A Comment -- General Comments From an Expert (A Commentary)

Dividends of 5-6% are great, probably. Dividends of 9-10% -- market's telling you the dividend is likely to be cut. Think of BCE.

Find a company that you like with a growing dividend. You're likely to do better with a company that grows the dividend than one that has a high dividend but has to cut it. The growing dividend payer almost always outperforms the other.

In Canada, today, December 31, counts as the first trading day of 2026. Anything you sell today for a gain doesn't count as a gain on your 2025 tax return because Canada uses the settlement day. So in this case, the settlement day would be Friday, January 2, 2026. Americans, on the other hand, have to wait until the first trading day of 2026 to sell and have the gain applied to their 2026 tax return. So if you want to sell to lock in your gain ahead of all those Americans, sell today.

He's not a tax adviser, but this is what he's been told.

The lesson for 2026 is don't let the winners of 2025 imprison you. Don't get over-risked. Watch for index concentration. So, rebalance to your target risk. Precious metals and tech have probably ballooned to be outsize part of your portfolio. Don't wait for a pullback to rebalance. He sees more market volatility in 2026: there'll be a Fed Chair change; a debt ceiling problem at end of January; disinflation, if rates aren't cut fast enough. Diversification is important again. Return stacking sees you layer on your diversifyer (bonds or managed futures) atop your stocks.

It's the most important index in the world, but the valuation is high and is dominated by seven stocks with little of the base materials and energy that go into the AI build. The S&P is a bit of a tech bet.

He's constructive gold, but it's had such a good run that you need to cut back and rebalance. There's still some upside to gold.

Markets are usually quieter this time of year heading into the new year. Coming off the back of 2025, we've seen this year really be more about resilience than about momentum. 

Many investors expected higher interest rates to slow the economy in the US much more sharply than what we've seen. Instead, we really saw the US deliver a soft landing. So growth cooled enough to bring down inflation, but not enough to break earnings or consumer spending. That balance is still visible today.

Markets are quiet and mixed, but the bigger picture around where we're headed in the new year hasn't really changed. Labour market is still holding up strong, but is clearly cooling. That's helped ease inflation pressures without triggering a downturn.

For her she's still investing, particularly around AI, which has shifted from a concept to a real spending cycle. What has changed is how investors are behaving. Even with valuations as high as they are, rate cuts are being pushed further down the line, and leadership is still there. 

It's no longer a market where everything is going straight up. Going forward, it's going to be a little more selective on where to allocate capital. Instead of broad multiple expansion, returns are increasingly driven by execution, earnings quality, and balance sheets.

In Canada it's a little bit different, as Canada had a more uneven year. But the setup has quietly been improving. Interest rates in Canada have come down quickly, inflation has cooled, and growth has moderated. Uncertainty around the BOC's next move is more balanced than restrictive -- tends to favour companies with visibility and long-dated cashflows.

Overall, patience matters. Investors are going to be a bit more patient in deciding where to allocate capital in 2026, rather than just predicting.

Typically, it's between Christmas and New Year's. On average, it's something less than 1%. There's a big flood of headlines, but it really doesn't mean a whole lot.

What it does mean is can we get close to 7000? That magic rounding number on the S&P 500. By the way, 7000 means nothing other than it's a round number. But it is something the financial media will, he's sure, talk about.

He's getting more and more concerned about valuations -- never a great thing to time markets on.

Leadership has been technology, and AI in particular. The NASDAQ hasn't made a new high, while the S&P has come closer. The broader markets have made marginal new highs, even though they've scaled back into the range recently. As we get more expensive on the markets, it becomes harder for them to break out from an already-expensive level. 

He's been reading and following Jim Grant for decades. Grant put out a note recently that compared the capacity being built in cloud versus compute storage for AI (near impossible, as everything's an estimate). They think we're going to be grossly over-supplied in terms of compute, and that will be a challenge at some point. Next month? No. Next year? Maybe not. But 2, 3, 4, 5 years from now? Very likely. That's just started to enter the market narrative, and is part of the recent correction.

