Investing in 2026, Opportunities & Risks Part 2 of 2

All right, so hello everyone, and welcome to this video on investing in 2026. What are the opportunities and the risks? So this is part two of a two-part video. Now, if you have not watched part one, go watch part one before watching part two. In part one, I talked about reasons to be bullish in the coming year. So in summary, there are six tailwinds that should drive the market higher next year. Number one, U.S. economy remains strong and projected to grow next year. Number two, the Fed is in the process of cutting interest rates and they've ended quantitative tightening that increases money supply. Number three, S&P 500 companies are performing better than expected, expected to grow their profits at 15% next year. As AI adoption increases, that increases earnings growth and profit margins. Number four is the one big beautiful bill that does a lot of deregulation and there's gonna be a lot of tax cuts to corporates as well as consumers. That would create more consumer spending and companies would have more earnings as they write off more in taxes. Number five, the yield curve is upward sloping. That's very bullish for the market and the 10-year yield is just below 4.2%, which is a sweet spot. And finally, we talked about the fact that the market is on a very clear uptrend and we are entering, or we are right now in the fourth year of the bull market, which has traditionally been a pretty strong year. Now again, as we know, we can't just look at the positives. We have to look at the negatives. So in this video, let's take a look at the bearish thesis. What could go wrong and what are the risks and the threats that we need to pay attention to? So there are basically six risks to the market or six reasons people say the market will go down, right? So let's tackle them one by one. Number one, this argument has been going around for quite a while. A lot of people are saying that the stock market is overvalued, it's expensive, it's a bubble, it's gonna burst. And people are still saying that, right? Number two, the labor market is weakening. So the recent report showed that the unemployment rate is now at 4.5%, which is actually been growing steadily. So that's a concern. Number three is what if inflation resurges as the Fed cuts interest rates and with tariffs still there, if inflation goes back up and the Fed is forced to raise rates again, oh, that would probably cause another crash, okay? Number four, we know that right now the Supreme Court of the US, SCOTUS, is now going through the tariffs imposed by the Trump administration last year and they're gonna rule whether it is illegal. Now, if you look at polymarkets, a lot of people are now predicting that they are gonna rule the tariffs as illegal. And if it's illegal, the government may be forced to refund billions of taxes it has collected and that would not be very good because if they refund all the taxes, then the debt burden of the government gets even worse. People lose confidence, they sell bonds, and the 10-year yield may spike up to dangerous levels. So that's something to be concerned about. Number five is the uncertainty over the Fed Chair independence. So Fed Chair Powell will be retiring next year and Trump is already saying that I want a new Fed Chair that will listen to me, he can't go against what I want and I want him to cut interest rates to 1%, all right? So there could be concern that if the Fed is no longer independent, creates a lot of uncertainty, that could tank the markets as well. And number six, next year will be the midterm elections, which will happen in November. And the market is pricing in the fact that the Republicans will probably lose the House, the House will go to the Democrats, but they'll retain the Senate. So usually before the midterms, the uncertainty causes a lot of choppiness in the market. But once it is resolved, once the elections are over, the market usually will rebound a lot higher after that. So let's analyze these points one by one and let's see if they hold any water and which are the ones that we need to really be wary about. So first one would be market is overvalued. So people will say that, why do they say that? Because they look at certain metrics like the P-E ratio. And they say the P-E ratio is high based on historical averages. You've heard that argument many times. Now, currently the forward P-E ratio of the S&P 500 is at 21.8 times forward earnings. So how does that compare? Well, in the last five years, the average was 20 times earnings. And in the last 10 years, the average was 18.7 times earnings. So yes, based on five to 10 year average, the current forward P-E ratio of the market is higher than the average. But is it at extreme highs? Not really. In fact, it was a lot higher over here back in 2020. In fact, the market is so-called cheaper today on a forward P-E than it was five years ago. But as you guys know from my videos, P-E ratio by itself is very meaningless because it doesn't take into account the growth of the earnings. So