Stockmarket Outlook 2026 - part I - systematic individual investor

Happy Holidays!
I removed the paywall for the first part of my the in-depth Big Picture Stock Market Outlook for 2026.

I am spending several editions of my weekly report (premium membership) to examine the big picture for equities over the coming year from different analytical perspectives to finally merge those viewpoints into a coherent, high-probability outlook for 2026.

The most important frames of reference for the current bull market to me are based on (I) Market Cycles, (II) Historical Patterns, (III) Price Momentum, and (IV) Market Liquidity, influenced by fundamentals and the coming turn-of-the-year price dynamic.

Two parts of the series have been published with two more yet to come, zooming in from the big picture to increasingly specific, granular charts and quantitative market studies. I hope you enjoy the read.

Market Cycle Based Outlook

Secular and Cyclical Bull Markets in Alignment
From an extremely long-term point of view, we are in a massive secular bull market, which started in 2009 after the GFC. Previous secular trends often changed direction via the bursting of a huge bubble when all assets tend to be at extremely high valuations. This is where the bearish skeptics’ prediction of negative average yearly returns over the next 10-year period stem from. I think, while this may not be wrong, it is rather unhelpful, if there is no clearer outlook on the distribution of positive and negative returns within that 10-year average.

From the chart below we can see that U.S. stocks have moved within an uptrend channel over the last century (data before 1920 is quite sketchy, but sufficient to set the baseline trend). Secular bull and bear markets since 1900 tended to deviate from this baseline by roughly two standard deviations when hitting secular highs and lows.

Currently we are a generous standard deviation above base, which means a true bubble melt-up could run quite a bit longer by historical standards. Sometimes this last burst happens quickly (1929 or 2000), at other times the rally has lasted many volatile years before finally peaking (1965).

A look at this widest available picture is helpful for general orientation, but too inexact for most practical trading implications. Valuations are a largely useless metric for the prediction of returns over the coming 1-3 years.

**Stocks tend to deviate by two Std Dev from their baseline uptrend at secular peaks or lows**; joemccann

**Valuations have no discernible predictive value over next year’s returns**; Schwab

Cyclical Bull Market
Zooming in, we are now embarking on the fourth year of the current cyclical bull market after the last minor cyclical bear market bottomed in October 2022 and equities made new all-time highs by January 2024. 2025 will highly likely be the third year of double-digit returns in a row for the S&P 500.

At 38 months, the current cyclical bull market is still well below the average 67 months in its duration. The fourth bull market year has excellent past performance statistic with the majority of fourth years ending up by double digits.

Is it really possible that the market could deliver such high returns for four years in a row? History says yes – this actually tends to happen more often than not, with the biggest exception being the last instance in 2022.

For increased granularity, I overlay the valuable presidential cycle, which introduces some disparity to the cycle-based outlook.

**The current cyclical bull market is still well below average in its duration**; Mike Zaccardi

**Double digit return bull market years often cluster**; Wayne Whaley

Presidential Election Cycle
The coming midterm-election year tends to be notoriously volatile and difficult: The average drawdown during the year is -17,5%. Even worse was the volatility in populist periods, when the electorate was inclined to hoist their pitch forks to come after the leader of the day – a tendency that is already brewing today. During the 1970s, for example, nearly all positive returns were concentrated in election years, while all midterms saw intra-year declines from 20-40+%.

As you can see in the charts below, stocks peak on average around the end of the first quarter of the second presidential year and bottom during the weakest part of the year in Q3 just before the November elections tend to start off a new rally. This jibes with the cyclical pattern in the table above, where Q3 of bull-market year four has a distinct tendency for weakness even in a strong, cyclical bull market.

**Midterm years often see large drawdowns, which is less pronounced under second-term Presidents**; Bluekurtic

**Midterms are the weak spot in the presidential cycle, followed by the sweet spot beginning at the end of 2026**; Almanac Trader

Cycle-based Outlook in Conclusion

From secular and cyclical perspectives it looks like this bull market potentially has quite a lot of fuel left in the tank, even if compared to average bull cycles. If we are actually in the midst of blowing up a major market bubble via the development and implementation of AI, the coming year(s) could surprise many.

However, even cyclical advances go through significant periods of mean reversion. While 2026 has a good chance to end positive – maybe even by double digits – a deep intra-year drawdown around 20% should definitely be on our bingo card. In previous cycles the time of maximum potential weakness was in the third quarter with a peak after Q1 – midterm-election years then tend to end on a strong note.

Over the coming weeks, I will continue in my weekly report to work through an extensive analysis of (II) Historical Patterns, (III) Price Momentum, and (IV) Market Liquidity to reach a coherent, evidence-based outlook for 2026.

Good luck with your investments, and thank you for reading!

David

This is not financial advice.
These are my own views, as I may implement them in my own portfolio.
Please do your own due diligence!