Why stocks will reward patient bullishness in 2026

WITH 2025’s good-to-great gains for global stock markets – and the Straits Times Index (STI) up another 6 per cent as at Jan 27 – what should investors expect in 2026?

My answer: Another positive year, but don’t get exuberant. Gains should slow from the STI’s 29 per cent. And volatility could be high. Hence, patience will be key to unlocking 2026’s rewards.

That said, a good year awaits. World stocks should top their 10 per cent long-term annualised average (including bull and bear markets) even while lagging history’s 22-plus per cent average bull market years. Non-US stocks should lead again.

A year ago, I said dour sentiment would pave the way for positive surprise and a better-than-expected year, with non-US stocks leading. So it was. European stocks soared 28 per cent, while world stocks, skewed downward by the strong Singapore dollar, rose less – by 14 per cent (although in US dollars, they jumped 21 per cent). Meanwhile, US stocks lagged.

In local currencies, 35 of 47 nations in MSCI’s All Country World Index hit record highs, with thirty of those achieving this in Q4 (including Singapore). Gains were global.

Many in 2025, like now, argued that US tech and artificial intelligence (AI) froth masked an otherwise flimsy market. Five of America’s “Magnificent Seven” tech giants actually lagged broad US markets, which, again, lagged the world. While some domestic names touted AI integration and productivity gains, that didn’t drive Singapore’s outperformance.

What did? Chiefly, banks and industrials were up 26 per cent and 28 per cent, respectively, in 2025. Those categories roared even louder in Europe: up 87 per cent and 33 per cent, respectively. Tech-bereft European nations – such as Italy, Spain and Austria – and big bank hubs, including Singapore, outperformed big-time. What AI “bubble”?

Perhaps you see huge STI gains as a reason to invest solely at home. But eschewing global diversification is risky. Sure, bank stocks in Singapore helped 2025 returns and may again in 2026… or not. Narrow index booms easily become busts or deliver big lags, like in 2023. Global diversification is always vital.

But, yes, big recent gains have stoked spirits somewhat. Of 73 professional forecasts, I can identify for the widely watched S&P 500, only four see US stocks down more than minus 1 per cent in 2026, with few outright pessimists. Meanwhile, tepid forecasts surround the median, 9.6 per cent (in US dollars), broadly in line with history’s long-term average. Few strong optimists.

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Professional forecasters’ consensus never happens one year out. Stocks pre-price that consensus a year out. Hence, two 2026 outcomes look likeliest: stocks fall or top 10 per cent gains. Fundamentals favour the latter.

The global yield curve is steep, spurring lending. US loan growth is a strong 6.1 per cent year on year, more than double year-ago rates. The eurozone’s business lending hit 3.6 per cent, the highest in nearly three years. More lending fuels global economic growth, which should top dour consensus expectations.

Many fret over US President Donald Trump’s tariffs, threats and geopolitical gyrations. Almost everyone argues “this time is different”, while ignoring 2025’s lessons. Those worries, in stocks now, are bullish.

Other politics? Singapore’s 2026 looks quiet. Europe’s too. France may be an exception, as more budget twists could emerge. But this old tale lacks shock power. Japan’s snap election on Feb 8 adds uncertainty, but results and clarity arrive soon.

The impactful political story of 2026 will be America’s mid-term legislative elections in November. Early on, extreme primary campaign season rhetoric routinely spurs fears, grinding stocks sideways.

After? The president’s party routinely loses relative power in midterms, increasing gridlock. Stocks love it. Big legislation stokes uncertainty by creating winners and losers – an anchor on stocks. Midterms kill that risk. So stocks soar. Political bias blinds most to this repeat “Midterm Miracle”.

In US dollars, America’s S&P 500 usually suffers meagre returns in midterm years’ first three quarters. But in Q4, stocks celebrate midterms – and gridlock – explosively, rising in 84 per cent of history’s midterm year Q4s. They climbed in 88 per cent of each of the next two quarters, too.

It all spills into tightly correlated global markets – including Singapore and Europe – in one big rally. Developed markets normally parallel one another. What is good for US stocks is good for the world.

Geopolitics, an uncertainty of what new Fed chair pick Kevin Warsh will be like, Trump’s unpredictability and more can still stoke volatility – maybe a correction like last April’s. And the world isn’t risk-free. But 2026, overall, calls for moderate, patient bullishness.