We expected the first half of 2026 to be volatile for stocks. It's only January 4, and we can add Venezuela to our list of unsettling developments. Nicolás Maduro, the Venezuelan president captured by the United States on Saturday, is being held in a notorious Brooklyn jail. President Donald Trump said the US will "run" Venezuela. The geopolitical fallout could be troublesome. The Chinese government might increase the heat on Taiwan. Russia might be less inclined to end the war in Ukraine. On Friday morning, Trump said the US is "locked and loaded" as he warned Iran not to kill peaceful protesters in Tehran as nationwide unrest unfolded.
Head-spinning stuff, for sure! However, geopolitical crises tend to create buying opportunities for stock investors. There may be a few such opportunities this year.
Still ahead is a Supreme Court ruling on Trump's tariffs; SCOTUS is likely to rule that they are unconstitutional. Also, Trump will announce his pick for the next Fed chair soon. In the coming weeks, the Treasury may need to borrow more to fund larger refund checks under the One Big Beautiful Bill Act. Any or all of these developments could agitate the Bond Vigilantes.
In the stock market, "AI Fatigue" is mounting: The Magnificent-7 haven't been so magnificent since October 30, 2025 (chart). That’s the day Michael Burry posted on X: “Sometimes, we see bubbles. Sometimes, there is something to do about it." He announced that he was shorting AI-related stocks.
The good news is that the outlook for S&P 500 earnings remains solid for the year ahead. Industry analysts who follow companies in the index collectively expect S&P 500 earnings per share to rise 15.6% in 2026 to $313.84 (chart). For next year, they are forecasting $359.44. We are forecasting $310 and $350 for the two years.
The forward earnings of the S&P 500 has been making new highs since late 2023 (chart). Now the forward earnings of the S&P 400 and S&P 600 (a.k.a. SMidCaps) are finally showing some signs of life too. They are close to surpassing their early-2022 record highs. The SMidCaps should continue to perform well in 2026, led by banks and biotech companies.
Now, let's quickly review the highlights of 2025 and consider 2026. Three of the four S&P 500 sectors that we recommended overweighting outperformed the S&P 500 last year (chart). This year, we recommend Financials, Industrials, and Health Care (especially Biotechnology). We remain bullish on gold, which is in the Materials sector. We now recommend market-weighting rather than overweighting Information Technology and Communication Services.
Late last year, we concluded that AI Fatigue was setting in on the Magnificent-7, so we recommended underweighting them (chart). That still leaves plenty of opportunities in the Information Technology sector, especially in the Semiconductor industry.
We believe that all companies are technology companies. They either produce technology hardware or software or else use them to boost their productivity and earnings. Some of last year's best-performing stocks in the DJIA aren't considered tech companies, yet they certainly have been investing heavily in technology to boost their productivity and earnings. Financial companies stand out in this regard (chart).
Since the start of the pandemic, investors have overweighted the Magificent-7 and worried that the stock market was too concentrated in these names. They did so again in 2025 (chart). The stock market rally began to broaden late last year and should continue to do so, lifting the Impressive 493.
We've been bullish on gold since it rose to a new record high above $2,000 per ounce in 2024. We remain bullish on it for 2026. Precious metals were the outperformers among commodities last year and should be this year. The price of oil, however, may have lower to go.
Last year was a very good one for the All Country World ex-US MSCI stock price index, in both local currencies and US dollars (charts). This year, we will focus on the Emerging Markets MSCI stock price indexes.
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