As of Tuesday, the S&P 500 had appreciated 79.5% since Jan. 1, 2023, assuming dividends reinvested. But instead of celebrating their good fortune, I’m guessing more and more of your clients are getting nervous about a painful correction, citing the sluggish job market, the affordability crisis, overvalued AI stocks, tariffs’ drag on the economy and the Fed’s reluctance to continue lowering interest rates.
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Behavioral finance calls the tendency to dwell on unfavorable outcomes “negativity bias,” and there’s been a lot of that going around lately. Yet there are reasons to support the case for an extended bull market in 2026:
● The One Big Beautiful Bill Act, expected to hit its full stride this year, includes tax breaks for businesses and consumers that should stimulate the economy.● The small-cap premium is back as cyclical stocks outperform mega stocks, improving overall market diversity.● The 2/10 year spread on Treasury yields (0.64% as of last week) is nearing the historical “healthy” zone, suggesting the economy may have avoided a recessionary hard landing.● Global supply chains continue to normalize after prior disruptions, reducing cost-push inflation, which has eased volatility and returned yield curves to a normal distribution.● Subdued volatility in the energy markets indicates raw material costs contributing less to inflation than they have in recent years. ● The long-anticipated U.S. recession continues to sit on the sidelines even as the U.S. economy cooled — but didn’t crack — as unemployment rose and consumer demand diminished. Typically, when the velocity of money decelerates, the GDP goes with it. This has not happened yet.
READ MORE: Why the AI bull market is raising diversification red flags
CAPE fears
Still, there are plenty of factors that could derail the current streak. In December, when the S&P 500 hit one of its recent record highs, only 104 of 500 stocks were up — the worst breadth ever recorded for an up day. The largest companies dominate leadership in a way I have not seen in decades. Passive flows remain the marginal price setter. None of this guarantees a collapse in the near future. But structurally, these conditions echo every quiet unwind in history.
Further, the Shiller CAPE ratio should give us all pause. The index, which uses a 10-year rolling average to smooth out business cycles and distortions caused by single-year earnings spikes or recessions, recently hit 40.63 — one of its highest readings ever and far above its historical average around 16 to 17.
No indicator is 100% reliable, but every time Shiller CAPE has exceeded 30, a crash has eventually followed. That said, it can take years before a crash occurs. A high CAPE also suggests lower long-term returns ahead: A CAPE ratio above 30 has historically led to just 0% to 3% annualized real returns over the following decade.
READ MORE: How to coach clients through the chaos of market volatility
Rational exuberance?
Nobody knows for sure how much this bull run has left. Markets are the product of the human mind, which is too complex and too emotional to be predictable. No AI tool or algorithm can solve the puzzle.
There is, however, precedent. The markets posted five straight years of double-digit gains between 1995 and 1999 for a cumulative rise of more than 91%; eight straight years of positive gains between 1982 and 1989 amounted to a 200% gain for disciplined investors; and between 1949 and 1952 there was cumulative return of +75% for investors who stayed the course.
If you had let clients rush to the sidelines after the first two or three great years of market runs, they would have missed out on massive returns and possibly never recovered. There was no lack of speculation and exuberance during those winning streaks, but the economy was generally solid and company earnings were strong.
This we know: Clients don’t like seeing their account balances drop, regardless of the reason. And like fans of the Kansas City Chiefs and the University of Alabama football team, today’s investors have gotten out of practice with losses.
Diversify and don’t miss the bounce
But the biggest complaint I hear from people is how they missed this market bounce. As the old saying goes: “It’s a lot easier to get out than to get back in.” It’s our job to counsel clients through the scary early days of a downturn and prevent them from making hasty emotional decisions that cause long-term damage to their financial plan.
So, what should we be telling our clients? If a client is close to or in retirement, advise them to “bet” only what they can afford to lose.
Second, start planning for income distributions for those near or in retirement. TIPS, short-term ultras and Treasurys are not a bad place to be for income right now. If clients insist on market exposure, then point them toward the metrics. Ultimately, it’s their money.
What we can do as advisors is look for patterns from the past that might fit the current situation and then build a contingency plan around the possible outcomes. The most powerful tool is diversification, not just across different stocks and sectors, but across asset classes and countries.
