ECC Information Management and Advisory Services

December 21, 2025, Dallas, Texas, U.S.A.

If the market ended the year of 2025 on April 8, 2025, the one year return (that is, from April 9, 2024 to April 8, 2025) of the S&P500 index for the U.S. market would have been down for 4.2%. As the writing of this post, the S&P500 is trading at the level close to 6835 with a year-to-date return of +16.5%. What a difference “a year” makes!

This simple example means that it is quite important to quote a return of a financial asset in the context of a “time frame”, both in terms of start/end points and the duration. Many people understand that many (if not all) financial assets (such as a typical stock) have prices that follow a so-called “random walk” mathematical model. What this model tells us – among many other things – is that any price point (such as 6835) is a realization of a random process: if we can turn back clock for a day or two and let everything run again, a different price point can be realized, possibly higher than 6835, or lower.

The randomness of asset price indicates that whenever we forecast (or quote) the price return of a financial asset, in addition to a “mean value” of the forecast, we should also provide (at least) the “standard deviation” or ” margin of error” of this forecast as well. This is a “common sense” in statistical analysis. However, very few people (financial professionals included) rarely do that, partly for the avoidance of burdening (and confusing) himself/herself and his/her audience, partly for the lack of such a “common sense” whenever predicting a future value of a random process.

As the year of 2025 is drawing to an end and the year of 2026 is right around the corner, it is interesting and fun to watch many market experts painstakingly argue their forecasts for the level of equity market indexes such as the S&P500 by the end of 2026. I can understand that there is still some rationale behind such actions that many deem “a fool’s game”: it still helps many investors to plan ahead, esp. in terms of capital allocation and risk management. Therefore, I plan to join this “fools’ game” as well.

My general approach at this year end to forecasting the level of S&P500 is “try to to use common senses”. By “common senses”, I mean basic principles that justify themselves based on collective intelligence of the mankind throughout history. Of course, even “proven ideas” can still be proved wrong when new discoveries are made and/or shackles on old habits are broken, not mentioning by nature human beings tend to doubt new information first as a protection. To do something meaningful, we have to take some risk.

Here are the few “common senses” and how they help predict the market in 2026:

