2025 was a volatile but strong year for the market, with the S&P 500 achieving a price return of 16.39% according to Morningstar, despite a near 20% decline from mid-February to early April. Last January we wrote that we expected volatility and modest positive returns in 2025. Our unprovable theory is that the extent of the decline in April – and the corresponding impact on investor positioning and sentiment – created a “slingshot effect” that carried the market higher than it otherwise would have gone. Entering 2026, our process leads to a similar conclusion as it did a year ago. The secular bull market that began in 2013 remains ongoing and the market is on positive footing overall, according to our indicators. The weight of the evidence suggests another positive year. However, there are several reasons to temper optimism and prepare emotionally for a meaningful decline at some point in 2026.
We have written about the positive demographic tailwinds – the largest generation of Americans (Millennials) entering their peak earning/spending years – powering this long-term bull market. Additionally, global labor force growth has slowed, creating a multi-year incentive for additional technology investment, namely artificial intelligence. Neither of these long-term tailwinds will end in 2026. Economic growth appears to have moderated in 2025 compared to 2024, but continued expansion is still supportive of stock markets. More importantly, corporate earnings have increased 12.1% in 2025 compared to 2024 and are expected to growth another 15% in 2026 according to data from Factset. Earnings growth is the primary driver of stock valuations over time.
Objective technical indicators paint a positive picture as well. Looking at the indicators on a long-term perspective, a sufficient number of stocks are participating in the market’s advance. The current situation does not resemble major market tops of the past. Additionally, economically sensitive sectors such as technology, financials, and industrials have been among the market leaders. Oftentimes defensive-oriented companies take a leadership role before significant market declines. Lastly, despite some hiccups in September, the credit market – usually a leading indicator for the stock market – is confirming investor confidence in the economy.
On a shorter-term basis, the market has shown some indecision. The S&P 500 was nearly flat in the 4th quarter. Amazingly, only 1 of the 11 sectors, Healthcare, outperformed the broader market in the last 3 months of the year. The momentum from the summer’s advance has waned, and the market is searching for its next direction and fresh leadership.
In addition to this short-term indecision, we have reason to think that 2026 is likely to see a meaningful decline at some point. Returns over the past 3 years recently exceeded levels only seen 5 previous times. 4 of the previous 5 saw flat to down markets soon after, while the counter example occurred in the technology boom of the late 1990s. We will discuss this more on our mid-month market call. Additionally, midterm election years are notorious for intra-year declines. Since WWII, midterm election years have seen an average decline of 17% according to data from CFRA. While there is wide variance around that number historically, there is enough of a pattern to deem it significant. However, we don’t think investors should be overly deterred by these potential negatives. Any potential decline should be viewed as a temporary setback in an ongoing bull market, in our view.
As always, we will follow our process to help determine where best to allocate client investments. Our approach remains grounded in discipline rather than prediction. Please speak with us if a change in your financial situation requires a review of the risk level of your portfolio.
This is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable but is not guaranteed as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here.
