Market Musings 170126: Remaining a nervous bull

Market Musings 170126: Remaining a nervous bull

Monthly report and video: Investment Strategy Focus January 2026 (click on link to read/watch)

Can stocks maintain their run streak in 2026?

1. US Q1 positive growth surprise? The One Big Beautiful Bill Act passed last year put in place several lower tax rates, resulting in lower 2025 tax bills for many US households and larger Q1 2026 tax refunds (USD 1000+ average per household). This should boost US domestic consumption and GDP growth over Q1 2026

2. Long-term bond yields to rise further? Over 2025, the Japanese 10-year JGB bond yield almost doubled from 1.1% to 2%, while German 10-year bund yields rose from 2.4% to 2.9%. Lower inflation but high debt refinancing requirements pull yields in different directions. Expect little movement in 10-year bond yields.

3. Stock leadership rotates to Value from Tech: in 2025, global value outperformed growth by a record 18% in USD after 8 consecutive years of growth dominating. Favour value-oriented sectors such as Financials, Industrials and Building & Construction. Strong momentum in UK, Spanish, Swiss and Swedish stocks.​

4. Strategic industrial metals in a bull market phase: copper, tin and aluminium continue to gain ground, propelled by strong technology and electricity generation-related demand and limited supply. Continue to favour these physical base metals and copper miners. ​

5. Silver, platinum and palladium have rallied dramatically in December as shortage of supply and strong industrial demand have squeezed physical markets. We return to a positive view on gold and upgrade our 12-month gold price target to USD 5000/ounce. Our silver price target is also increased to USD 80/ounce.

Questions to answer

1. How long can this bull market for stocks continue? 

2. What could bring it to an end?

3. If the US stock market and Tech isn’t leading any more, what today are the leading themes, sectors and regions?

4. What is driving US foreign policy as regards Venezuela and Iran? Is it just about oil?

5. What new areas of emerging leadership am I looking at now?

Can the bull market continue?

Yes. I consider that this current bull market in stocks began in October 2022, and is thus over 3 years old now. While there has been considerable variation historically in the duration of stock bull markets, they have on average lasted around 5 years and delivered even greater performance (167% in USD) than this current episode (c. 100% so far).

Last 12 US bull markets

Source: Fisher Investments

This is one for the stock market optimists - according to the US fund manager Fidelity:

• Historically, long-term uptrends have lasted decades. If this cycle follows that pattern, the S&P 500 could keep rising well into the 2030s.

• Even after a more than 30% rally since April 2025, the market is not at an extreme compared to past peaks.

• If the current artificial-intelligence-fueled Nasdaq Composite rally were to mirror the length of the 1990s tech cycle, it could continue for several more years without a major correction.

This following chart is also one for the long-term stock market optimists. Fidelity suggest, according to past US stock market bull cycles, that the long-term peak may not arrive until 2032! I am not quite that optimistic, but who knows?

What could bring this bull market phase to an end?

This following chart is a great schematic of the lifecycle of market sentiment. Ultimately, financial markets remain (largely) driven by human investors with their psychological biases and mood swings from pessimism to euphoria and back.

The danger point for investors is typically when we hit peak euphoria, i.e. when everyone is super-optimistic about the state of the economy and about the stock market. This was seen in the years 2000 and 2007, preceding that last two stock market crashes.

Are we at peak euphoria today? In my view, there are clearly signs of over-optimism that have crept into the minds of investors, in the US in particular. To a large extent, this is natural given the performance of US technology stocks since 2009 - the technology-heavy Nasdaq 100 index has multiplied by over 21x since the 2009 low. The S&P 500 benchmark index has delivered an annualised average return of over 10% over these 16 years, allowing investors in US large-cap stocks to double their money roughly every 7 years or so.

Stock valuations are an element

One element of euphoria is captured in expensive stock market valuations. When people are over-optimistic, they do not pay any attention to how expensive stocks are, on the basis that “they will always go up”. Of course, this is clearly not the case if we look at history.

It is true that the US stock market (by far the largest in the world) is at the expensive end of the scale, with a 24x estimated P/E. However, stock markets outside the US remain relatively fairly valued versus history, so neither cheap nor very expensive in spite of 2025’s strong performance across the board.

Current valuations of stocks have a big impact on expectations of long-term future returns that can be expected from stocks and other asset classes.

