Some Positive Trends Are Emerging for the Market This Year
While the overall market remains overbought, there are some reasons to remain bullish.
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As 2026 gets underway, the market remains in overbought territory in my opinion. I base that viewing via numerous traditional valuation metrics.
By many tools like the Shiller PE ratio or the S&P 500 dividend yield, equities are trading at levels not seen since the tail end of the Internet Boom a quarter century ago. Using the "Buffett indicator," otherwise known as the "market-cap-to-GDP ratio," stocks are in uncharted territory completely.
Given this, my columns tend to have a frequent bearish tint. However, extreme valuation levels are not what traditionally ushers in a bear market. That trigger usually is provided by an economic, geopolitical or credit event. And while the music is playing, an investor has to continue to dance to some extent.
And despite myriad worries the investment community legitimately has around the economy and equity trading levels, there are some positives that should be acknowledged. In today’s article I will accentuate some of these encouraging trends.
The small-cap Russell 2000 rose some 2% last week, while the NASDAQ and S&P 500 posted small losses on the week. One of the themes I am hoping develops in 2026 is a significant broadening of market breadth. Since ChatGPT debuted late in 2022, the majority of the gains in the markets have been driven by the Magnificent Seven, as these companies are the primary beneficiaries of the AI revolution. These tech giants have seen their profits rise over 20% annually over the past three years. Earnings growth from the S&P 493 has muddled along in the low-single digits annually since 2023.
However, it is forecast that earnings growth will accelerate to a bit over 10% in both FY2026 and FY2027 from these smaller names. Hopefully, last week’s market action was the start of some overdue catch from the non-Magnificent Seven. And while economic growth is bifurcated and largely dependent on the surge of tech spending from the buildout of AI infrastructure, it is still impressive. GDP growth in Q2 and Q3 averaged a robust 4% and the current GDPNow reading has better than 5% growth projected from Q4.
And while inflation is still significantly above the Federal Reserve’s 2% bogey, it is less than one-third of its peak of June 2022. Average wages are also outpacing inflation after losing buying power to the surge in prices from roughly 2021 to 2023. In addition, average rents nationally have fallen on a year-over-year basis for five straight months now. There are two primary drivers of this trend. First, there was a huge number of new apartments that came online from 2023 to 2025, particularly in the Sun Belt. Second, the presidential administration’s immigration enforcement efforts have resulted in a huge re-migration by recent migrants in 2025. This has had a significant impact on the number of renter households and on rental demand.
The fall in rents is a substantial positive on two fronts. First, Owner’s Equivalent Rent or OER is the largest component of CPI, making up just over quarter of the core calculation. Second, rent is by far the largest expense for renter households on average. This demographic also should get a nice boost from larger tax refunds this year and benefit from recent changes in tax policy such as no tax on tips up to $25,000. Hopefully, these trends start to boost consumer sentiment which remains in dismal territory despite robust recent GDP growth readings.
And those are some thoughts around some positive trends in the economy and market, which hopefully continue to play out throughout 2026.
At the time of publication, Jensen had no positions in any securities mentioned.
