Investing in 2026, Opportunities & Risks Part 1 of 2

Hello, Merry Christmas, everyone. It's the 27th of December, and we've got only three trading days left for the year. Yup, we're coming to the end of 2025. And it's been another double-digit gain for the U.S. markets. We had double-digit gains in 2023, 2024, and now 2025. S&P is up 17% year-to-date, and of course, no thanks to the profits of Doom. Once again, if you had listened to any of the Doomsday Pawn Stars on the mainstream news, you would have lost a lot of money this year selling at the bottom at the end of the tariff crash of April, and probably lost money if you shorted the market. Never forget. In fact, in June last year, we had experts saying that the stock market crash is coming 2025. Well, they said that every year for the last 10 years. And it's the bubble of all bubbles gonna burst, right? And then in April, when we had that tariff crash from Trump's Liberation Day, we had, again, majority of economists saying that we are going into a recession this year. They said that in 2023 as well. All right, classic bear market rally says HSBC. Jefferies cut S&P 500 target sees stock falling from here. This was back in April of this year. Wall Street trading desk warns S&P 500 sell-off will get worse, not could get worse, will get worse. We are still heading into a bear market. This was 10 April of this year. Strategist who called end of US exceptionalism sees no recovery. All right, so as again, I keep telling all of you, ignore all these opinions of other people. Just stick to great companies, stick to the market, stay invested, and you will do very, very well. Now, as for my personal portfolio this year so far, with three days left to go, let me just check it out right now. It's loading live. Yep, so I'm up 18.74% year-to-date, slightly aging out the S&P 500, but it's actually nothing compared to my students. My students are kicking my ass this year, right? You can see Adnan up 31% this year. We've got Raj, who's up, sorry, 32% this year. We've got Rustam, who's up 127% this year. We've got Airy, who's up 28% this year. We've got Brian, who's up 208% this year, and the list goes on, right? So it kept me thinking that I think this year I was too conservative, right? I was really too conservative this year, right? But never mind. I'll be actually doing another video which I'll talk about my year in review, which is what are my hits in 2025, what are my misses, what I learned from it, and so on and so forth. But as long as I beat the market, even by a bit and I made money, it's a pretty good year. I can't complain. So anyway, let's get to the focus of this video, which is what can we expect in 2026? What are the opportunities and what are the risks? Now, before I begin, I always say this, right? No one can predict the market with any certainty because there are too many moving parts. All we can do is we can just make guesses, and of course we could be wrong. But understand that whether I think that 2026 is gonna be bullish or bearish, it does not affect my investment and trading decisions at all. Forecasts are purely for entertainment. So even if I think that 2026, the market's gonna be bearish, I will still buy companies if I think they're undervalued because in the long run, they're gonna grow in value. If I see trades that are bullish trades within a down year, I will still take the bullish trades. But of course, I'll take some bearish trades as well. So with that in mind, let's take a look at what we can expect. Now, first and foremost, remember that every year that begins, the bias is always to the upside. And this, again, based on history. If you take a look at the last 74 years, excluding this year, you can see that the market goes up a lot more than it goes down. In the last 74 years, starting from 1951 all the way to the end of last year, 2024, how many years ended up again? If you count, you can see there are 58 years out of 74 years ended up again. So that's 78% of the time. And 16 years ended with a loss out of 74, that's 21.6% of the time. So what does that mean? That means that on any given year, your chance of the market going up is 78% on any random year. So the question is for 2026, are we bullish, which means is the chance more than 78% or are we bearish where the chance is less than 78%? So let's take a look at both arguments. And let's begin with the bullish argument and then we look at the bearish argument and we'll do a summary. So reasons to be bullish for 2026. I think there's six main reasons to be really, really bullish. Number one is the US economy remains very strong. A lot of economists, they said that we're gonna go into a recession this year. They said that for the last three years, it never came. And not only that, but the recent GDP quarter tree data that was released a few days ago showed that the US economy grew the fastest in the last two to three years, right? It was way above