Editor’s note: Happy New Year! Today, we have a special Jolt for you… we’re sharing an important part of this month’s Disruption Investor issue, so you can better prepare for the year ahead.
***
We’re coming off the third “up” year in a row for US stocks. While this may seem frothy, it’s perfectly normal.
Stocks have risen for at least three consecutive years 11 times over the past century. Can we pull off four in a row? Yes. It’s happened seven times since 1928.
January is a great time to pause and reset expectations. But the whole “year ahead outlook” ritual is a little ridiculous.
The calendar flips, and suddenly everyone pretends they can see 12 months into the future. If I truly knew what was going to happen next year, I wouldn’t wait until January to bring it up.
We also try to stay away from sweeping “macro” forecasts. Too many moving parts. Too many confident people end up wrong.
But it would be just as foolish to ignore decades of market history and the handful of signals that actually matter.
Before we dive into our 2026 surprises, here are two big-picture things we’re watching closely…
Midterm elections
Some folks think making stock market forecasts based on election cycles is voodoo.
But stocks have followed the four-year presidential cycle to a tee over the past few years. This pattern was one of our secret weapons when we pounded the table to buy stocks in late 2022, right when Wall Street’s finest were waving red flags.
Now the cycle has reset, which likely means there’s volatility ahead.
The second year of a presidential term typically delivers the weakest returns of the four-year cycle. While stocks still tend to inch higher in midterm years, there’s a 42% chance they’ll fall instead. It’s a coin toss.
The stock market usually follows a “script” during midterm years:
Leading up to the election, US stocks typically perform poorly. From January to October in midterm years, they drop an average of roughly 1%.
Then, stocks bottom a few weeks before the election.
Once the election “fog” clears, stocks rise an average of 15% over the next 12 months. That’s 2X the return of all non-midterm years during the same period.
Takeaway: Expect volatility—including lots of “bear market” commentary—in 2026.
A breakout in small caps
I’m sure you’ve heard that there are only a handful of huge tech stocks driving the market higher.
The most important development in markets right now is US small caps breaking out. This is only the fifth Russell 2000 breakout over the past 25 years—and the first of new highs since 2021. When small caps clear a major multi-year ceiling, it often kicks off a multi-year run for stocks.
After so many false starts, this breakout deserves attention. It tells us the bull market is broadening out. It means investors are confident enough in the real economy, not just artificial intelligence (AI) hype.
Takeaway: With small caps breaking out, expect 2026 to be a stock picker’s market.
Our research suggests we’re in the middle of a long-term bull market. But no matter how bullish we are, we still invest like we might be wrong. Let me explain…
First, don’t lose sight of why we invest in the first place. We invest so we can live comfortably… give our kids the best possible opportunities… enjoy wonderful vacations… and eventually live fulfilling retirements.
We invest to build lasting wealth.
We’ve made a lot of profits in the stock market over the past three years. To make the most of the new wealth you’ve generated, you must avoid significant losses.
In my experience, this is the #1 thing that separates investors who grow rich from those who see mediocre results. There are a lot of “one-hit wonder” investors who strike it big during a stock market rally... only to give it all back on the other side.
|
We must respect the market and remember that stocks fluctuate. The investing gods spoiled us with 95 new highs over the past two years. They won’t always be this generous.
So, what’s the game plan?
First, clean house.
If you own stocks you only “kinda, sorta” like, now’s the time to sell. With markets near record highs, this is a golden exit opportunity.
That doesn’t mean sell everything and head for the hills. Think about this: If you sell everything and stocks drop 20%, will you have the courage to buy back in? Probably not. Fear has a way of paralyzing us at exactly the wrong moment.
Second, continue to invest in great disruptors.
Our edge is owning great, disruptive businesses in long-term megatrends. Over the years, companies solving real problems and generating strong profits march forward regardless of market conditions. They power through volatility.
Whatever 2026 throws at us, Chris and I will be here to guide you every step of the way.
***
Want to know what Stephen thinks could really move the markets in 2026?
In this month’s Disruption Investor, he lays out 10 big surprises for the year ahead.
Some of them he expects to happen, and others are long shots. But all of them have the potential to reshape markets and create new disruption opportunities.
For each event, Stephen has included a Disruption Score to help you gauge both the odds and the potential market impact.
Paid-up members can read the full issue, including all 10 surprises, right here.
If you’re not a member yet and want full access to Stephen’s 2026 outlook, you can join us in Disruption Investor at this link.