The S&P 500 Index is a popular indicator of how stocks perform, and for the past three years it has been giving investors an uncontested thumbs up. In 2023, the S&P 500 returned slightly more than 26 percent to investors; in 2024, more than 25 percent; and last year, though not quite as strong as the two previous, still a stellar performance of nearly 18 percent. Bonds have also produced gains the past three years. Commodities, in particular the metals, have been volatile, with gold and silver soaring then recently softening a bit, yet still well above their prices of early 2025.
While we bask in the glow of those returns, we have a new year and a new perspective to consider for 2026. The markets are off to a positive start, but coming off those three straight double-digit growth years, we might ask ourselves, to paraphrase the 1974 hit song, “How long can this keep going on?”
How did we get here?
Coming out of the bear market correction of 2022, which included about every major asset class except for a basket of commodities impacted by inflation, history proved again that it may not repeat but often rhymes. That is, rising interest rates often equal lower asset prices and vice versa. It was an anticipated recession that moved the market into correction territory in 2022. But as interest rates and inflation peaked, a recession did not materialize. The Federal Reserve signaled rates were likely at a peak, and the next move would most likely be a reduction in rates, that is, a more accommodating Fed.
The economy—and the stock market—again proved the recession predictions wrong, and in doing so also proved that financial markets are nearly impossible to time. Spurred by emerging and refining technologies, the markets rebounded quickly and continued to press on through 2025, despite uncertainty about inflation, elections, policy changes and the related vagaries, the threat of a trade war, and various geopolitical concerns. Clients often ask how the markets can respond in a positive manner amid so many negative, or at least challenging, circumstances. Again, the markets prove tough to predict in the short term.
Among the many factors influencing market performance in the past few years, lightning technological growth rooted in the boom in Artificial Intelligence (AI) investment was most prominent. Today, technology stocks make up almost 40 percent of the total market capitalization of the S&P 500. As well, interest rates trended down.
Where are we headed?
So where do we stand of this writing, just a month into the new year? Markets are wandering a bit, hesitant to find direction. We’re seeing both positive returns and increased volatility. Market prices are fully valued—and maybe more than fully valued in some cases. However, corporate profits, most essential to long as well as short-term stock price increases, continue to rise. And the stock markets are pricing in expectations at least two more interest rates cuts in 2026.
Then there’s the elephant in the room. There remains significant excitement with the coming economic tsunami that is AI, even if there is some concern over the lack of income currently being generated by many of these companies (Remember the dot-com bubble and bust?). Still, the markets are reflecting the increased productivity and profitability already being demonstrated by companies implementing AI—and it’s across all sectors. Companies are making huge investments in AI in anticipation of reaping extraordinary benefits in terms of economic growth.
These tailwinds have continued the bullish behavior. The bond markets have continued to drift higher in 2025 and into 2026 on the assumption that interest rates will continue to trend lower.
However, while the equity and bond markets are giving us an all-clear signal, gold and precious metals performance is perplexing. Gold has historically been a non-producing asset that trades on fear. When times become tough and the economies are enthralled in recession, gold appears as a safe haven. What has been unique about precious metals’ most recent bull run is that it has happened while the equity markets are continuing to climb to all-time highs. Gold and precious metals have also been a hedge against devaluation of currencies historically, and gold in particular is pricing in a continued decline in the dollar.
There is also inflation and the Fed’s moves on interest rates to consider. It is evident that the Administration is willing to accept somewhat higher inflation to attain higher GDP growth numbers. The Fed’s target has been a 2 percent inflation rate. That would imply a tighter monetary policy by the Fed and perhaps a GDP growth rate of less than 3 percent. Hypothetically, if the Administration and new Fed chair are willing to adjust this target, say to accept a 2.5 to 3 percent inflation number, the economy might be able to grow at a 3-percent-plus rate. Stock investors are betting on the higher growth rates and gold is telling us the growth could come from increased inflation.
History says that at some point we can expect the two markets to move in opposite directions. Precious metals cracked a bit on the last trading day of January as the new Fed chair Kevin Warsh was announced. The significance was that the markets, especially assets like gold and silver, were projecting the president would nominate a dovish Fed chair that would push for lower rates and trade higher inflation for a faster-growing domestic economy. What the market received with the nominee is a more hawkish chair with a history of not being a proponent of the easy money resulting from lower rates and quantitative easing. The surprise resulted in a one-day decline of 10 percent in gold prices and 25 percent in silver.
Where do we go from here?
We are in one of the most advanced, technological revolutions in our lifetime with the potential to create positive returns in businesses of all types over the long term. With the short-term backdrop of favorable tax policy, deregulation, and an interest-rate environment expected to be stable at minimum with a bias to stimulative, the economic tailwinds look good—outside of geopolitical risks, which are always present but admittedly greater today, and the fact that equity markets can get ahead of the economy in terms of valuations.
Throughout my 24-year career, markets have had their way of humbling me, both bull and bear markets. And I have learned that timing them is not a suitable investment strategy. So if it is a run on AI stocks, a flight to bonds, or even a rush to gold, there is no substitute for a diversified portfolio that can participate in the upside of the markets while mitigating the impact of volatility. Build your plan, don’t try to time, remove emotion, and stay consistent with your investment strategy and asset allocation. That approach will give you the best chance of continued success.
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