remember that a stock with a P-E of 30 could be cheap if the earnings are growing at 20, 30%. But a stock with a P-E of five could be expensive if the earnings are not growing. So P-E by itself is quite meaningless. We have to look at the P-E versus the growth of the earnings. So what is more accurate, I keep saying, is to look at what is known as the PEG ratio. The PEG ratio is the P-E ratio divided by the growth of the earnings. This gives you a better valuation perspective, right? So as of December, 18th of December, you can see the PEG ratio of the S&P 500 is at just about 1.2 times. Is that high? No, you can see that it was at two times over here. This was back in 21, 22, 23. It was at over 2.4 times here. It was higher here. So if you look at a PEG ratio, the market is not at all that expensive if you factor in the growth of the companies, and the companies are growing a lot faster today than they were five, 10 years ago. So that kind of throws that overvalued argument out the window. But I've got more, and I've showed you this before, but just to reiterate, this is not a bubble because, again, the dot-com bubble, which I went through as an early investor, we saw share prices go up, but the company's profits were nowhere near the share price. So that is called a bubble. Eventually, prices will come back down to reality, to the fundamental valuation, all right? But today, you can see, yup, share price is going up in brown, but the earnings of the company are going up in sync with the price. So this is not a bubble. Now, some people argue that a lot of these earnings of the companies are coming from AI CapEx expenditure, and they're spending so much on CapEx, are they spending too much, and is it gonna slow down? Well, again, if you look at history, no, because if you look at AI CapEx as a percentage of GDP, it is currently only 1%. And if you compare this AI revolution, CapEx build-out to previous CapEx build-outs during the US telecom boom in the 1990s, the US ICT hardware boom, US electric motor boom, auto infrastructure, railroads in the 1860s, you can see as a percentage of GDP, it was a lot higher than AI CapEx spending today. So in other words, if you look at AI CapEx spending, it is still a very, very small percentage of the GDP. So to, in my opinion, I think that we're just at the early stages of this AI CapEx build-out. We are nowhere near the late stages at all. And again, the most accurate thing to do is to take a bottom-up approach to the market, which means we value the individual companies that make up the S&P 500. So how do we value the companies? Depending on the type of company. If the company has consistent growth in cash flow, we use a DCF method. We use a discounted free cash flow valuation method. If it's a bank, we use a mean price to book ratio to value it. If a company has got inconsistent cash flow, but consistent net income, we use a discounted net income valuation method. So with Stock Oracle, as you guys know, most of you are using Stock Oracle, it uses the best valuation method depending on the type of business. So using Stock Oracle, you can see that out of the S&P 500 companies, are they all expensive? No. So how many are very expensive? About 23% of stocks are very expensive, which means they're selling over 30% above their intrinsic value. And 17% of stocks are overvalued, which means they're selling between 10 to 30% above their valuation. And we've got about a third of the stocks in the index that are fairly priced, selling between plus minus 10% of their fair value. But we also have got a lot of good companies that are cheap right now, that are undervalued. We've got 22.4% of stocks undervalued, by more than 10%, and 6.8% of stocks that are very undervalued by more than 30%. So again, in this market, there are still good companies that are selling at bargains. So what are some of these companies? Well, here's a sneak peek, you can see that you've got companies in the industrial sector, which are undervalued or very undervalued. So example, the Copart. Copart's a great compounding business that is currently undervalued. You've got software companies like Salesforce that are undervalued. You've got healthcare companies like UnitedHealth that is still undervalued. You've got technology companies like Mac Seven, some of them are undervalued, like Meta is undervalued after the recent pullback. We've got Microsoft is undervalued. We've got Essential under the technology sector, which is undervalued. We've got ServiceNow, which is undervalued. So quite a number of high quality companies are undervalued and some of them are fairly priced, like Amazon, like Broadcom, for example, like MasterCard, like Lockheed Martin, and even Alphabet is fairly priced right now. And Nvidia is also fairly priced, S&P Global, some of these great companies are underpriced. Now, if you're wondering the color coding, green means wide economic mode. They've got sustainable competitive advantage that protects them from competition for at least the next 20 years. The ones in yellow have