Image Source: Pixabay

This is the time of year when my counterparts and I get asked about our predictions for the year ahead. As I look at the landscape of the equity markets and their key influences, I really wish I could be more optimistic. Instead, there are several reasons why my outlook veers to the cautious side, with year-end 2026 targets for the S&P 500 and 10-year yield that are relatively gloomy at 6,500 and 4.45%, respectively. I don’t mean to be a spoilsport, so I will do my best to justify those opinions.

Recent history offers one set of negative precedents. Next year will be the second year of the current Trump administration. The past two “second years” have not been kind to stocks.Keep in mind that the current bull market began in November 2022.That meant that we were emerging from a bear market that prevailed through most of that year, which was the second year of the Biden administration.Despite its late rally, the S&P 500 (SPX) lost -19.44% in 2022. Four years earlier, the second year of the first Trump administration was particularly rocky.We got off to a solid start, but “Volmageddon” jolted markets in February 2018, and after some months of sideways trading we experienced a swoon in that year’s fourth quarter. SPX closed -6.24% lower that year.

I have noted that seasonality is a fickle friend, and as with any other pattern – especially one with relatively few observations – this one can be dubious.We saw good years for SPX in 2014 (+11.39%), 2010 (+12.78), and 2006 (+13.62), but 2002 was particularly nasty (-23.37%). Three out of six is hardly reliable, but considering that the only two of the past 10 years (including 2025) that saw declines were in administrations’ second years, I must put some weight on that finding.

Another concern is that this bull market is getting long in the tooth. The average length of a bull market since 1926 is 51 months. That is boosted a bit by the extraordinary experience of the post-GFC run from 2009-2020 (131 months), but if we remove that data point, the mean is still almost 46 months.By that measure, the current bull market is below the average length over the past 100 years.But the median length of those bull markets is 38 months (37 if we exclude the 2010’s). The current bull run began 37 months ago.Can it run longer? Certainly.But that is another precedent that bodes poorly.

Those precedents are not in and of themselves a reason for concern.There are other precedents and fundamental considerations that guide my thinking.

Keep in mind – we are getting a new Federal Reserve Chair in 2026. Current odds strongly favor Kevin Hassett after recent reports indicated that the current director of the National Economic Council is President Trump’s preferred candidate.It is reasonable to think that whoever the President selects would at least initially and publicly share his desire for lower short-term rates.If those cuts come despite inflation remaining above the Fed’s target, it is not unreasonable to fear that the yield curve will steepen because of higher inflationary expectations priced into long-term rates.  Hence my expectation for a 4.45% 10-year yield.The inflationary concerns would be mitigated if those cuts are necessitated by a weakening labor market, but then we would need to worry about recession risk. That would jeopardize my expectations for bonds but not be helpful for stocks.

Furthermore, markets have a nasty way of testing new Fed Chairs.Jerome Powell took office on February 5, 2018, coinciding with “Volmaggedon”.Janet Yellen had a relatively placid period from February 2014 to 2018, though SPX did fall by -0.73% in 2015.Ben Bernanke took office in February 2006 and had an easy time of it until the Global Financial Crisis began a year later.And Alan Greenspan assumed his role on August 11, 1987, two months before the stock market crashed.Can we be certain that the new Chair, whether it be Hassett or someone else, will be greeted similarly? Of course not.But that is another set of unpleasant precedents.

Finally, I remain concerned that investors’ love for all things involving artificial intelligence is fading.This is not to diminish the prospects for the new technology as a whole, but instead to point out the growing concerns about returns on the billions of dollars of recent and future investment in the sector.It is not unreasonable to wonder how all this investment will be financed and whether the race to build data centers has echoes of the overbuilding of internet bandwidth in the late ‘90s. Considering the unprecedented dominance of a small cadre of AI-linked stocks in major indices like SPX, even a slight hiccup in their investment thesis can cause major tremors in key market measures.

Hence, I find myself on the opposite side of many of my street side counterparts.It is causing me to have this song going through my head.I must admit that some of my caution stems from the role I played for decades in our market-making operation. I was the risk manager, the one who needed to contemplate what could go wrong with our models and assumptions. Thus, in a market environment where so many are seemingly enamored with a continuation of the recent good times amid an easier monetary backdrop, I once again feel the need to test those assumptions.I kind of hope I’m wrong, actually.

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