Dutch fund manager Robeco produces estimates of likely 5-year future returns by asset class (stocks bonds etc.) heavily based on where valuations are today versus history. Their table suggests that there is still reasonably good potential for stocks (6% per year on average in euros) over the next 5 years to 2030, with a focus on emerging markets (7.5% expected annual average return).

But expensive valuations can only provide the setup for the end of a bull market. Ultimately, a bear market is triggered by a catalyst, which is typically an economic downturn, i.e. crisis or recession.

The Oil Price is Key

The year 2000 saw a recession largely based around over-investment in technology and telecom (e.g. fire-optic cable) where a boom in tech investment then turned to a bust. In 2007, the global financial crisis and a deep recession was triggered by the boom and subsequent bust in the US housing market, specifically around subprime mortgages which had been granted to high-risk borrowers.

The most common geopolitical crisis trigger for a global economic recession is and has been the oil price. We can consider the economy as simply as transformation of energy. When the cost of energy goes up sharply, economic activity slows sharply.

In the lead up to the 2000 and 2007 stock market peaks, the crude oil price rose sharply, subsequently helping to tip the global economy from growth into recession and ushering in a new bear market each time.

The good news today is that the oil price has actually declined steadily since peaking around the outbreak of the Ukraine conflict in 2022, and today sits at nearly half of those peak oil prices seen in 2008, 2011 and 2022.

If anything, recent events in Venezuela, Iran and potentially around any Ukraine ceasefire could also suppress oil prices further by increasing world supply over time. This is clearly one of Trump’s many objectives with the November US mid-term elections in mind - he wants to keep US domestic gasoline prices as low as possible in his quest to win Middle America’s votes - a real challenge given Trump’s low approval rating among American voters in the latest opinion polls.

Source: economist.com.

Conclusion: OK for now, but keep your eyes on the oil price. Any sharp and sustained rise could mean trouble for the global economy and for the stock market. Perhaps the real danger will come after the November mid-term elections...

Rising inflation and interest rates are the real killer of bull markets

Linked to the oil price, the second trigger for the end of economic expansion and the bull market in stocks is typically rising inflation and thus rising interest rates. This is linked to oil prices, as in the past, sharp rises in oil price have resulted in a surge in general price inflation. This has then prompted central banks around the world, led by the US Federal Reserve, to then raise interest rates to cool growth and inflationary pressures.

As is often said:

“Bull markets don’t die of old age, they are killed by the Fed.”

Economic growth both in the US and globally remains in pretty good health for now, helped by low and falling interest rates.

US and European inflation rates continue to decline slowly, while there is no inflation of note in China.

This in turn allows central banks in Europe to maintain very low interest rates at 2%, and for the US, UK and emerging market central banks to continue to cut their benchmark interest rates gradually.

So until we see mounting inflation pressures once again which then oblige central banks to begin a new rate hiking cycle, I remain positive that we can avoid a sharp economic downturn.

For evidence that the Federal Reserve may be forced to increase US interest rates, watch the 2-year US government bond yield. For now, it is falling rather than rising, good news for the economy and for stock markets.

So what am I focused on today?

There are several themes I like in global stocks:

1. European industrial exposure, including Sweden. Increasing infrastructure and defence spending should be a good growth driver for this segment, while lower interest rates are also helping the domestic economy.

2. Global health care stocks. Health care remains a sector that should be amongst the first the reap the rewards of implementing AI technology to improve drug development and diagnostics. New treatments for cancers and age-related diseases like dementia should provide growth, as will the continued expansion of use of anti-obesity drugs.

3. Rare earth metals and lithium: this is a clear geopolitical challenge globally, given the huge Chinese dominance in the production and refining of these metals, necessary for batteries, defence and technology applications.

4. Uranium and nuclear:there is renewed momentum in uranium prices which is also transmitting through to uranium miners, given the growing need for reliable baseload electricity supply for data centres, not to mention the ongoing growth in energy demand in the likes of China and India. Meanwhile, developed countries such as the US and Japan continue to restart all available nuclear power stations, thus increasing the medium-term demand for uranium.

Swedish stocks doing well

European Health care recovers, helped by Roche and Novartis

Rare earth metals

Uranium and Uranium miners

Have a great week

Edmund