got a narrow economic mode. They've got a competitive advantage that should protect them for at least 10 years. And the ones in red, they don't really have an economic mode. Although the earnings can grow right now, the stock price can still go up a lot, but in the long term, they could be more easily disrupted by competition. Hence, red means easily disrupted in the future, but it doesn't mean it can't go up right now. It could still go up. So there are some stocks that are in red that I may buy, but I don't buy them as an investment. I buy them more for a medium term trade or short term trade, usually using options, or I may enter the stock itself, but I have a stop loss in case it reverses because the ones in red are more risky. If they drop, they may not come back, but the ones in green, when they drop, I've got high confidence that they'll always go higher. It's a matter of time. It's a matter of patience. And the ones in yellow are pretty durable as well. So that's the first bearish reason that I have discounted. Now, the second reason to be bearish is that the labor market has been weakening. So some of you will notice that the last data point showed that the US unemployment rate has actually been creeping up quite a bit in the last two years, and now the unemployment rate is above 4.6%, which is a four-year high. Now, is this something to be worried about? And does increasing unemployment rates signal a potential recession? The answer is yes, historically. So historically, when the unemployment rate goes up, it's a leading indicator of recession. However, this time it's a bit different. I know that sounds very cliche, but this time it's a bit different. Why? Because for the first time, we have got GDP growing and unemployment rate also growing. So this is called a jobless economic growth. So why is this happening? So the reason this is happening is because companies are not hiring as much people to grow because they don't need to. In the past, you needed to hire more people to grow, right? Now companies are figuring out that I don't need to hire more people to grow because I can grow with automation, with AI, with technology. So they're hiring slower, and some are even retrenching, especially the tech companies. So to me, this is not a cyclical issue as in the past. Now cyclical means that the unemployment rate goes up, recession, and then unemployment rate goes down, boom, it is cyclical. But it seems that now it's a structural shift. So structural means it is a kind of like a permanent long-term change in the unemployment rate. Why? Because of artificial intelligence. So agentic AI is automating entire workflows in many industries like finance, like law, like encoding in IT companies. So companies are able to increase their output. They're able to sell more products and services without adding more employees. So this chart shows you clearly that, if you look at in the 1990s, for example, a company in the S&P 500, they needed six workers for every million in revenue. If I wanted to get another one million, I needed to hire six more people, right? But I can see that over time, you need less and less people for every million in revenue generated. In fact, currently you can see that right now, on average, you only need two people for every one million in revenue generated, okay? So that's why companies are now figuring out that, hey, we don't need so many people anymore. We have got automation, we've got AI, and that's a structural shift. And if you look at unemployment, it is concentrated in certain parts of the economy. It's concentrated right now in entry-level, white-collar roles that are easily replaced by AI. And technology-exposed sectors like customer service and administrative support. And unfortunately, yeah, it's towards the younger group, 20 to 25 years old. And this 4.6 unemployment reflects a skills mismatch in the short term. Why? Because the jobs being created by AI, by the way, does AI create new jobs? Yes, it does. So the new jobs being created are AI auditors, energy grid engineers. So these new jobs are not being filled by the people being displaced because they have not yet learned AI to fit into the AI economy. So the clerical staff, the junior developers, they can't fill the new roles. So what's the lesson? Is this good or bad? Well, it is very good if you own a business. It is very good if you're an investor because it means that you're gonna make more profits with less people. You have got more profit margins, but it's bad if you are an employee who doesn't know AI. So the old saying goes that AI may not replace you, but someone who knows AI will replace you. So it's imperative that we all have to upscale, upscale ourselves with the AI knowledge. That's why my elder daughter, she just graduated from university with a Bachelor's in Communication. And before she starts working, she's now taking a six-month AI course from the SMU, Singapore Management University, Certification in AI. Because I told them, I said, unless you are AI trained, you're not going to be able to