Market Thoughts: Everybody wonders what you’re gonna do?

David Byrne’s “Everybody Laughs” seems a song written for the year behind us. Also, the one ahead. To say investors were whipsawed in 2025 is a charitable way of welcoming in the new year.

Last year there was rising concern about the outlook. This year consensus is decidedly bullish. Consensus is right until proven wrong. That’s worth remembering.

The macro environment and corporate earnings have tailwinds coming into 2026. In round numbers, we expect U.S. nominal growth of about 5% this year. Real growth somewhere between 2-2.5%, inflation around 2.5-3%. That’s an encouraging backdrop.

U.S. inflation should press higher the first half of the year before trending lower. Barring a marked break in the labor market, the Fed can stay on hold until mid-year. We see two rate cuts this year. A rise in unemployment would pull those forward. Even add to them.

Hand-wringing about whether we see a hard or soft landing for the U.S. economy is over. We’ve landed. With growth strong and inflation sticky, it feels like this year offers more of the same. We remain mid-cycle. Late-cycle’s in the offing.

Every Washington administration works hard to load fiscal stimulus into its second year, ahead of mid-term elections. This year’s no different. There are significant tax cuts coming, along with other embedded stimulus from the One Big Beautiful Bill. Also, expect a greater push on deregulation.

The global economy is in solid shape. If there’s a bias, the tilt for developed economies is for more stimulus if needed. That’s ‘good’ news. The reality check? That positive outlook is well priced into valuation levels and markets.

The S&P 500 returned 18% last year. Total return wasn’t driven by multiple expansion, it was driven by earnings. Earnings accounted for about 70% of last year’s returns. Dividends about 10%. Multiple expansion the rest. The multiple on the S&P 500 rose about one point, to 22.5x.

We’ve seen three years of back-to-back double digit returns for the S&P 500. The fact that last year’s was driven by earnings is important. It’s the difference between rational and irrational investor behavior. Last year was rational. That observation doesn’t make the market any less expensive.

As we roll into this earnings season expect to see another strong quarter. Earnings growth for the S&P 500 should come in right around 12-14% for 2025. As we model earnings forecasts for the year ahead, we see a similar possibility.

Exuberance will bob and weave as it does. Investor confidence doesn’t feel ahead of itself. Investors are well-grounded. The fact that we’ve seen a broadening of market support is a healthy signal.

Last year reminded investors about investments outside of the U.S. Europe a case in point. In local currency terms Europe managed to about match the U.S. in returns. The euro’s rally versus the dollar was ‘the story’ behind outsized returns for dollar investors.

European equities benefited from a valuation catch-up trade to the U.S. in 2025. That happened without any earnings growth. Lagging multiples in Europe (relative to the U.S.) may offer a bit more upside. For Europe to do well in 2026, earnings need to deliver. I don’t believe we’ll see a similar rally in the euro this year compared to last.

Scaremongering always circles. To be clear, there’s always a chance of a market correction. Human nature is built into the emotional fabric of markets. I count on it. Markets are messy because of it.

A 5% drawdown in a calendar year is almost a given. Over the past 20 years, we’ve seen 10% selloffs in the S&P 500 about 50% of the time. We’ve seen 15% peak-to-trough corrections 40% of the time. When pundits call for a 10-15% drawdown, they’re saying there’s a coin toss chance of a correction. The critical question is why. Then, what are you going to do about it?

All else equal—it never is—we’re better buyers on a pullback. Adding risk at lower valuation levels because of our constructive outlook. Given the headline driven world we live in, geopolitical events might provide that. I’d prefer not to be offered that particular ‘type’ of opportunity.

A positive surprise to earnings might also nudge us to increase risk. We’d be getting a discount on the forward multiple to increase exposure. What might have me cut back on risk? Valuation levels that skyrocket higher. For the broad markets, I don’t believe we’re there today.

We are fully invested across portfolios. We’re modestly overweight equity markets, funded from core bonds. The same is true for extended credit. We’re focused on diversifying and managing the risk we’re taking, not overreaching for it.

The above remark is an observation about markets being expensive. It’s not meant to be negative. Take the investment risk you’re being paid for, not more.

Are we in a bubble? Bubbles are ‘obvious’ after they burst. Cassandra would eventually be proven right, but it took a while. The majority of market prophets aren’t ‘blessed’ with foresight. Most are simply cursed to be ignored.

My counsel? Set clear investment goals. Be honest about your risk tolerance so you don’t blink. Tactically manage your risk budget. Curb any enthusiasm to chase after expensive markets. Diversify the risks you’re taking. For long term money, stay invested. For traders, be prudent. Stay nimble.

Opportunities always present themselves. Animal spirits are people driven. People have the power. That’s a lot of emotion to deal with. Everybody wonders what you’re gonna do?

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 01/08/26.

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.