Markets fluctuate between optimism and blindness

It is surprisingly easy today to outline both positive and negative scenarios for the development of financial markets. Not because the future is predictable, but quite the opposite. Markets are at a point where established interpretative frameworks are breaking down and previously reliable rules are losing their predictive power.

One example suffices. The price of gold is at historic highs. This is a classic sign of fear, inflation, or systemic risk. At the same time, however, US stock indices are breaking records, as if the economy were entering a new era of stability and growth.

This growth is driven primarily by technology stocks, which are inherently very risky. Any minor change or problem can significantly knock down the price of these stocks. The contradiction between signals has thus become the new normal.

The choice between a positive and negative scenario is therefore mainly a matter of interpreting the same reality. Just like in the classic image of a half-full glass, markets can be viewed in two ways. Optimists see continued growth and structural opportunities. Pessimists point to the fragility of valuations and the risk of a sudden correction.

Optimistic scenario: sustainability of the current trend

The encouraging scenario is based mainly on the assumption that we will continue to grow. Technical analysis supports this scenario. US markets are on a long-term upward curve and are growing by inertia. For this growth to be disrupted, some truly unexpected bad news would have to come along.

And here's the problem, because even bad news will not disrupt market optimism, but rather strengthen it. Bad news means that the US central bank will have to intervene. It will either lower rates or supply the market with the necessary liquidity. Investors are counting on this.

That is why any decline will be seen by most investors as an opportunity to buy. The fear that investors will miss the boat will ensure that no stock price decline will be permanent. So, it really doesn't take much for an optimistic scenario to unfold.

However, 2026 may not rely solely on the same circumstances as 2025. Next year may confirm that Donald Trump has chosen the right path for the US economic recovery. Tax cuts for American companies are expected. Lower taxes on profits will automatically translate into economic results. Lower corporate income taxes automatically mean higher profits for shareholders. Higher profits will improve stock prices. In addition, the Trump administration wants to continue removing excess regulations. Thanks to cheap energy, the US can expect continued strong growth.

The final factor that could ensure increased profitability for companies around the world is the gradual adaptation of artificial intelligence. This will manifest itself in increased labor productivity in companies. Language models will not be used for employees to spend time asking useless questions or consulting about their health problems, but will use the power of artificial intelligence to solve their daily work tasks. Productivity growth across the entire economy will dispel concerns about the return on astronomical investments in AI. Technology stocks will thus have another excuse for growth in 2026.

Pessimistic market pitfalls in 2026

There are several possibilities for the development of a negative scenario. The first is the return of the debt issue. One of the effects of COVID-19 was an increase in government debt. Before the coronavirus, there was talk that the debt situation was serious and that countries had ten, maybe fifteen years to start seriously addressing the situation. COVID-19 halved this time buffer.

Debt is a ticking time bomb under the financial markets. This is true regardless of whether it is US or French debt, for example. The path to resolving the debt crisis lies in reducing the government budget deficit. Neither the Americans, the French, nor the Japanese are good at saving.

The onset of the debt crisis can be seen in the rise in yields on long-term bonds. We can already see this effect now. Despite the rate cuts in 2025 by both the Fed and the ECB, long-term yields on government bonds are rising. Rising yields could once again send the bond and stock markets into a sell-off.

The second landmine is, of course, investment in artificial intelligence. The big tech companies will continue to increase their investment in AI at such a crazy pace that it will start to show up in declining net profits.

Investors will panic because, although there is speculation that companies such as Oracle are struggling, no one expects large American companies such as Google, Amazon, or Meta to have such high investments in artificial intelligence that it would fundamentally threaten their profitability. A reduction in the margins of technology companies would confirm that investments in artificial intelligence will not pay for themselves in the next five years.

The calculation of risks can be continued. The return of inflation to the US would be a major blow to the markets, as would geopolitical tensions in Asia. The conflict in Ukraine may end next year, but that does not mean the world will be safer.

The war in Ukraine has had a relatively small impact on the markets. Its course was reflected primarily in the commodity market in oil and natural gas prices. However, the clanging of weapons in Asia would be a disaster for the markets. Tensions between China and Japan are intensifying. At any moment, either side could escalate the conflict. A deterioration in security in Asia would be an unpleasant wake-up call for most global stock markets.

The year 2026 will therefore not be a test of economic growth, but a test of confidence in its sustainability. Confidence is a commodity that behaves very strangely in the markets. It disappears without warning. And yet everyone counts on it as if it were going to last forever. Excessive confidence is ultimately just a more sophisticated form of blindness.