Market in 2026: A Delicate Balance

Late happy new year, everyone.

Sorry for the slight delay on this usual New Year post. I caught that stupid flu over Christmas—like probably half of you—which pushed my New Year post into the first week of January. The first week of the year is always particularly hectic for me work-wise, but more on that later. That being said, I didn’t really feel the rush, as the market is currently doing its thing: a low-volatility grind higher, with some good days and some bad ones, but no euphoria or panic in either direction. These are the kinds of periods where the best approach is often to focus on other things.

As with every post I write at the beginning of the year, I’ll start with a market update, assessing what we believe the current market situation is, while also zooming out to the bigger picture of what we think is most likely heading into 2026. After all, New Year posts are partly about that.

I’ll then go over what we believe could be the most likely investing trend winner for this year. We were broadly right last year, which—if one believes in mean reversion—might imply that we could be more off this time around. Still, while predicting what the market will look like in November 2026 is probably impossible, identifying which trends are likely to gain traction this year is not entirely random. These trends tend to be connected to an evolving narrative in which businesses operate.

Another topic I’ll cover, as I do every year, is our plan for WealthUmbrella in the year ahead.

Near-Term Market Outlook

Since the end of October, the market hasn’t done much. Over that period, we’ve mostly seen a series of low-volatility up-and-down moves that didn’t generate much pain, but also not much upside.

After the strong rally from the bottom of the tariff-related correction last April, some form of consolidation was to be expected. In fact, this was probably the best scenario we could have hoped for. Instead of a sharp price correction, we got a correction in time, which helped reset some of the exuberance. And yet, on Friday, the stock market closed at an all-time high, in a way that very much resembled a breakout.

That positive and relatively easy price action at the index level—which made for a fairly relaxed Christmas period—may have felt quite different for those exposed to riskier assets. While the S&P 500 was making new highs, or hovering around them for part of the holiday period, market breadth continued to deteriorate steadily until the last day of 2025.

This was somewhat a fractal of what we saw earlier this fall, when the index ground higher while market breadth steadily deteriorated. When superposed, these dynamics made the latter part of 2025 a very tough period for investors exposed to risk-on assets such as growth stocks.

But something tells me that the relatively good performance we’ve seen at the index level is about to extend to a broader part of the market. Indeed, if you look at the graph showing market breadth, this important variable has improved continuously since New Year’s Eve. It is now sitting far from a dangerous level, but also far from a euphoric one, which is typically what precedes a reversal.

Over the same period, the CBOE SKEW cooled down by a very significant 20 points, which is about 4 points more than what we typically observe during a standard correction.

This suggests that investors have started to let go of deep downside protection and have shifted toward buying more bullish calls. This is usually what we observe ahead of an improvement in market conditions.

This positive outlook on what the market is willing to bet on can also be seen in our option model, which is currently in a very good position. Indeed, it has significantly cooled down from the euphoric levels reached in 2025 and is now pointing higher.

It is not as low as the level we reached in April 2025, but such lows are typically only seen during strong corrections. Overall, much like our market breadth indicator, this option-related indicator is now well positioned, with enough room ahead for a healthy next leg higher.

This is happening in a low-volatility environment, as signaled by our Volatility Trend indicator.

This indicator stayed in the red for about a year, from summer 2024 to summer 2025, but it can also remain in the green for even longer periods. When it is green, it typically suggests that upside progress happens through an accumulation of small positive candles rather than euphoric moves, while also reducing the risk of sharp, highly volatile downside swings. These are usually the periods when investing is the easiest.

This dynamic is now clearly observable in the VIX, which has remained steadily low and below 15. For those who remember a post we made one or two years ago on the VIX, we showed that when plotting the VIX distribution over the past 20 years, there is a significant gap between roughly 15 and 16. This suggests that the VIX does not tend to spend much time in that range. Below is a chart originally produced for another purpose in 2024, where this gap between 15 and 16 is clearly visible.

