A Solid Start to 2026
The S&P 500 finished 2025 with a 17.9% total return for the year, while the equal-weighted index posted an 11.4% total return. That is better than the average stock market return of 10% over the last 100 years, which amounts to about 7% adjusted for inflation. Alphabet# (Google’s parent), led the gains in the Magnificent 7 stocks last year, up over 60%, while Microsoft#, Apple#, Meta# and Amazon# lagged behind the S&P500 return. So far this year, Materials, Industrials, Financials and Healthcare sectors are leading returns as value stocks have garnered more investor interest, although AI-driven technology stocks also joined the party yesterday.
S&P 500 targets for 2026 among analysts are mostly bullish (as they usually are early in the year), suggesting 6-16% upside from 2025 levels. This is based upon an outlook for strong corporate revenue growth and improving profit margins. Key drivers for 2026 include continued investment in AI infrastructure by hyperscaler companies, gradual rate cuts by the Federal Reserve, fiscal policy stimulus from the new tax bill passed last year, and continued positive consumer spending trends. There are several potential headwinds and risks, however, including high market valuations, midterm elections which often bring increased volatility and policy uncertainty, and lingering tariff impacts. The second year of a presidential cycle, which we are entering, also tends to be the weakest historically.
Markets unperturbed by geopolitics
Following the capture of Venezuela President Maduro, global stock markets began the week strongly and seemed unperturbed by geopolitical events. Oil market impacts appear limited as production and export constraints remain subject to U.S. sanctions and enforcement. Venezuela currently produces under 1 million barrels of oil per day, which is less than 1% of the global output, and faces an already oversupplied market. Oil infrastructure was untouched by US strikes, leaving Venezuela positioned to restore some production relatively quickly. However, the US blockade remains in full force and has curtailed exports, which fell 50% in December from the prior month. Longer-term, oil output could reach 1.4 million barrels per day within 2 years with a political transition and steep investment, but those are major uncertainties. Getting oil production back over 2.5 million barrels per day will likely take 5-10 years by most estimates. Exerting control over Western Hemisphere oil supply may keep oil prices capped for a while, giving the U.S. some leverage over China, which buys most of Venezuela’s oil output. OPEC confirmed Sunday it will keep oil production steady through the first quarter. After that, it could be a slippery slope.
The Road Ahead
Fiscal stimulus and technology spending are expected to support economic growth in 2026. Inflation may remain above the Fed’s 2% target, driven in part by the effects of tariffs. But unless growth unexpectedly weakens or unemployment rises significantly, no interest rate cuts are expected in the first half of the year. Beyond that, the outlook is uncertain, with a new Fed chair taking office at the end of May. Concurrently, there is the potential for further market broadening beyond AI into other sectors and regions, which we have started to see. In the U.S., the enactment of the One Big Beautiful Bill Act (OBBBA) is expected to add approximately $200–300 billion in stimulus in 2026. This fiscal thrust should provide a front loaded boost to economic activity and corporate earnings. The OBBBA’s emphasis on physical infrastructure, energy grids, roads, bridges, data centers, and industrial capacity should drive renewed breadth across industrials, materials, and energy sectors. Europe, on the other and, could lag because the front‑loading of tariffs in 2025 has stunted manufacturing demand. In emerging markets, inflation and debt levels may be reasonably under control, but tariffs are a wild card whose effects may take years to play out.
Three years after the launch of ChatGPT and a year after the DeepSeek scare, the narrative around AI is beginning to shift from what is possible to what is profitable. AI investment remains at full steam going into 2026, and innovation is driving gains and energy efficiencies according to technology leaders at the Consumer Electronics Show (CES) recently. However, speculative activity in some corners of the market continues to spark anxiety over a potential bubble and we may see more public stock offerings of AI companies looking to raise capital and monetize earlier investments. As leading AI firms increasingly tap debt markets for capital, and circular financing continues, pressure is mounting to carve out clear paths to monetization. Assuming interest rate trends and earnings growth remain favorable and AI-related spending shows no sign of slowing down, the path of least resistance appears to be higher for this economic expansion and bull market so far. We would note that the average intra-year correction in the stock market is about 14% in any given year (last year was about 19%), even though the year may end positively. Economic and employment data out this week will provide some further guideposts to the convergence trends building this year.
Formula One driver Lewis Hamilton turns 41, actor Nicolas Cage is a national treasure at 62 and singer Kenny Loggins is alright at 78. In case you were wondering, it is a rare Fire Horse Year in the Chinese Lunar Calendar.
Christopher Crooks, CFA®, CFP® 610-260-2219