Market cycles are once again at the center of the investment narrative as we head into 2026. Optimism is familiar as earnings in 2025, the economy avoids recession, and Big Tech lift indexes. However, those victories are already reflected in the price. As we move into 2026, with prices expanding, the margin for error has narrowed. However, while analysts are very optimistic for this year, the case for another strong year hinges heavily on historical patterns.
Let’s start with the presidential cycle. Market cycles tied to the presidential calendar show that the second year of a new administration is often slow. Since 1948, there have been very significant gains in years three and four of a presidential term, while year two, or the year after an election, has performed poorly, with modest gains and low win rates. The data is shown below, and while 2025 is above historical norms, 2026 may not be so lucky.
Since 1871, markets have won in 30 of those years, with losses in only 18, resulting in a win rate of about 62%. While better than a “coin toss,” it is much lower than the win rate in years three and four. Another potential headwind heading into markets is midterm elections in 2026, which could potentially result in a change of control in the House or Senate, leading to increased gridlock in Washington.
It is worth noting that since 1948, there have been seven losses during the second year of a presidential cycle. Two of those losses occurred in 2018 and 2022, respectively, during the last two administrations. However, stocks have, on average, performed better during bull market cycles than during bear market cycles. The chart below illustrates the average market return during both bullish and bearish market cycles during the second year of a presidential term.
with a “Win Ratio” Of the 62%, the media has been quick to assume that the bull market will continue unabated. However, there is a 38% chance that a bear market will occur, which should not be taken lightly. Furthermore, given the valuation issues associated with the current duration, scope and market, A “The Vegas Handicap” can increase these odds slightly.
Year 6 of the annual cycle
Then there is the trend of conflict. A market cycle constructed in decadal shifts represents the sixth year of each decade. In fact, only the seventh and 10th years have weak returns. While 2025, the 5th year of the cycle, performed in line with the historical average, years 6 and 7 (2026 and 2027) Suggest some caution. Average returns are 4% and -1.2% respectively, with win/loss ratios barely better than one “Toss the coin.”
We can further assess the potential risk by examining the average market change by year of the annual cycle. As 2025 has performed close to historical norms, the risk of a low return year in 2026 is elevated.
While presidential and non-annual cycles are not guarantees of low-to-negative returns in 2026, the analysis suggests that investors should at least exercise caution when it comes to risk management. With prices rising, risk-taking and speculation high and sentiment very bullish, there doesn’t seem to be much risk of disappointment.
- Revival of interest rates that affect corporate profits
- Inflation rises, causing the Federal Reserve to hold off on rate cuts.
- An economic slowdown, or mild recession, that results in a reduction in forward income.
- A financial or credit-related event that causes a restatement of market prices.
You get the idea. The current setup reflects that as the rate of income growth slows, the consumer is leveraged, and when inflation is low, it remains sticky. The Federal Reserve is caught between weak growth and high prices. Betting on another strong year without acknowledging the weight of these market cycles is a risky assumption.
Cycles do not dictate market direction. But they shape investor psychology, and while both primary market cycles suggest caution, it’s not time to be aggressive.
“Technical” risk of reversal
Market cycles work because they reflect the behavior of investors. Bull phases are driven by optimism, liquidity and earnings growth. When expectations exceed reality, follow in the footsteps of the bear. Right now, we’re on the cusp of that shift. The Schiller-Cap ratio is trading well above its long-term average, and market prices are undercutting profits by a wide margin. It’s a signal, not noise.
Market cycles have always corrected this type of variability. In 1999, the last time we had a similar disconnect, the result was a steep and painful correction.
Worst of all, income growth in 2025 leans on familiar crutches: cost-cutting, fiscal engineering, and suppressed wages. Margins held up, but revenue didn’t increase. Now, consumer wages are falling, resulting in slower spending, and less revisions to forward guidance. This is not a setup that is compatible with the optimism baked into current prices.
For example, Bank of America’s 2026 Outlook clearly sees this. Their analysts present a downside risk to weak consumer demand and earnings. However, BNP Paribas is more bullish, offering 7,500, but even he admits that this depends on strong economic momentum and falling rates.