expectations and I'll go through that in a while. But basically the economy remains very, very strong and it's expected to grow next year as well by between 2.3%, which is the target by the Federal Reserve to 3% by some of the investment banks. So that's the range for next year. So why does it look like the US economy will continue to grow next year? Few reasons. Number one, the lag effect of the rate cuts. So remember that the Fed has been cutting interest rates already for a few months. Now it's a lag effect. Cutting interest rates is like stepping on the accelerator, the gas on the car pedal, but it doesn't react immediately. It takes a few months to react. So the effects of lower interest rates have not filtered through the economy. So it's gonna kick in next year. Second is fiscal stimulus. So as you guys know, the Trump administration, they are one big, beautiful bill. They are doing a lot of fiscal stimulus, which means the government is pumping a lot of money into the economy through infrastructure building, through tax cuts. And of course the Fed is in an accommodative cycle, which means the Fed is not raising interest rates, they are cutting interest rates. So all that bolsters well for the US economy. So that's the first thing. Now I'm gonna go into detail in a while. So this is just an overview. Second reason is that, once again, the Federal Reserve is in a rate cut cycle and they just ended their quantitative tightening. So in essence, this increases the money supply, which historically bodes well for stocks and risk assets. Number three, the S&P 500 company's earnings are expected to grow next year by 15%. By the way, they grew double digits this year, way above expectations. They're expected to grow at 15% for calendar year 2026. Why? Mainly driven by productivity, increase in profit margins because of AI adoption. And again, details in a while. Fourth reason, once again, the one big beautiful bill, which is deregulation, plus a lot of corporate tax cuts are coming. So essentially what the Trump administration is doing is that they are allowing companies to keep more of their money through tax cuts and tax write-offs. A total of $137 billion is going to go into the pockets of companies. So more profits means more value of the shares, higher stock prices. And as part of the bill, households in the US, the consumer themselves, are getting a $100 billion amount of tax breaks. So more money in the pockets of consumers, more consumer spending, higher GDP, higher growth for companies. Number five, the yield curve that was inverted for a couple of years and people said recession, that didn't happen. Now the yield curve is uninverted and the yield curve is sloping up very nicely and the 10-year treasury yield is in a sweet spot. Again, details in a while. And the last reason is more of a technical reason, which is the market is on an uptrend and on an uptrend, the probability is that prices keep staying on the uptrend until the trend reverses down, which it has not yet. And the fact that we are in the fourth year of the bull market, which started in October 2022, next year will be the fourth year of the bull market and the fourth years are usually pretty strong. So let's go through these points one by one. So again, the first point. Like I mentioned, this was reported a few days ago, GDP for quarter three that was delayed, but just came out, came in at 4.3%. That was the best quarterly growth in two years. I think I said three years earlier on. Wrong, it's two years. So what drove GDP growth in quarter three? It was consumer spending. Interesting, right? Consumer spending was the key driver of growth. In fact, it was up 3.5% with strong purchases of both goods and services. And you can see it here on the table as well. You can see quarter one was negative and everyone screamed recession and quarter two was very strong. Quarter three, even stronger. And quarter four, which is again, not out yet, is projected to be pretty strong as well. I think it's like 3% as well. So first reason. Second reason, again, the Federal Reserve is now our friend. So the Fed is right now in a rate cut cycle. They've been cutting rates for a while, as you can see. So they have reduced the Fed funds rate about 5%. All the way down now to the target range of 3.5 to 3.75%. So from here, where do we go? Well, based on the last FOMC meeting, the Fed expects to cut one more time in 2026, one more time in 2027, and that should bring the Fed funds rate to the neutral level at 3%. So 3% is the neutral level right there. And if you look historically, 3% Fed funds rate is somewhere in the middle of the range. So that's, in a way, the sweet spot. In the last FOMC meeting, the Fed also said they are more optimistic about the economy. They expect GDP to be at 2.3% next year, which is an increase from their prior forecast. They expect inflation to have peaked this year, going down, and unemployment they expect to