• Bubbles will burst, sooner or later: I believe this is true, in general. In statistics and sociology (and many other fields in sciences), this is also called “reverting to the mean”. But it is difficult to identify a bubble, and more difficult to tell when it will burst. The bubble may deflate instead of burst. The “AI Bubble” has been a constant presence in recent discussions about the U.S.’s financial market. I believe there is definitely an extraordinary amount of investments pulled into AI construction; however, I am uncertain it is necessarily a “bubble”. Maybe a bubble can only be identified when it bursts; in that case, I don’t believe we have a bubble yet. To make the AI Bubble burst (assuming it is here already), many factors have to be present, one of them being the increase in Fed rate, which is not present. As a result, this bubble (again, if it is here) will inflate for a while, possibly well into 2026 and even 2027, before it “bursts”. From investment point of view, I don’t believe an investor should continue loading up on pure AI players, which may have been what the market has been doing in the past several months.
• Debts will have to be paid: Debts have to be paid, and hopefully it won’t end up being paid via hostile ways such as wars. The one thing that the U.S. can still do well (at least marginally and people have to be patient) is self-correction. There are many visionaries in the U.S. who can also be powerful politically, which will help correct the debt situation in the U.S. This, of course, takes efforts and painful actions to many constituents in the society. One argument has been allowing the U.S. to grow out of its debt. There will be several tail winds to this argument, such as tax relaxations, de-regulations, government income via tariffs, etc. The key point here is the U.S. government and private sectors (regular citizens included) can work together – no matter how painful and awkward the process will be – to resolve the situation.
• Market, collectively, has to be right: For a highly transparent financial market like the secondary market in the U.S., I believe the market in general is always right. However, to an investor, what is more important is how to react to the fact that the market is always right: if the price of a publicly traded asset is always a true reflection of the value of the asset, an investor cannot do anything in terms of wealth growth. This is because an investor can only grow his/her wealth by (for example) buying an asset when the price is low and holding it before the price goes down for whatever reason. Therefore, if the market is right in terms of determining the current true value of an asset, it has to be also right in determining the price trend of the asset over a certain period of time into the future. The market may be always right in terms of price forecasting; however, it won’t necessarily tell the investors outright; instead, an investor has to determine that by himself/herself, and take actions on that belief. Because many investors make mistakes when determining the price trajectory of financial assets, the best thing an “ordinary” investor can do, is buy the whole market and hold it long enough so that the noises eventually smooth out. Of course, the market is NOT always right about determining the current price of an asset. Therefore, there will be people who can make money by betting against the market in terms of asset pricing. But, that is hard, as many investors who short the market can testify.
• Technology will boost productivity: I believe this is also true, with high conviction levels. This implies two things at least: first, an economy that can innovate and absorb new technology developments will constantly grow its economy and create better lives for its citizens, which means that an investor should bet on that economy for long term; secondly, there is always a path (sometimes a long one) between the emergence of a technological innovation and the adoption of it which measurably enhances productivity thus lifting general annual GDP of the economy. This second aspect indicates, obviously, the existence of volatility associated with the process of productivity boosting by technology. In general, the market – considering that it is always right in terms of asset pricing – can discover promising technologies; however, it is precisely because the market can detect such technologies, the lack of capability by the market to tell the price direction of financial assets over different periods of time leads to market volatility. Because it is very hard for the financial market to control how individual persons and companies adopt a new technology (this is exactly why a financial market possesses extremely high dimensionality), the best way for an investor to bet on the technology-productivity relationship is long the market.
• Risk has to be diversified away: This is true, especially when we talk about “market risk” or “market volatility” that is exemplified by asset price fluctuations. Practically, diversifying risk away also means that it is hard to time the market. There have been discussions that the technology sector has been gradually losing it strong lead in the U.S. equity market to some other sectors (financials, industries, healthcare, to name a few) since November of this year. If one cannot tell when such “rotation” can happen, he/she should hold a diversified portfolio because, sooner or later, some names in that portfolio will start to outperform others. At the end of the day, risk diversification is also a phycological decision given different investors’ different risk appetite. Wealth creation is often not the ultimate goal of investing; better life of an investor and those of other members in the society should be.
• Compounding is the key to grow wealth: This argument is generally true. However, there are so many factors affecting this argument. For example, compounding is apparently related to time, esp. durations. A term the people often use related to compounding is “cumulative returns”, which often assumes re-investment of gains. This, in turn, has many practical implications. For many investors, a portfolio cannot be just left to grow; many investors rely on the portfolio for certain income as well. Of course, for those investors who do not rely on the portfolio for income, compounding is quite powerful and should be always leveraged by investors.
• “Alpha (or, excess return beyond that of an index)” has to be generated via idiosyncratic outperformances: This is in general true. It is extremely hard to beat the market (such as the returns of a broad market index). Therefore, an investor should try to get as much “beta” as possible by investing in a broad market index (or a reasonable mix of asset classes). After that, he/she can focus on generating alphas by overweighting or underweighting certain asset classes or individual assets. This is largely a risk consideration, but also an acknowledgement by the investor on two things: first, for a well developed market, the market is often right in terms of directing capital to the investments that eventually benefit the whole society; secondly, through skills, common senses, and luck, one can get more correct predictions on the price trends of assets than the market, thus earning a bit more than the market over a period of time.

With the above comments, my skin in the “fool’s game” of predicting U.S. markets for the year 2026 is:

• S&P 500 will reach a point between 6800 and 7500 by year end of 2026;
• AI names will continue appreciating in terms of stock prices but there will be volatility;
• Financials, industrials and healthcare will appreciate, but they collectively still cannot replace technology;
• The general trend of rates is down in 2026; however, there is still (low) chance that rate may go up, which is more a risk to be managed than a directional forecast;
• The U.S. dollar will continue depreciating against other major currencies; this is in fact what the U.S. government wants to see; it also gives a “put” on non-U.S. assets including precious metals such as gold;
• The mid-term election in the U.S. will inject certain volatility to the market, but nothing comparable to the impact of tariffs announced in April of 2025.

Happy investing!