get a job very easily in the industry today. So you gotta do that. Now, one piece of good news is that those people who are employed have seen real wage growth. So you can see that this is real wage growth, which means to say after you take away inflation, which means the wage growth above inflation, you can see has been increasing. So now those people who are employed are getting paid more, they are paid more, they can spend more, and so consumer spending is up 3.5% in the last month, and that, sorry, in the last quarter, sorry, and that's been driving GDP growth. So what happens when companies require less people to produce more goods and services? Their profit margins increase, because labor is one of the biggest overheads of a company. And sure enough, you can see that the profit margins of the companies in the S&P 500 have been increasing very steadily, and now is projected to expand to 15.5% by 2027. And this is good news if you own these companies. That's why I say you have to be an asset owner. You can't be rich being an employee anymore. You can only be wealthy and secure if you own assets in this new AI economy and AI world, okay? So that's the second thing. Now, the third thing is the resurgence of inflation. Is that something I'm concerned about? Yes, I am concerned about it. Now, the good news is that inflation just came in lower than expected at 2.7% in November, and it's the lowest since July. Now, of course, there are arguments that the government was shut down, so many of the components of the CPI were missing. So they're saying that, oh, this is a bullshit report. Maybe, yeah, maybe. So something to be worried about. But the fact is that the reported CPI, Consumer Price Index that measures inflation, has been falling, and Core CPI has been falling as well. And of course, Trump says there's no inflation, man. Okay, to me, that's a bit of bullshit. There is inflation. It is higher than the 2% target, but it is on a downtrend. Now, of course, if inflation resurges in 2026, and the Fed is forced to raise interest rates, then yeah, that could cause a big correction or bear market, all right? So something to be worried about. Now, is that something that I can predict? No, I can't. I wish I could. I just can't, but something to be worried about, yeah? Now, the other thing is that in June next year, the Supreme Court will rule whether Trump's tariffs have been illegal, and there's a high chance that they will rule it illegal based on polymarket betting odds. And if they do rule it illegal, and if the government is forced to refund the billions of dollars, that could cause short-term market volatility. That could cause the bond market to sell off, the treasury bond market to sell off. That could cause the 10-year treasury yield to spike. That could cause a short-term pullback in the markets. Now, is that something I'm concerned about? Not really. As a long-term investor, if that happens, I'll use it as an opportunity to buy great companies if they're selling at big discounts during this panic selling. If it happens in June, okay? Next would be the uncertainty over the Fed Chair Independence. So, Jerome Powell will be stepping down in May. And in January next year, Trump said he will name his successor. And he said, I want someone who listens to me. I want someone who will not go against me. I want someone who will slash interest rates to 1%. Now, what happens if that happens? I have another video coming out to talk about what happens if the Fed slashes interest rates to 1%, okay? So, I can tell you that in the first half of next year, because of these uncertainties, which is the tariff being ruled illegal because of the Fed Chair being changed, that could cause more choppiness or turbulence in the market before June next year, which is the first half, all right? So, something to be wary about. But again, as a long-term investor, that's good because if the market goes down, I buy more, all right? Okay. And then in November, early November, we've got the midterm elections uncertainty. And as I said before, usually what happens just before the midterms, again, the market gets very choppy again. But if the Democrats win the House and the Republicans hold the Senate, and of course, Trump is Republican White House, then it's good for markets because the markets love a gridlocked government. When the government is gridlocked, market does very, very well. So, that could cause a bit more turbulence leading up to November as well. So, speaking of midterm elections, like I said, next year will be the midterm election year where the House and the Senate, many seats are up for elections. So, usually it's the midterm year, which is next year, is it a bullish year? Well, it depends. You can see that if it's a new president, ooh, then it's not very bullish. But if it's a second-term president like Trump, then it is not too bad, right? Historically, it has averaged an 8.8% gain in the market during a midterm year with a second-term president. Okay, so in summary, in summary, part one, we talked about