have peaked. Now, how much weight do I place on their analysis? Not really a lot, right? Because the Fed has been wrong many, many times. But basically, that's what they say. Now, not only has the Fed started cutting interest rates, but as of December this year, they have ended quantitative tightening. So what does that mean? So basically, when you cut interest rates and you do not continue quantitative tightening, that increases the money supply in the market, right? So when you increase money supply, there's more money in the system that is bullish for assets, okay? If you take a look at this table, you can see that when the Fed cuts interest rates, is that bullish or bearish? It depends. When the Fed cuts interest rates, when a recession is expected, or when the economy's in a recession, that's bearish. Then the market goes down as the Fed cut interest rates. But when the Fed cuts interest rates when there's no recession, and the Fed cuts interest rates when markets are near an all-time high, historically, that has been very bullish. And that happened the last 22 times since 1980. And you can see that these were all the times the Fed cut interest rates when the market was near an all-time high, which is where we are right now. And out of the 22 times it happened, in all 22 instances, the S&P 500 was up one year later, which is 12 months later, in fact. 12 months later, the S&P is up a median of 11.1%, and six months later, it's up a median of 5.2%. So what does it mean? Basically, it means that Fed cut interest rates when market doing well, economy doing well, is bullish. Then we look at, not only that, but the end of quantitative tightening. So quantitative easing is when the Fed buys bonds. When they buy bonds, it increases the money supply. And they did quantitative easing, QE, during the crisis, right? So during the COVID crisis, the Fed, they did the quantitative easing. So when they buy bonds, what happens? It pumps money to the system, market does very well. And then when inflation was too high, what did the Fed do? The Fed, they raised interest rates, and they did quantitative tightening, which means they stopped buying bonds. And they allowed the bonds that they own in the balance sheet to mature, and they do not renew the bonds. That's called quantitative tightening. So that started in April 2022. They started quantitative tightening, which is reducing the money supply. And you can see the Fed balance sheet shrank from April 2022 to December this year. So this is so-called the money supply shrinking. But you may say, hey, if the money supply is shrinking, how come the stock market went up? So that's what a lot of people didn't understand, because a lot of people, when they say, hey, the Fed is doing QT, the market has to crash. And so a lot of people shorted the market, and they're gonna short there. Why is the market going up? Reason is because even when the Fed is reducing money supply, the market will still go up if earnings are very strong. And because corporate earnings have been very strong, driven by AI productivity gains, that's why we have the market doing very well. So now we have got, again, the productivity gains going forward, plus now QT's ending, what do you think's gonna happen? We're gonna have two tailwinds to the market in 2026. Again, there's no guarantee. I'm not saying it must go up, I'm just saying that the odds of the market going up are higher now than it was in the last three years, because we have got now no more QT, and we've got strong earnings growth, and we have got lower interest rates. Next, we look at the individual companies, the S&P 500 companies. The 500 companies are projected to grow at 15% earnings growth in 2026, and again, mainly driven by productivity gains from the adoption of AI, AI agents, large language models, and automation. So the red dotted line is the projected earnings per share. The blue line is the actual earnings per share. So you can see that for this year, the projected earnings per share for the entire year is over here. There's a projection, and the actual earnings per share looks like it's gonna catch up to that. Now for next year, that is the projected earnings per share for the S&P 500, and ultimately, share price follows earnings, right? And that's why the market is expected to rise next year as well. This is from FactSet, of which I own the shares as well. You can see that the magnificent seven companies are expected to report earnings growth of 22.7% next year, and the other 493 companies are expected to report earnings growth of 12.5% next year. So overall, 15%, but the magnificent seven, your Microsoft, your Apple, your Nvidia, your Amazon, are expected to make up the majority of the gains. Hence, we wanna stay invested in those strongest companies in the market, which I am. So those are the first three points. Now, point number four, once again, the one big beautiful bill, I have already talked about