year two. And in recent history, in year two of President Trump's first term, the market fell 6.2%, and in year two of President Biden's term, the market fell 19.4%. This doesn't mean a decline is guaranteed, but it does suggest that volatility and lower returns are more common during this phase of the presidential election cycle.

Third, and finally, stock valuations are elevated. As shown in this chart, the market is currently trading at roughly 22 times next year's expected earnings compared to a 30-year average of about 17. At the same time, the dividend yield on stocks is around 1.4%, which is 30% lower than its long-term average. High valuations don't cause immediate declines, but they do reduce the margin of safety and often lead to more uneven returns.

So, what are we going to do? We feel like 2026 calls for discipline and preparation, and three things stand out for us. First, proactive rebalancing. Over our last several rebalancing cycles, we've trimmed a portion of the stock indexes that have performed best and reallocated toward short-term bonds and the stock indexes that have lagged behind. This isn't about timing the market. It's about managing risk after strong gains. Second, staying ready to rebalance the other way. We have a disciplined investment strategy in place for our clients. If markets decline, we are prepared to rebalance in the opposite direction, adding to stocks at lower prices and taking advantage of the volatility. Third, looking at potential volatility the right way. If you're still working and contributing to your investments, market volatility is an opportunity, not a threat. Temporary declines allow you to invest new dollars at lower prices, which can significantly improve your long-term outcomes. However, if you are retired and using your portfolio for spending instead, the focus should be on your market cushion: how long your more stable assets can support spending without needing to sell stocks during a downturn. We will be reviewing this with all of our retired clients soon.

We are well prepared for whatever the world and the markets bring us in 2026. We have navigated volatility and down markets many times before, and each time we've been able to turn those challenging periods into opportunities for our clients. If this year brings smooth markets and another positive year, great. But if it brings volatility, we're ready for that, too. It is times like these that working with a firm like ours can be especially valuable. Thank you, and I look forward to talking with you next Friday morning.