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

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.

She buys real gold and silver and not the ETFs. She bought silver in 2011 around $44, which returned to $44 last September. Be very careful. It took her 14 years for her price to return. 

One word is chaotic. The other thing is that there was this idea that the world would look very, very different. It was chaotic during that time, with everyone feeling that the world was going to go into recession, inflation would be higher, and economic growth would slow. All those things that economists and such predicted from January to April really didn't happen, especially in the US.

All that filtered into higher stock prices. One of the things that he, too, missed was underestimating just how dynamic the US economy is, with companies able to pivot very quickly when all these things were happening. Yet they still maintained margins and were able to grow earnings. Even though prices were probably going up, they were able to manage that on the margin side -- either by using different suppliers or even putting pressure on suppliers to take some of the burden off prices.

When you look at Covid, a lot of companies were able to do that as well. But we forgot about that, and thought that the new order was going to be terrible. The chaotic part, of course, was that depending what country you were in tariffs went up, then came down, then went up. Also, the bond market put pressure on the administration to say you can't keep doing this and you better do some deals or bring down the tariffs. That helped a lot.

It still is very chaotic. But the follow-through has been very different from people's expectations of where the stock and bond markets would be and where the economy would be.

Thinks it'll be just as volatile. The problem with this administration is that it's very chaotic. There's no presentation of a cohesive economic, foreign, or domestic policy. It all seems very ad hoc, and one thing changes after another.

One of the things that it's very important to look at is that China has way more leverage against the US than vice versa. So they were able to put a lot of pressure on the US. The mechanics of that relationship have to be looked at from a foreign policy perspective. In his view, they've done a terrible job of it. We saw China continue to manufacture like crazy, and manufacturing numbers were off the scale. 

The leverage that they have in critical minerals is very important. We're never going to be able to get to the level that China's at because of the cost and the environmental perspective. Those kinds of minerals are all over the place, but China really focused on that area. They focused on it because they also built out an EV business that uses a lot of those minerals.

He feels that we'll see a lot of the tariff issues and chaotic policies come to fruition in 2026, so we could have a much more difficult year. That's what we'll have to keep an eye on from the perspective of the stock market and the economy. Even the GDP numbers, if you went through them in detail, weren't really all that great.

The last thing is the Fed. To come out and say "If they don't agree with me, I'm not going to be happy" is a terrible thing to say to the economy, the bond market, and the stock market. Lower rates might be good for the stock market, but he thinks the bond market would overreact in a very different way if the Fed is politicized that way.

Another play for 2026. Lots of regulatory change going on in the US over the next little while. Trump administration wants to take away a lot of the regulation that came in during 2008 with Dodd-Frank. That move would free up a lot of opportunity from a capital perspective. So they could buy back more shares, increase dividends, and have more capital to expand.

We saw a bunch of M&A over the last year, which probably wouldn't have happened under the Biden administration. There are 4,000 banks in the US, it's ridiculous. Consolidating the banking industry would be very good. You could buy a regional bank index and do well over the next little while.

They usually trade at much higher multiples, something like 3x book value. You might actually get to those multiples in the next couple of years. 

When we experience challenging macro-economic conditions (recession, high inflation, geopolitical events) we buy quality businesses at lower prices which extends returns. He can't predict the next scenario. Since July, there's been a bifurcation of stocks, namely founder-run quality businesses which have been trading lower vs. AI stocks continued to trade much higher. He hasn't seen such a difference since 1999.

He's cautious for 2026. Earnings and capital markets have been very good in 2025, especially for Canada. The U.S. 10-year yield can't break 4%, which is a barrier to investment. Earnings growth always looks for the coming year. Fundamentals of rates and earnings are merely okay. There's so much uncertainty, starting with tariffs. Will we get a US Supreme Court judgement this or next month? What will happen with inflation? Will companies raise prices? The Fed will look at numbers and wait. What will happen to oil if there's a peace agreement? And to the US dollar? Interest rates have never been more important given so much debt. Suppose borrowing costs rise? Debt is important. We have a K-shapes economy: people with assets and people who don't own houses or stocks and are not participating in this economy. There's a growing discontent in the latter. He will sit and watch.

Carney is a lot better than the previous PM, so this is positive. However, Canadian banks aren't yielding 4-5% like a year ago, but 3%. Our economy is bleeding jobs, and there are problems with real estate. The jobs being created aren't replacing the ones lost. He'd rather get a higher yield from a utility or pipeline than a bank.

How much do you need for income? How much to protect your portfolio from calamity? Bonds don't pay yields like 4% and bonds also face more risk from inflation uncertainty. You buy gold to protect from inflation or geopolitical uncertainty. He holds 20% gold and 20% bonds in his portfolios. He wouldn't move his bonds into gold, but keep above-average gold for protection.

Prefers the device makers. He sold Novo Nordisk, but could buy it back. You can't buy the entire sector, but a part of it.

The Santa Claus Rally happens between Christmas and New Year's on average under 1%. It makes headlines, but doesn't mean much. Can the S&P hit 7,000? He's growing more concerned about valuations. AI tech stocks have been leaders, but have not made new highs this month, though markets have. As markets grow more expensive, it's tougher for markets to break out. A researcher, Jim Grant, noted that difference between cloud capacity and AI compute storage; he concluded that we will be grossly oversupplied in computer storage in a few years. Are we over-investing in AI? The tailwind is still buying dips, so markets will keep grinding higher. Washington needs to keep the market and US economy strong heading into the US midterm elections.

Yes and no. If trading takes up the vast majority of your day and your income, you lose the benefit of the tax shelter. This is what he's been told, so consult a tax expert.

Sometimes, yes, where the provider will take clients directly. Unfortunately, you need to pass the asset or income test and become accredited. This space is complex and some may need advice.

Forecasting is difficult. A year ago he predicted a volatile year, and he was correct. A year ago, the street predicted 6,496 for the S&P and we're now at 6,900; the bulls were around 7,000. S&P earnings growth was predicted at 12.1%, exactly what happened, but missed the PE which they predicted at 24.17x. He predicted AI and the US will lead in 2025. In reality, Canada is the world leader. It just surpassed emerging markets in terms of growth in 2025, followed by EM, Europe and the US in last place. So, he was wrong. The street (28 analysts) predicts the S&P to grow 9.2% to 7,464. The most bullish call is 8,100. Earnings growth will rise 13.4% given tax incentives, a new Fed chief and economic momentum.  Trump wants to keep the markets and economy strong heading into the midterms; the Republicans are struggling in polls now. Tech is largely pushing the US market higher. Unless people worry about AI In 2026, tech and stocks should grind higher in 2026. He expects momentum to continue in the first half of 2026, but the long end of the curve will have trouble rallying, making him concerned about the interest rate markets. The yield curve will steepen as short rates fall a little more. The street is pricing the Bank of Canada's next move to be a rate hike, which is insane. He expects a couple of rate cuts in the US and none in Canada, if the US economy stays strong. This could set us up for a fiscal cliff in 2027 and beyond, which would be really bad for markets which are exuberant. Gold will probably hit $5,000 before correcting big. When the liquidity bubble breaks, money will come out of Bitcoin, spec stocks and gold, and will rush into bonds.

In general, earnings estimates have been great. The market has been chewing through some rotation, and that's been going on a while. Money moving away a little bit from large-cap growth because there are some alternatives. 

Some money has been moving out of the US and back to international markets. Sectors like financials have been reasonably strong. So the market's been going through a balancing process. Looks decent going into 2026.