In other words, in a volatile environment, when the VIX re-enters that zone, we usually see a quick reversal and a renewed volatility spike. On the other side of that gap lies a low-volatility regime, where this same zone tends to act more like a ceiling. The VIX is now on that side of the distribution gap at 14.49, with a very wide ribbon.

This combination of low volatility, a slow upward grind, and a positive market outlook recently caused our Margin Risk indicator to flip green, with the color signal now sitting at a very healthy level of 9.

This level is usually associated with a phase where risk has significantly declined, while still remaining far from any overheated behavior.

For newer members, our Margin Risk Signal is built very differently from our Hedge. It is not designed to maximize returns or time exposure in the market, but rather to highlight periods when risk—defined by five different underlying indicators—is similar to what we have historically observed during favorable market phases. Typically, when this indicator reaches or exceeds 12, it has been associated with some form of correction. While this is not an immediate timing signal and does not indicate the magnitude of what may come—some corrections are small—most major corrections have historically been preceded by this indicator peaking in that zone.

But the good news is that we are not there yet, as this indicator currently stands at only 9. Investment exposure would typically be much higher by the time we reach those levels, should we eventually get there.

Considering that market breadth is improving, and that several data points suggest the market still has room for another leg higher, this makes me think that tech could finally regain the spotlight. Indeed, tech has been underperforming the broader market for about two and a half months now, once we adjust its returns by its usual beta relative to the S&P 500.

Excluding bear markets, tech has historically underperformed the market for period of about two months on average since 2019, with the longest underperformance periods reaching roughly four months. With tech already lagging for about 2.5 months and market breadth now improving, the current fear surrounding tech could be close to fading.

Our sector strength maps also support this view.

XLK (Technology) has moved from an overperforming phase to weakening, and is now classified as lagging. With this relative performance currently sitting around minus three standard deviations, what typically follows is a progressive return toward a healthier trend for the tech sector.

If this scenario plays out, it should also help bring the current position of our hedge signal—still sitting in a very low bin of its historical distribution (although in the positive)—more in line with the rest of the signal cluster.

But this is where my near-term bullishness stops, and where I think we need to shift our focus to the bigger trend.

The Bigger Picture

The last sentence of the previous paragraph was probably a bit dramatic, wasn’t it? Almost as if I were about to tell you that my crystal ball is pointing to a total market collapse. I won’t go there. Instead, let me start this section by summarizing my current thinking about the market.

• First, the market is overextended from many different angles.

• Second, I believe we are likely only a few months away from a meaningful correction.

I hesitated to phrase the first point as “we are late-stage bull market,” and ultimately chose a softer formulation. The reason is simple: I don’t know how this will play out, nor whether the next major correction will mark the end of this AI-driven bull market, or instead serve as a healthy reset of valuations, similar to what we experienced in the fall of 2018 or in 1998.

As for the second point, it may sound almost trivial, given that the market tends to experience a pullback roughly every eight months. That said, I do believe this year is likely to deliver a correction that is more significant than the typical pullbacks we’ve seen recently—something at least on the scale of last April’s move.

So here is why I believe that, despite the near-term bullish view presented above, I remain very cautious for this year.

Valuation

The recent months of consolidation have helped reset some of the overheating in the market trend, which had started to move a bit ahead of itself. The S&P 500’s distance from its 200-day moving average has returned to a much healthier level, now sitting only slightly above its most frequent occurrence over the past 30 years.

The more pronounced consolidation in tech has also cooled down the QQQ RSI, bringing it back almost exactly to its long-term average of the past 25 years.

However, despite this non-negligible technical cooldown—which has given the market the room it needs for another leg higher—the reality is that valuations remain extremely elevated from most historical perspectives. In other words, we have seen a reset in momentum, but not a reset in valuations.

Below is the current P/E ratio shown in the context of its own historical distribution.

You might tell yourself that the P/E ratio has reached the 40s on a few occasions in the past, suggesting there is still plenty of room. That is true, but the only times it moved sustainably above roughly 34 were during major recessions, such as in 2001, 2008 or 2020, when earnings collapsed more sharply than prices, mechanically pushing the ratio higher.