But the tailwind is still investors buying the dips. Until that changes, the market can continue to grind higher. The US administration has every need going into the midterm elections to keep the market in good shape and the economy as strong as possible. That's going to be a big part of 2026.

If trading takes up the vast majority of your day and is a major source of your income, you lose the benefit of the tax shelter. The actual determination is done by the CRA.

(Now, he's not a tax expert, but has been told this by several people. Best ask for qualified advice.)

In some cases, yes -- where the underlying provider will take clients directly. But it does require you to be an accredited investor, which means you have to pass the asset or income test. That's the challenge for the space.

Firms like his are involved in the space, but then you have to work with an advisor to get access to that investment area. The area is complex. Many people could understand it, while others would need financial advice. There's more and more interest in this area, and regulators are going to have to weigh these considerations.

Thinks we're going higher before we go lower. But once we enter a risk-off market, these things are going to correct. Getting to be very richly priced. Doesn't think a correction will be a story for 2026.

A really high yield of what a company earns is a warning sign, as the company will have to go into debt to sustain the yield. A payout ratio north of 70% is when he'd start asking a lot of questions.

You want a lot of coverage on the distribution. Banks in Canada, for example, pay out just less than half of what they earn. But they're really stable, robust earners. You don't have to worry too much there. You'd have to keep your eye on a company that has more variability because it's not as big or as robust. Remember that BCE is a big, big company, and it still ran into issues.

Fearless Forecast for 2026

Forecasting is very hard, even for the smartest people out there. For example, a year ago we thought it could be a volatile year. And we were right on that, certainly in the first half of the year. 

Last year, 24 strategists predicted that the S&P would be (on average) around 6500. And we're at 6900 right now. The bulls predicted ~7000. So the more optimistic views were closer to the actual market performance. As for earnings, the analysts were pretty much bang-on. They didn't, however, get the multiple right.

His next chart shows 4 ETFs. In the last week, Canada is the leader in the world (just surpassed the emerging markets). Then comes Europe, and then the US. The US market is actually the worst-performing, so he was wrong about that last year. Money is recognizing that there are challenges in the US and is moving to other places in the world.

Now let's look to the year ahead, and his chart computes numbers from 28 strategists. They see roughly 9% growth, and the S&P average price target is 7464 (Larry thinks it's doable, not sure about sustainable). The top 10 strategists (the bulls) are looking at 7700 to just a little over 8000. They all see really good earnings growth because of tax incentives, economic momentum, and midterm elections (where White House will push to keep markets and economy strong going into those). New leadership at the Fed will probably see a bit more easing. 

Let's look at earnings and break it down by sector. The tech sector earned approximately $168 this year, but earnings for 2026 and 2027 are expected to grow 20-30+% annually. That one sector represents 35% of the market. If we start to see people worry about AI at some point in 2026, then analysts will have to change their outlook. But for now, we should continue to grind higher. 

When you look at it from an individual stock perspective, and you consider what price targets the analysts are projecting and roll it up by market cap, you get 7938 (but that assumes every stock will be at its high, which won't happen). It does tell you, though, that there's a lot of enthusiasm for earnings growth going forward, and there's the economic backdrop to support it. That should continue for the first half of the year.

He's more concerned about the interest rate markets, with long end of the curve having trouble rallying. There's a tremendous amount of treasury supply. Market's getting very concerned about how we're going to fund all this. Thinks the yield curve will steepen, with short rates coming down a bit more.

They're pricing the next move by the BOC to be a rate hike, and he thinks that's insane. If the economy stays strong next year, and we get 2-3 rate cuts in the US but none in Canada, then all this pull-forward next year for capex spending could be a fiscal cliff coming in 2027 and beyond. It would be pretty bad for exuberantly priced markets. Eventually the long end of the curve responds to that, but not in 2026.

Now to gold and precious metals. People are worried about the world's fiscal challenges, and gold keeps going higher. Probably hit $5000 on gold before we correct. But when that liquidity bubble breaks, and we see $$ rushing into bonds, then money will come out of bitcoin, speculative assets, and gold too.