2025 felt like the economy and markets were playing a giant game of financial chicken. On one side, bears were yelling about a recession on the horizon, and on the other side, bulls were buying AI stocks like it's the last Pokémon pack on the shelf. But over the last year, unemployment remained relatively low.
Consumers kept swiping credit cards like it wasn't real money, and anyone who shorted Nvidia aged a decade. It was a weird year, a confusing year. And now we're stepping into 2026 and things are only getting more chaotic.
Rate cuts, maybe the AI bubble pops, perhaps soft landing, hard landing, or no landing, like my dating life. All possible. This is the year we could see markets blow the top off.
Or it could be the year where you look back and think, I should have just bought treasuries and shut the up. And after getting flooded with messages asking what I think about the markets going into 2026, I realized something. Instead of answering hundreds of messages one by one, I could just make a video.
And I know it's already 2026 and I'm a little late, but hey, at least we're here. And to be transparent, I see a few possible scenarios playing out. I see the bare case, the bull case, and the uncomfortable gray area in between that nobody seems to be talking about.
So, here's my 2026 market outlook and what I could see possibly happening. And because I'm emotionally wired for disappointment, let's start with the bare case. It's only right to start with the elephant in the room because whether you think AI is going to reshape the global economy or that it's the most overhyped technology since the Apple Vision Pro.
One thing is clear, we may have gotten ahead of ourselves with the AI story because the numbers don't lie. Nvidia trades at around 47 times earnings. Palunteer sits around 400 times earnings.
and data dog. Well, try over 430 times earnings. At this point, there's no investing on fundamentals.
You're just pre-ordering hope. And the problem is AI stocks are dragging the entire market up with them. Because when Nvidia goes up, it pulls semiconductors up, which pulls the tech sector up, which pulls the S&P up.
And suddenly, you look around and realize the S&P is trading at nearly 31 times earnings, which is nearly double the long-term average of around 16. And if these trading multiples normalize back to historical averages, it's not just AI stocks that take a hit. It's the whole market.
And we haven't even talked about the circular spending problem or that 95% of companies are realizing zero return in generative AI. But that's a whole different video for a whole different day. So, for now, we'll move along to the next point in the bare case because there's another issue that goes handinhand with the stretched valuations in the market.
And that issue is the market is topheavy. Because the S&P 500 isn't being lifted evenly by the 500 different companies. It's being dragged higher by a small handful of tech [music] stocks.
Some people call them big tech. Some call them the Magnificent 7. Wait, not that one.
Anyways, I just call them 35% of the entire S&P 500. That's right. Over a third of the entire index's total market cap and an even larger share of its returns come from just seven companies.
Because through the first three quarters of 2025, the MAG 7 accounted for over 41% of the S&P's total returns. And if you swap Tesla with Broadcom and the MAG 7, that contribution increases to over 55%. This means the index that's supposed to represent broad diversification across industries is quietly turning into a very concentrated bet.
And that's something to worry about because it's starting to look like a group project where two people do all the work and everyone else still gets the credit. And the explosion in passive investing is quietly pouring fuel on the fire. Because most index funds and ETFs that track major benchmarks are market cap weighted, meaning a stock's influence in an index is directly proportional to the market cap of that company.
Basically, the bigger the company, the more weight it receives in the index and the more impact it has on how the index performs. So, as these tech stocks grow larger, they naturally take up a larger share of the index. And when new capital flows into these funds, it disproportionately gets allocated to those same tech names.
It's a feedback loop that's beautiful right up until it isn't because when indices become this topheavy, small moves can turn into big problems. For example, a 10% pullback in Nvidia's stock doesn't stay isolated in Nvidia. It bleeds into the NASDAQ, the S&P 500, and then creates broader market pressure.
And suddenly, what you thought was a diversified portfolio is reacting to the mood swings of a handful of stocks. So, while everything appears to be fine right now, all it takes is the MAG 7 stocks to stumble for the whole market to slip. Which brings us to the final point in the bare case.
I'm not saying a crash is imminent, and I'm not predicting financial Armageddon, but statistically speaking, we're overdue for a down year. Nerds would call this a reversion to the mean because markets, especially US equities, go through cycles. And since 1954, the S&P 500 has averaged a pullback of at least 10% about once every 3 years.