If we instead look at the Shiller CAPE ratio —which provides a longer-term view of valuation by smoothing out earnings noise—the only instance since 1870 when it traded higher than today was during the six months around the peak of the dot-com bubble.

So why, in the face of such evidence, am I not ready to call a market top?

While I do believe these valuation levels are meaningful and do not represent an exceptional long-term investment opportunity, I also think the AI trend could push valuations even higher.

From a fundamental standpoint, the internet was undeniably transformative, but it took a long time before it truly disrupted the business world. While it was, at the time, one of the fastest technological revolutions, it was really in the early 2010s that most of today’s dominant web giants emerged.

By reducing friction between people, the internet became a powerful tool that—combined with Western countries’ willingness to embrace globalization—opened commercial borders. Still, that transformation took many years, especially when compared to what AI is doing today. AI is increasing corporate productivity at a pace we have rarely seen. The impact is so dramatic that it could eventually contribute to its own downside by severely disrupting labor markets, something that would inevitably spill over into consumer demand and brake the economic cycle. This is a challenge we will likely have to navigate over the coming years, but not necessarly today and that is a discussion for another day.

The key point is that AI acts as a direct productivity accelerator, and this may already start to reflected in the strong GDP growth we have observed in december.

But returning to numbers and stats, I fully recognize that the current S&P 500 P/E ratio is extremely high and often compared to dot-com bubble levels. This comparison has been widely used since late summer to argue that we are near the end of this bull market. However, what this narrative often overlooks is that the dot-com bubble was not centered in the S&P 500, but in the much more speculative Nasdaq.

At that time, most of the companies benefiting from the tech boom were younger and less mature. Today, the primary beneficiaries of the AI trend are large tech giants that are already heavily weighted in the S&P 500. The bubble is present, but it is not occurring at the same level of speculative excess. In March 2000, the Nasdaq-100—the 100 most mature tech companies of that era—was trading at a P/E ratio of roughly 60. The broader Nasdaq was even more extreme, with a P/E ratio close to 200. This is far removed from what we are currently seeing.

For that reason, it would not surprise me to see the S&P 500 trade at P/E levels above what it reached at the height of the dot-com era. In my view, the real signal of a bubble will appear when early-stage AI companies with limited revenues, profits, or operating history begin commanding premium valuations based purely on optimistic narratives. That is what we saw in 2000, but also in other speculative episodes such as the 3D-printing bubble of 2013, the cannabis bubble of 2017, and the stay-at-home and growth-stock bubbles during the COVID era. We have not seen that behavior broadly emerge in AI yet (except a tiny bit in September of 2025).

That said, while the discussion above helps put today’s elevated valuations into context and explains why I am not calling the end of the bull market, it does not mean valuations should be ignored. On the contrary, they help explain why the market has struggled to move decisively higher since late summer, and why it may continue to do so until sentiment undergoes a more meaningful reset.

This stretched sentiment is clearly visible in one indicator that not only suggests we are overextended, but also raises the risk of a strong correction in the coming months: our NYSE and Nasdaq derivative volume indicator. This indicator spends most of its life in bullish territory. Below is how it has behaved since the start of the current bull market in January 2023.

It has flipped red on a few occasions, but in all of those instances it occurred in the middle of a correction (fall 2023, March 2024 and April 2025) or early in (Summer 2024). What makes the current situation different is that the indicator is now thinning and flipping red while the market continues to climb.

To understand why this matters, it helps to explain what this indicator measures. The NYSE and Nasdaq derivative volume indicator classifies all option contracts traded on both exchanges into bullish and bearish categories. Statistics are then computed for each group, and current volumes are evaluated relative to their own historical mean and standard deviation.

Because markets rise more often than they fall, it is normal for bullish option volume to dominate. Bearish bets are inherently riskier, and investors are generally less inclined to take them. This explains why the indicator is green most of the time. During corrections, fear spreads quickly and positioning shifts abruptly, causing the indicator to flip red. When this happens in the middle of a correction, the signal mostly reflects fear—something we already capture through volatility indicators like the VIX.

