Strategist who nailed stocks, bonds and oil this year warns of ‘optimism shakeout’ in early 2026

2026 could bring some exciting AI developments that help the bull market broaden out, says strategist Warren Pies. - MarketWatch photo illustration/iStockphoto

Stocks, bonds, oil. Strategist Warren Pies has made accurate calls on all of those this year, with his 6,800 forecast on the S&P 500 made last December looking pretty good heading into the final days of 2025.

In our call of the day, the founder and portfolio manager at 3Fourteen Research talks to MarketWatch about the year ahead, with one big observation: “I think the average investor is too hung up on this market being overvalued.”

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First, his calls. Last December, Pies predicted an S&P 500 SPX correction in the first half of 2025 on stretched sentiment — that arrived in April. He had dropped to a benchmark weight on stocks in February, then overweight in May, back to benchmark in late July and returned to an overweight just before Thanksgiving.

While they missed out on some of the autumn stock run, Pies said “the key is we never went underweight.”

He said they also accurately predicted between three and four Fed rate cuts this year — the fourth is likely to come next week, and were bearish on crude all year, expecting it to break down, creating an “inflationary tailwind.” Again he was right.

But Pies said the most important thing that got the direction of the bond market right this year, forecasting a 4.8% yield reached in January on the 10-year Treasury note BX:TMUBMUSD10Y would mark a high, and it would drop below 4% in the second half.

“And I think that if there were people who were worried about the market this year, they were most worried about the bond market selling off in hurting stock markets,” he said.

Pies, who invests his own money and manages the $225 million SMI 3Fourteen Full-Cycle Trend ETF FCTE and around $500 million for the SMI 3Fourteen REAL Asset Allocation ETF RAA, believes bullish stock momentum from the end of this year will likely carry on until the start of next year.

But like last year, he worries there’s far too much optimism headed into 2026. “I don’t know that we need as severe a correction in the first half of next year as we got last year, but I think we’ll need something to shake out the optimistic sentiment in the first half of the year,” he said.

He acknowledges a bear case is tough, given prospects for a dovish Fed and general earnings and economic optimism. He thinks the Fed and other policies will help smooth out an uneven K-shaped economy, which appears to be disproportionately favoring wealthier Americans over lower income households.

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Pies also doesn’t share valuation fears, noting estimate for profit margins to rise by 180 basis points through 2027. “When margins are rising, you don’t see in general multiple contractions,” he said.

He also doesn’t share worries about high relative valuations of the S&P 500, arguing the composition of the market has changed to mature tech companies with higher margins. He explains that when margins rise for a cyclical business such as an oil refinery, it’s given a lower multiple because those rising margins are a cyclical phenomenon.

“When as a whole, the main composition of the market switches to nontypical, mature tech like we see right now, higher margins result in much higher multiples,” he said.

He said they wrote last year that the S&P 500 would reach 7,000 in early 2026 and still not be overvalued. If the bull market can expand out, he expects the S&P 500 SPX could clear 8,000 within the next 15 to 18 months, and “it still would not be overvalued under our assumptions.”

How will it broaden? He doesn’t expect market leadership will shift away from the tech pockets but more stocks will be “moving along for the ride.”

He expect the first beneficiaries will be higher-quality, larger-cap, non-tech stocks, such as Walmart WMT, Costco COST and McKesson MCK. “Those stocks with relatively narrow margins are the best examples of a place for AI to show up first,” because AI adoption rates are much higher in larger companies, he said.

What the bull market also needs to broaden is for AI adoption to pick up next year. He expects to see AI advancements outside of technology, such as breakthroughs in the healthcare and pharmaceutical spaces, like drug discoveries.

“I think there are real enterprise uses of AI that you will see show up next year,” he said.

The markets

U.S. stocks SPX DJIA COMP are little changed, with gold GC00 and silver SI00 slipping while bitcoin BTCUSD has slipped below $93,000.

Key asset performance Last 5d 1m YTD 1y S&P 500 6849.72 0.54% 1.93% 16.46% 12.75% Nasdaq Composite 23,454.09 1.03% 1.74% 21.46% 19.05% 10-year Treasury 4.085 8.60 -0.30 -49.10 -9.00 Gold 4215.4 0.56% 5.79% 59.72% 58.77% Oil 59.36 0.46% -0.29% -17.41% -13.28% Data: MarketWatch. Treasury yields change expressed in basis points

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The buzz

Following Wednesday’s surprising jobs drop in private-sector payrolls, weekly jobless claims fell 27,000, the lowest reading since Sept. 2022. Ahead of that, outplacement firm Challenger, Gray and Christmas said U.S.-based employers announced 71,321 job cuts in November, a 24% gain on the year earlier, but 53% less than October.

Meta shares META are jumping 6% after Bloomberg reported the tech giant will make cuts of up 30% linked to its metaverse buildout. Separately, the EU is investigating Meta META over its AI policy for WhatsApp.

Dollar General DG is up over 3% after the cut-price retailer posted an earnings beat and lifted guidance.

UiPath stock PATH is up 9% after the automation platform provider posted stronger revenue than forecast.

Salesforce shares CRM are rising after the software group lifted its forecast and cited momentum for its AI products.

A dazzling stock this year, Snowflake SNOW is falling 8% after the data-warehousing software group reported slowing product-revenue growth.

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The chart- Source: J.P. Morgan Equity Strategy & Quantitative Research

This JPMorgan chart shows how retail investors had the edge over markets this year. The analysts split out the ETFs that they deduced retail investors put their money in. “In ETFs – which represented 75% of retail’s invested dollars this year, retail investors outperformed both SPY SPY and QQQ QQQ, thanks to their larger tech bias and successful risk-taking in precious metals during the September and October gold rush,” they said.

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