Updated 2026 outlook: after a positive January, where now for stock markets

​​​Mid-term years historically poor

United States (​US) stocks tend to operate in the four-year presidential cycle. Of these four years, the second year (the ‘mid-term election year’) is the weakest in terms of price returns, up just 4.6% on average, compared to 7.9% for Year 1, 17.2% for Year 3 and 7.3% for Year 4.

​In addition, only just over half of mid-term years have been positive for the US stock market since 1950, whereas Years 1, 3 and 4 have much stronger track records.

​Many will remember 2022, the most recent mid-term year. This was a very poor one for financial markets, as rising inflation, higher interest rates and concerns about elevated valuations drove a sustained bear market for most of the year. In that year, the S&P 500 fell 19%, its biggest one-year loss since 2008.

​Positive January bodes well for the year

​There is reason to be hopeful, however. The ‘January’ barometer is a remarkably effective indicator of how a year will perform. A strong January usually leads to a strong year overall. Since 2000, the S&P 500 has, in price terms, returned an average of 7.7% per year. But this rises to 12.46% in years when January is positive.

​By contrast, since 2000, a negative January leads to a return for the full year of 2%. The difference is stark:

​Current macro outlook

​The macro backdrop remains supportive for equities despite the strong run. Inflation is easing across the US, United Kingdom (UK) and Europe, giving central banks confidence that rate hikes are finished and cuts are likely later in 2026.

​That shift has reduced downside risks to growth and improved visibility for earnings. The days of worrying about aggressive rate hikes are over, at least for now.

​Economic data have been mixed but resilient. The US economy continues to grow above trend, labour markets are cooling without cracking, and consumer spending remains robust.

​European growth is subdued but stabilising. China is benefiting from targeted policy support rather than broad stimulus. This "slowdown without recession" narrative remains constructive for risk assets.

​Falling bond yields and a softer US dollar are helping as well. Lower real yields improve equity valuations, particularly for growth stocks, while a weaker dollar supports global liquidity and commodities.

​Corporate balance sheets remain solid. Earnings momentum in technology, energy and financials continues, providing fundamental support beneath the market moves.

​The macro environment still provides a reasonable foundation for further equity gains. Volatility will remain elevated, but the fundamental backdrop hasn't deteriorated.

​Even with its high valuation of 26 times earnings, the S&P 500’s high profitability compared to other global indices continues to provide a favourable outlook.