The more meaningful signal occurs when this indicator turns bearish while prices are still rising. In those cases, it reflects growing skepticism about the sustainability of the rally. This is exactly what we observed throughout much of 2018, well before the sharp correction in the fall of that year.

We saw a similar pattern in 2021, when after more than a year of bullish readings, the indicator turned mostly red starting in May—months before the 2022 bear market began.

In both cases, the prolonged bearish tone in the options market while equities continued to climb reflected a growing sense of overextension relative to realistic expectations. That is precisely the dynamic I believe is beginning to emerge again.

This does not mean that a correction will necessarily begin in February, and we could still see smaller pullbacks before a more significant move develops. However, this is an environment in which a sudden shock—whether a black-swan event or a sharp macroeconomic shift—could quickly escalate into a major correction.

Once again, this does not automatically signal the end of the bull market. While the prolonged bearish readings in 2021 were followed by a full-year bear market, the correction in the fall of 2018 was sufficient to reset sentiment—helped in part by the Fed—and ultimately fueled another year of upside, before COVID brought that bull market to an end.

Path forward

I will not speculate on how this correction may unfold. Nobody really knows. It could, as mentioned above, originate from a deteriorating labor market, as suggested by recent BLS reports. Monitoring the Sahm Rule—which has already started to move meaningfully—will be important in that respect.

Other narratives, such as recent discussions around seizing Greenland, could also trigger political chain reactions capable of disrupting the global economic order. As I said, nobody really knows.

If I had written a New Year update in 2020 using WU signals, I would have confidently stated that the risk of a strong correction was elevated, given several indicators pointing to an overextended market (prices at decade-long channel resistance, the Margin indicator oscillating between 13 and 14, the Option Model at a two-year high, etc.). Yet I could never have imagined that the catalyst would be a respiratory virus emerging from China that would shut down the global economy. Once again, I am certain that my imagination will not be sufficient to anticipate the trigger of the next strong correction.

That said, I still believe that the near term could offer some good opportunities. However, I will keep the current overvaluation—and the associated warning signs the market is starting to display—in mind, with the goal of not being caught by surprise. If conditions evolve in that direction, this broader context will likely influence some of our decisions, such as maintaining lower leverage, although we will continue to rely on our signals. From a data perspective, the larger the correction, the easier it usually is to detect in time, so I remain confident that we will be able to react appropriately.

That said, while I will not speculate on what might trigger a larger correction, I do want to share my thoughts on how we could get there. With three consecutive rate cuts, equity indices trading at elevated valuations, and the cost of integrating AI into businesses having sharply declined in 2025, I would not be surprised to see a slower trend at the index level, accompanied by a much broader market participation.

Such a scenario would likely push our market breadth indicators into a range similar to what we have observed historically at euphoria.

We have seen this type of market behavior roughly every four years, with the last occurrence in 2021. It may simply be time for the market to become something broader than just big tech. The market currently appears to have enough room for such a scenario: P/E ratios could continue to rise, but only at a very modest pace, while riskier segments of the market finally start to perform.

I am not fantasizing about a scenario that would benefit me the most. In fact, I am currently not very exposed to riskier assets. Rather, this is simply one of the scenarios I consider most likely when looking at the broader picture. Should we start to see clear signs that this dynamic is playing out, I may gradually move in that direction, potentially using the small amount of unallocated cash within WU (about 16%) to pivot toward those areas, such as the Russell 2000 or ARKK.

Leading Investment Theme for 2026...

Well, I realized that I had much more to say about the market than I initially thought. The day is already over, and I’m only halfway through this post. Since the section above relies heavily on charts—and charts tend to become outdated quickly as new data comes in—I’ve just decided to split this into a Part 1 and a Part 2. In any case, given the length, this should make it easier to read.

So this was Part 1 of our take on 2026. Part 2 should be posted in a day or two and will cover:

• The leading investment theme for 2026

• WU plans and news for 2026

• Bitcoin in 2026

See you soon.