And after several years of outsized returns, history [music] tends to tell us we need to pump the brakes because corrections aren't anomalies. They're actually normal and healthy. However, as Michael Bur showed us recently, going short the market because of a gut feeling is probably not the best strategy.
Because as famous economist John Maynard Kanes once said, "Markets can remain irrational longer than you can remain solvent. " And that's the uncomfortable truth about the bare case. You can be right on valuations, right on unhealthy concentrations in indices, and right on overextended rallies, but still be wrong.
Because being right too early is indistinguishable from being wrong. Which brings us to our bull case. Because what if markets continue to rip?
What if they don't care about historical averages? And what if markets continue to remain irrational? So, let's start with the fundamental tailwind that bulls are clinging to.
[music] Because whether you trust the Fed or you think Jerome Powell runs monetary policy decisions through a magic eightball, one thing is clear. Interest rates are coming down. 2025 ended with the Fed delivering three consecutive 25 basis point cuts.
And going into 2026, the median expectation is at least one additional cut. And lower rates means cheaper capital. And cheaper capital means higher valuations.
And higher valuations means investors are more comfortable paying premiums for future earnings. And that's why rate cuts don't just matter to borrowers, but also to valuations and trading multiples because liquidity loosens, financial conditions ease, and risk on assets come alive. And that's how you can see markets grind higher.
Even when underlying economic data may feel mixed, confusing, or slightly uncomfortable. But just because the broader macro picture may feel uncomfortable, it doesn't mean that you also have to be. Which brings us to the sponsor of today's video, Flexispot.
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And now back to markets because the monetary policy backdrop I previously covered is only half the story. The other half is fiscal policy. Which brings us to the next point in our bull case.
[music] Because while the Federal Reserve argues over quarterpoint cuts, the US government is doing something far more impactful. Spending. Which is why the United States now runs on a more than trillion dollar deficit annually.
And I've made videos on this channel about how the deficit is becoming a serious problem and the potential long-term damage it will cause. But the reality is in the short term it brings some benefits as well because government spending puts money directly into the system. It supports consumer demand, props up corporate revenues, and keeps economic activity high.
And unlike monetary policy, fiscal policy is slow to change because programs don't get shut down overnight. budgets don't just get suddenly slashed and politicians don't win elections by campaigning on frugality. So even if growth cools, the fiscal backdrop remains supportive in the short term.
And that matters. But that's also where the confusion begins because when fundamental tailwinds collide with real structural risks, markets rarely move in clean, predictable ways. Which brings us to the final point in today's video.
The most likely outcome is the one nobody's positioned for. On one side, you have the optimists, the people talking about rate cuts, continued government spending, and how AI is the best thing since sliced bread. These are the people expecting the market to rally through 2026.
And on the other side, you have the pessimists, the people talking about an AI bubble, a topheavy market, stretched valuations, and how we're overdue for a correction. These are the people expecting 2026 to finally be the year things break. But here's the scenario I have yet to see anyone talk about.
Not a meltup, not a crash, but a market somewhere in the middle. The kind of market where headlines flip every two weeks, rallies stall just as confidence rises, and dips feel scary without ever bringing real opportunities. I'm talking about a long, choppy, sideways price action year.
And it's these markets that are often the hardest to survive. It's where impatience destroys portfolios. It's this gray area in between a bull and bare market that is so dangerous.
It's a market where every stock feels eerie, every decision feels wrong, and capital just rotates between asset classes. And when markets feel like this, it's a good reminder that nobody actually knows what the is going to happen next. And if anyone tells you they do, well, they're either lying, trying to sell you something, or both.
Because the best thing you can do is absorb as much information as possible and then come to your own conclusions. And now that I've laid out some of the different scenarios I see for 2026, I want to hear where you land on things. Do you think 2026 is the year things start to break?
Do you think it's the year we rally higher? Or do you think something else is going to happen? Drp your take in the comments and let's see how split everyone really is.
Oh, and before I go, if you want a pretty sweet desk, remember to check out Flexis Spot below.