This is where market cycles come back into focus. Every long-term chart illustrates the same lesson: when prices outspace fundamentals, upside is inevitable. It’s not always immediate. It is rarely clear. But it is permanent. And 2026 is shaping up to be the test of whether this time is different.
i I created the following chart that says:
“A market meltdown is interesting while it lasts. During a meltdown, investors argue that ‘this time is different.’ They begin to leverage more and more to try and take advantage of price moves, and fundamentals take a backseat to price momentum. Market meltdowns are about ‘psychology’. Historically, whatever has been the catalyst for engendering risk aversion is easily observed in the corresponding rise in price and value.. The chart below shows relative strength, divergence and long-term deviations in prices. Previous ‘thaw’ periods should be easier to find than current advances.
Of course, just three months later, the market began a nine-month correction that saw almost 25% of asset prices trimmed before bottoming out in October 2022.
The chart has been updated at the end of 2025. It is worth noting that prices are once again moving away from the long-term mean, prices are extended, and relative strength is decreasing. Additionally, investors are increasingly taking on speculative risk and leverage, as they did in 2021.
Corporate earnings, lifeblood of market performance, expectations appear overly ambitious, and analysts are projecting another high-digit earnings growth for the year, well above historical trends. However, these projections may not match economic realities, particularly if consumer demand softens, the global economy slows further, or cost pressures persist.
The chart below uses quarterly datafor , for , for , . So it is slow to move. It is worth noting that the current market has deviated significantly from its long-term mean, with the price at the second highest level on record. While many people claim it “This time is different,” LLong-term analysis suggests that this is unlikely.
In 2025, real income growth was lower than originally forecast but remained decently strong overall. However, much of the market’s performance in 2025 was driven by valuation expansion rather than underlying earnings growth. If this pattern continues, the risk of a correction increases.
With everyone “experts” Currently expecting above-average economic growth and earnings rates in 2026, investors should consider being more risk-aware. As discussed in “”
“Rule #9: When all the experts and forecasts agree, something else will happen.”
That certainly seems to be a threat as we head into the new year.
Investors would be wise to treat this phase of the market cycle with discipline. The choice is yours.
“The chase returns, and you’ll likely end up paying for it. Manage the risk, and you’ll still be around when the next true bull leg rolls around.“
How to Position for Market Cycles in 2026
I always discuss talking as much as possible “endangered” Access to markets. This is because investors usually interpret such interpretations “Sell everything and go cash.”
While 2026 presents its share of challenges, the solution is not to abandon the market entirely. Instead, investors can take practical steps to navigate these uncertainties.
None of this means the next “Bear Market” Sifting. Statistics show that being overly aggressive, taking excessive risks, and increasing leverage may not produce the desired results. Because very bullish markets are primarily a function of psychology, they can persist longer and extend much further than logic would predict.
The need to “end” such a phase is an external event that quickly turns the psyche into a slump. That’s what happens when there’s a rush to get out, and prices can drop very quickly. Thus, investors need guidelines to participate in the market advance. However, the real challenge is to maintain these gains when reforms inevitably occur.
Positioning for 2026 means respecting our current market position. This is not the time to get bogged down in high beta names or speculative stories. This is a time to manage risk, preserve capital and focus on quality. With presidential and decadal market cycles below average returns, prudence is more valuable than predicted.
- Tighten the stop loss level At the current support level for each position. (The market provides identifiable exit points upon reversal.)
- Hedge portfolios Against major market declines. (Uncorrelated assets, short market positions, index put options)
- Take profit Among the positions that have been big winners. .
- Sell Lagards And losers. (If something isn’t working in a market meltdown, it most likely won’t work during a downturn. It’s best to eliminate that risk early.)
- Collect cash And balance departments to target weight. .
Notice, there is nothing that says, “Sell everything and go cash.”
Investing in 2026 will require a combination of optimism and caution. With slowing economic growth, fiscal policy uncertainty, global challenges, heightened sentiment, and ambitious earnings expectations, investors have several reasons to approach the markets with caution. It will be time to increase the critical cash level. A good portfolio management strategy will ensure that exposure is reduced and cash levels are increased when sales begin.
The most important thing to remember is that market cycles are not about timing. They are about understanding the psychology of investors, the flow of capital and the rhythm of fundamental trends. In 2026, this rhythm suggests caution. Stay fluid. Stay hedged. And don’t forget – every market cycle eventually resets. Your job is to stand still when your job is done.
Remember, like can say,
“You don’t have to be a genius—just don’t be a schmuck.”