Market Story Lines
Hello, I'm Michael Reinking, Senior Market Strategist at the NYSE, and this is the first episode of Market Storylines in 2026. Every week we are here to keep you to date on the key trends and events driving global markets. We are recording on Thursday afternoon, in the first full trading week of the year, so let’s get to it.
Welcome back and I hope you and your families had a happy and healthy holiday season. The new year brings a fresh start and a sense of optimism. For beleagured Giants fans like myself, we hope that a new coaching staff led by Kevin Stefanski or maybe even John Harbaugh will usher in a new era. Within markets the score board for traders resets back to zero. As trading desks fill back up after the holidays and investors start to put money back to work we often see some violent rotational activity and volatility under the surface. But before we talk a bit about what we’re watching in 2026 and what we’re seeing in the early trading, let’s put a bow on 2025.
After the policy driven volatility around the end of Q1 which led to a nearly 20% drawdown equity markets quickly snapped back and continued to grind higher through the back half of the year. The S&P 500 ended up 16.4%, the third consecutive year of >15% gains, more on that in a second.
The AI trade was the primary driver of gains yet again but it did broaden out shifting beyond just chips to companies levered to the data center and energy infrastructure buildout. There were growing concerns about the level of capex spending which seemed to hit a tipping point in Q4 amidst increasing circular partnership/financing announcements and as companies started to tap debt markets.
On the economic front, inflation stabilized and the feared impact of tariffs never fully materialized but inflation remained stubbornly above the Fed's target. Treasury yields moved lower throughout the year with the Federal Reserve resuming its easing cycle after an extended period on the sideline as there were signs of weakness in the labor market.
The resumption of the easing cycle coupled with the AI concerns drove some rotation within equity markets during Q4 into small/mid caps and into more cyclical areas of the market. Raising one of the biggest questions for 2026, will that broadening continue, and guess what we were asking the same question at the start of last year as well.
So after three consecutive years of strong gains. the S&P 500 was up nearly 80% over that time frame. We reviewed the last 55 years of returns to understand how these gains stacked up and to see if there were any lessons regarding performance following such significant returns. Since 1970, the trailing three-year gains have exceeded 50% only eight times. A little over half of those, occured during the 1990’s with the most recent instance interestingly in 2021. The data suggests that such strong performance does not necessarily preclude future gains and in fact suggests there could be more in store. Excluding the build-up and subsequent burst of the dot-com bubble which positively skews the data, the average return over the next three years is close to 30%, which underscores the importance of adhering to a long-term investment strategy.
The overarching backdrop for 2026 looks pretty positive but as always there are a lot of questions and not surprisingly a lot of those have to do with AI. Here are some of the things we’re watching -
• Will the AI related capex boom, which has become a driver of not only equity market gains but also economic activity, continue?
• Will the adoption of the technology show more tangible benefits justifying that investment?
• Will the policy measures put in place by the administration in 2025 begin to help economic activity to accelerate? And will this along with the lagged effects of rate cuts put upward pressure back on inflation?
• Will companies be able to deliver on the high expectations for earnings growth which the street expects to be in the mid-teens, justifying stretched valuations?
The answer to two other questions may come imminently. The Supreme Court could potentially rule on the fate of tariffs as early as tomorrow and President Trump’s choice to replace Fed Chair Powell could come at any moment.
Geopolitical uncertainty also remains at the forefront, and we didn’t have to wait very long for our first surprise in 2026 as the escalating US pressure on Venezuelan President Maduro reached its crescendo over the weekend when US forces captured and extracted him to the US to face criminal indictment charges on narco terrorism. As has been the case in recent years, markets largely took the event in stride. Oil is a central part of the story and while the country currently accounts for less than 1% of global oil production it sits on the world’s largest oil reserves. However, the infrastructure to access those reserves will require significant investment that will take years and President Trump is expected to meet with US oil executives to discuss that tomorrow. The administration has announced that it will ease sanctions on the country and begin handling the sale of 30-50ml barrels at market prices, to put that in perspective that is the equivalent of about 3 days of US production. The proceeds will be kept in the US until the Venezuelan government is deemed stable and secure. There has been some volatility in oil markets but considering the situation the overall reaction has been pretty muted with prices currently up ~1% for the week.
Turning to equities, there was some weakness in the final days of 2025, but markets have bounced back to start the new year with most major US indices hitting new all-time highs before pulling back yesterday. To start the year there has been continued outperformance in cyclicals and small and midcap indices which are already up between 2-4%.
This week’s economic data has continued to point to a resilient economic backdrop, but the biggest piece of data comes on Friday with the BLS Employment report. Looking to next week the economic data will include inflation and retail sales but we’ll start to see the corporate headlines picking up as well with the start of earnings season and a couple of important investor conferences including JPM’s healthcare conference in San Francisco and ICR in Orlando.
That’s going to do it for this week thanks for spending some time with us and we look forward to taking this market journey with you. If you liked today’s episode, please tell a friend or leave a comment wherever you listen to your podcasts. I’m Michael Reinking and we’ll talk to you again next week.