Week ended Jan 2, 2026: welcome to the new year!

Welcome to 2026.The last two weeks of 2025 were – not surprisingly – rather uneventful with the Christmas and New Years holidays.  Trading volumes were muted, and price levels generally lacked direction.  There’s not much particularly enlightening looking back at just those two weeks, so I will keep this update short and sweet (something I am reminded to do more often!), and will look at the year overall and what might be ahead. 

Review of 2025

The table below summarises the performance in 2025 of the key stock, bond and other indices / asset prices tracked each week in EMC.

The clear winner as far as the indices and assets tracked by EMC was gold, up an astonishing 65.1% in 2025.  As far as stocks, the best performing markets were generally outside of the U.S., with emerging markets being the clear winner.  Bond markets also served up nice risk-adjusted returns across the board, including corporate bonds and intermediate-maturity US Treasuries.  Recall that US Treasuries suffered losses in 2024, so 2025 was a nice recovery year for the “global risk-free asset” (if that’s still true).  At the other end of the spectrum, both the U.S. Dollar and Bitcoin were in the red in 2025, the latter even with outlandish support and considerable graft from the family of President Trump.  

Tech shares drive gains

As you know by now, the key driver of U.S. stock gains was tech shares, especially anything and everything that was attached to the A.I. narrative.  The table below speaks volumes.

As you can see, gains in the S&P 500 were driven mainly by the extraordinary performance of Mag 7 stocks, which accounted for 34.5% of the index on a market-weighted basis at the end of 2025.  Returns on the S&P 500 on an equal-weighted basis rather than a market cap-weighted basis were barely half of the return.  To explain this, the Mag 7 stocks on an equal-weighted index would account for only 1.4% (7 stocks x 0.2%/stock) of the index, rather than over one-third of the index. You can see how the Mag 7 performed in isolation in the Bloomberg Mag 7 index in the third line.  And you can also see how the tech-heavy NASDAQ 100 performed vis-a-vis the S&P 500, noting that the NASDAQ is an index that is substantially more concentrated in tech companies.

Sector performance

The last table below contains the performance of the 11 key S&P sectors in 2025.  Perhaps not surprisingly, the Communications Services sector (Alphabet (GOOG), META and Netflix among others) and the Information Tech sector (Nvidia, Microsoft, Apple, Broadcom, Oracle, Cisco and Palantir among others) led the gains.  

Bubble….or not?

The debate continues in the investor and pundit community on the valuation of global stocks, with a focus on U.S. stocks because the key A.I.-related names that have been “bid to the moon” are all based in the U.S.   I think valuations are frothy and a bubble is forming in some of these stocks, but as always, the timing (and catalyst) for the bubble deflating is impossible to predict.  This upward trajectory in risk assets (and dare I say gold) could last another week, another month, another year, or even longer.  The reality is that no one really knows for sure. 

However, with every Street analyst projecting gains in the S&P 500 in 2026 – which would be the fourth year running – the long U.S. stock trade is getting very, very crowded.  As I reiterate over and over again to my readers, my philosophy is to stay invested but to prepare for a potential sell-off (or correction) via a defensive tilt in my stock portfolio, enough cash / bonds to cover 6 to 12 months of run-rate, and market hedges (via index puts).  And whatever you do, stay well diversified.  For American investors, you should have exposure to global stocks, not just U.S.-listed companies.

John Plender published a great summary of “bubble mania” in the #FT this weekend, in an article entitled “How the bubble bursts” which FT subscribers can read here.  If you are not an FT subscriber, I have extracted below the opening two paragraphs of this thought-provoking article so you can chew on these thoughts as 2026 gets underway.

Wishing you a strong start to 2026 and positive portfolio returns this year!  

_________________

**** Follow E-MorningCoffee on Twitter, and please like and comment on my posts right here on my blog. You need to be a subscriber, so please sign up. Thanks for your support. ****