it, which is, again, the Trump administration doing a lot of deregulation, cutting the red tape, making mergers and acquisitions a lot easier. Corporate tax cuts and household tax breaks will put more money in the pockets of consumers and more profits in the pockets of companies, and that is very, very bullish. Number five, the yield curve is in a sweet spot. If you look at a yield curve right now, this shows you the different interest rates or yields based on different maturities of the US government bonds. And you can see that we are right now in an upward-sloping yield curve. The 10-year treasury yield is currently at just below 4.2%. So is that good or bad, right? So this was a chart from Fundstrat, couple of years ago, in fact, and you can see that if you look at the P-E ratio of the market, it tends to be at the highest where the 10-year treasury yield is between 3.5 to 5.5%. So that's the sweet spot. So currently, where's the 10-year yield? We're currently at less than 4.2%, somewhere around here. We are within that sweet spot. So as long as that 10-year yield doesn't go above 5.5% and it doesn't fall below 3.5%, we are in a Goldilocks spot for the long-term interest rates. Okay, so the sixth and last reason for being bullish is simply that the market is on an uptrend and we are entering the fourth year of the bull market and the fourth year of the bull market tends to be a pretty strong year historically. So again, when did this bull market start? This bull market started in October of 2022. That's when this bull market started. So 2022, October, 2023, 2024, 2025, October. So October this year was the end of the third year. So we are now in the fourth year of the bull market. And if you take a look historically at the previous bull markets, you can see that year four of the bull market, what are the chances of it being up? You can see percentage of the time it is higher in the fourth year is 85.7%, which is higher than the 78% usual bullish year in the market. So again, I expect 2026 to be bullish, more bullish than normal in other years. But having said that, I don't expect another double digit gain. I expect a single digit gain year. And I'll talk more about that later on. And of course, finally, if you look at the charts, you can see that the old saying is the trend is your friend. As long as the market remains on an uptrend, the path of least resistance is up, up and away. Until the trend reverses. But for now, we are on an uptrend. How do we know? We take a look at the moving averages. We've got a 20 EMA, the red dotted line above the 40 EMA. That means the short term trend is up. We've got a 50 moving average, the blue line above the 150 moving average, which means the medium term trend is up. And we've got a 200 day moving average sloping upwards, which means the longer term trend is up. So the short term, the medium term and the long term trend are all aligned. They're all on an uptrend. And sure enough, you take a look at the price action, you can see higher highs and higher lows, right? You can see wave up, wave down, wave up, wave down, wave up, wave down, wave up, wave down, wave up, wave down, wave up. So you can see the market making higher highs and making higher lows. So when the market makes higher highs and higher lows, the uptrend is very much intact. But again, always remember that it doesn't go up in a straight line. After a wave up, what tends to happen? You're gonna have a wave down, right? And then wave up, and then wave down. So do I wanna, you know, if I wanna buy the S&P 500 ETF, do I wanna jump in right now? Probably not, right? Because we're not on a wave up. I like to wait for a wave down, wave down, to, you know, dollar cost average into the market before the next wave up. Okay, so six reasons to be bullish for 2026. But there are reasons to be bearish as well. Yeah, there are a lot of reasons to be bearish as well. So what are these reasons? Well, find out in part two of this video coming up really soon. So if you have not already done so, subscribe to this channel so you get instant notification once the next video is gonna come up, and it's gonna be really, really soon, part two. I'll talk about reasons to be bearish in 2026, and then we'll do an overall summary of what to expect and how to position ourselves for the coming new year. Thank you for watching, and may the markets be with you. If you wanna catch my latest videos, click on the subscribe button right now. Click on the bell so you get instant notifications once I upload my latest video. If you wanna check out my online courses, go to piranaprofits.com. We're gonna learn how to invest and how to trade the financial markets and create an income from all around the world. If you wanna join my live Wealth Academy program, go on to wealthacademyglobal.com and find out more about how you can learn investing and trading live online. This is Adam Koo, and may the markets be with you.