bullish reasons, reasons to be bullish. In the second part, I talked about reasons to be bearish and concerned, and I dispelled a lot of the bearish myths. So, all in all, what do I think about next year? Now, my guess would be, I think next year will be bullish, but I don't think we'll get another double-digit gain in the S&P 500. I think that the gain will be a single-digit gain. But despite that, despite that, could I and you and my students get a double-digit gain of more than 20%? Yes, we could, even if the S&P's single-digit. Why? Because by picking the highest-performing companies that are undervalued, we can outperform the market significantly. Plus, if we add on options trading, swing trading, we can definitely beat the market by a wide margin. And I'll create another video talking about that in a short while, right? So, next year, moderately bullish, but again, remember, will the market go up in a straight line next year? No, it doesn't go on a straight line, right? So, expect there will be ups and downs. Now, if you take a look at this table, you can see that historically, every year, the market will drop about 5% or more at least three times every year. This is going back since 1951. Now, what is this called? This is called a pullback. When the market drops less than 10%, it's called a pullback. If the market drops 10% or more, that's called a correction. This is called correction, and this happens at least once a year. And the market, if it drops 15% or more, that happens once every three years, that's a big correction. And if it closes 20% or more below the high, that's called a bear market, and that happens usually on average once every six years. So, it will happen, yeah? Now, recall that in 2025 this year, the market is ending up about 17%, which is a pretty good year, right? 17%, but it was not a smooth ride, right? It was not a smooth ride. We didn't go up in a straight line. We didn't go up every day, every week, every month, right? We had a lot of choppiness. So, if we take a look at this year, we had how many pullbacks? More than usual, right? We had actually one, two, three, four, five, we had six pullbacks this year, which is considered more than normal. So, again, a pullback is bigger than a 3% drop, but less than 10%, it's called a pullback, right? So, we had dropped 4.4%, 3.3%, 3.3%, 3.4%, 3.2%, and more recently, dropped 5.7%. And in April, thanks to Trump's tariffs announcement, the market dropped 21%. Now, people say, isn't that a bear market? No, it's not considered a bear market because a bear market is only if the market closes more than 20%, below the high. It touched 21%, but before the end of the day, it closed above that. So, this is not officially a bear market for the S&P 500, although the NASDAQ went into a bear market, the S&P did not, it almost did, it almost did. So, this is considered a big correction. So, this happened this year, do I expect the same thing to happen next year? Maybe, this could happen next year as well, I'm not surprised, right? So, the point is that we wanna buy great companies, but we buy them when people are fearful, we buy them when there are discounts, and there are discounts when this happens, okay? Now, when will this happen next year? I've got no idea, I can't predict when it's gonna happen, but it will happen, it will happen. But my guess is that most of it is gonna happen in the first half of the year because of, again, the Fed Chair uncertainty, because of the tariffs ruling, and some of it will happen just before November because of the midterms. Now, when this happens, guess what? The moment the market drops, I will be buying good companies at discounts, I'll be selling cash-secured put options, taking advantage of high volatility to collect premiums, and put credit spreads as well, right? And once I see reversal patterns, I will then take short-term long trades using bullish synthetic spreads to capture the upside. So, I think that with the right strategy, you, me, we can definitely get another double-digit gain next year. So, some of you may be wondering, okay, so, Adam, which specific sectors or industries or stocks should I look at next year and beyond? I can't cover it in this video, so I'll be coming up with another video in a couple of days, and that video will be on the six megatrends that will mint millionaires. Coming up in the next few days, so subscribe to the channel to be alerted the moment this video hits. May the markets be with you, and I'll see you guys next year. If you wanna catch my latest videos, click on the subscribe button right now, click on the bell so you get instant notifications once I upload my latest video. If you wanna check out my online courses, go to piranaprofits.com. We're gonna learn how to invest and how to trade the financial markets and create an income from all around the world. If you wanna join my live Wealth Academy program, go on to wealthacademyglobal.com and find out more about how you can learn investing and trading live online. This is Adam Koo, and may the markets be with you.