What’s in Store for 2026?
The days are getting longer, and the sunshine is hopefully making your day brighter.
During the fourth quarter of 2025, the S&P 500 Index gained 2.3%, the NASDAQ Index gained
2.6%, the Russell 2000 Growth Index gained 1.1%, and the iShares Barclays 7-10 yr. Treasury
Bond ETF (IEF) lost 0.3%.1
My prediction for 2025, an educated guess, rolled out close to what I expected. I wrote that the
market would be higher if big-tech earnings kept growing, but the path up wouldn’t be smooth. A
Trump tariff scare would likely cause turbulence without lasting damage, Bitcoin would swing
wildly, and the Middle East would remain unstable.
What’s in store for 2026?
I’ll give it my best analysis, but one thing for sure is that the 2026 midterm election season is going
to be ugly. All members of the House and a third of senators are up for re-election in November,
with the outcome largely determining the road ahead. Anticipation and uncertainty will likely be
felt far before the election and may play a role in what I expect, high market volatility.
If the Republicans are successful in keeping their majority, they may be able to continue carrying
out their agenda in the final two years of Trump’s second term.
If the Democrats win there will likely be government policy stagnation or another sea-change. In
addition, a material distraction could develop as President Trump predicts he will be impeached if
Republicans lose the midterms.
Markets do not like uncertainty.
Periods of uncertainty often push investors to the sidelines, reducing buying activity and triggering
more selling, which in turn drives prices lower.
Artificial intelligence, AI, is currently a primary driver of the market and will be tested this year.
My take on AI is that it is a disruption, similarly to past new inventions such as the wheel, train,
automobile, adding machine, radio, TV, computers, spreadsheets, internet…. and may not be as
bad of a development as many espouse. Significant new ideas typically have a bifurcated reception
with exaggerated claims by each side.
What I can see from this list of new inventions is that I am glad to be able to enjoy them and society
has benefitted from them. AI’s efficiency gains are a catalyst for higher corporate profit, which
traditionally leads to higher stock prices.
A very interesting development of AI efficiency provides me with a good analogy of what the
future stock market may bring. When I started college in the late ’70s, a computer science degree
was widely seen as a guaranteed path to strong earnings and long-term job security. A comp sci
degree is what most computer programmers and coders hold.
Ironically, the very field that created AI—computer science—is now seeing many of its
programmers and coders displaced by it. Don’t worry, these people are a smart bunch and will
likely retrain for a new opportunity created by AI. For them, it’s still a disruption. In addition,
there will be a large demand for them in smaller and mid-sized companies which don’t have the
pocketbooks for a large IT department.
In recent decades, many people have gravitated toward higher-paying service-sector desk jobs,
moving away from goods-producing fields such as manufacturing, agriculture, construction,
machining, and other skilled trades. AI can improve administrative efficiency in goods-producing
industries, but the work itself remains largely protected because many of these jobs still require
hands-on human involvement. Due to increasing demand in the goods-producing industry and a
lack of supply, this may be a good opportunity for young people.
In the mega-tech world with its huge opportunity, stock prices have ubiquitously jumped. Many
are ignoring the tremendous cost outlay for R&D and for building the elaborate AI infrastructure.
Stock prices for much of this universe reflect a Rosey Scenario far into the future. From experience,
anything beyond six months out becomes cloudy at best.
In 2026, there may be a high degree of scrutiny for AI companies. Investors will likely demand
confirmation that AI’s large capital outlays will produce the expected profits. This, in turn, could
slow—or even reverse—their meteoric stock-price gains. Like the goods-producing industry, the
smaller and mid-sized companies may become stock market darlings. The ones implementing AI
may benefit from increased efficiencies and profit margins and could prove to be attractive
purchases due to those advantages, without incurring the enormous buildout costs.
My predictions are:
- The stock market will rise, in a volatile environment, with smaller company returns beating
large company returns. Returns will probably be less than in 2026 and include a few scares
through the year, primarily due to stretched valuations and uncertain economic climate. - While the depth of any market correction is impossible to predict, it may be cushioned by
renewed buying interest, given that money-market balances remain near $7.7 trillion. This
huge amount potentially provides a floor as bottom-fishers would enter the market or
FOMO (fear of missing out) takes over and conservative investors abandon their fears of
entering the market. This event would be a cautionary event for me that signals the market
may be heading towards a top. - Inflation will be contained, especially since Venezuelan oil seems to be coming back online
and should dampen oil price increases. - Interest rates are likely to carry a slight downward bias, influenced in part by the
appointment of a new Federal Reserve Chair selected by a president who favors lower
rates. A Fed Chair doesn’t act alone; they must steer the other 18 members of the Federal
Open Market Committee (FOMC) toward a unified direction. This means economic data
should lead the way. - The political climate will continue to be hard to stomach, especially around the midterm
elections.
Positive catalysts and potential drivers
- Efficiency gains and continued spending from AI companies
- Larger tax refunds due to President Trump’s “Big, Beautiful, Bill”
- Lower interest rates
- Stable to lower energy prices
- Growing economy
- Stable labor market
- Rollback in some reciprocal tariffs
Major underfollowed events I will be monitoring:
- Slowing in some areas of the economy
- Possible government shutdown
- Supreme Court (SCOTUS) decision on tariffs
- Unwinding of the Yen Carry Trade
- A revaluation of U.S. gold reserves from $42.22 to more current pricing due to the Lummis
Bitcoin Act of 2025 - Geopolitical events: Russia, China, Middle East, Venezuela, Cuba, Columbia
It’s going to be another interesting year and I’m excited to tackle it for my investors. As I’ve
always said, in the long run, market prices will reflect current and expected future earnings. The
difficulty is in reading what the markets are keying on and to what weight they are assigning each
variable. That’s where my 40+ years come in handy.
Someone recently asked me when I plan to retire. Rest assured, I’m not going anywhere—my
passion for the markets runs deep, and I still have my own portfolio to manage.
Very truly yours,
Martin L. Yokosawa
Torii® Asset Management, Inc. Landolt Securities, Inc.
9S040 Stearman Drive, Naperville, IL. 60564
- These returns are price based and exclusive of dividend reinvestment. Return data provided by QUODD Financial, ETFreplay.com, and Yahoo Finance. ↩︎