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Dear Reader

You’d be forgiven for thinking it’s not the easiest time of year to start New Year’s resolutions and yet, January has a way of bringing renewed motivation and optimism, a chance to reset and start fresh. If only that feeling could be bottled and dispensed all year round.

From an investment perspective, AI-related capital expenditure and infrastructure spending played a considerable role in stock market performance and GDP growth in 2025. Whether we see a meaningful correction may come down to how effectively businesses turn that investment into real-world outcomes higher productivity, lower costs, growing revenue and profits. Ultimately, earnings will need to keep pace with the scale of spending if current valuations are to be justified into the future, 2026 will be a pivotal year.

While the AI investment opportunity is enormous, there are also potential fault lines that could expose cracks in valuations over the year ahead. One of the most talked-about is the circular financing dynamic behind the AI “flywheel”…

For a deeper dive on the potential AI bubble, the Goldman Sach report is available here: ​​AI: In a Bubble​

Given the time of year, there’s no shortage of predictions, forecasts and “best ideas” doing the rounds. So, in that spirit, let’s run a simple experiment.

Below are two heavyweight outlooks from Wall Streets, JP Morgan and Goldman Sachs:

JP Morgan: 2026 Year-Ahead Investment Outlook​

Goldman Sachs: The S&P 500 Is Expected to Rally 12% This Year​

With all the client data, research firepower, and financial resources behind these predictions, it’ll be fascinating to see how they stack up when we look back in January 2027.

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The Folly of Forecasting

As we kick off 2026, media outlets are already flooding our feeds with bold predictions for stocks, bonds, and the global economy. It’s an annual tradition, but before you adjust your strategy based on a headline, it’s worth asking: Why are we so drawn to these forecasts in the first place?​​

Our Brains Crave Predictability

Psychologically, humans are hardwired to prefer certainty over chaos. When faced with an unpredictable future, we crave a sense of control even if that control is an illusion.

Predicting the future, however inaccurately, satisfies our brain’s desire for order. It’s much more comforting to believe a specific "story" about the next twelve months than to admit that many market events are simply random. This is why pundits who make the loudest, most detailed predictions always find an audience; admitting that the future is unknowable is a hard pill to swallow. People don't have time for the person who knows enough to say they don’t know.

When in Doubt Zoom Out

During the next temporary market decline, context and perspective will matter. A falling market can trigger very real panic, fear, and the urge to “do something,” but reacting emotionally often leads to the worst possible outcome: selling quality investments when they’re at rock-bottom prices.

Over 12 months, markets can look scary and unpredictable. Over 30 years, the long-term trend has historically rewarded patience, discipline, and staying invested. Perspective is the key that turns volatility from a threat into something you can endure and even use to your advantage.

If you’re playing the get-rich-quick game, I genuinely wish you the best of luck, you’ll need plenty of it.

A Dismal Track Record

History is a harsh judge of market "experts." Just a year ago, many predicted that 2025 would be a year of negative returns for global markets. Instead, we witnessed significant growth.

This disconnect shouldn't surprise us. Markets are complex adaptive systems. With billions of variables interacting in real-time, "Black Swan" events are inevitable. As Warren Buffett famously quipped:

"Forecasts usually tell us more about the forecaster than of the future."

In other words, a prediction often reveals more about a pundit’s ego or need for engagement than it does about your portfolio’s potential.

The difficulty of predicting short-term returns shouldn't surprise us. With so many variables in play, it is nearly impossible to discern genuine skill from luck over the short to medium term. We often see pundits make a career out of a single 'right call,' but as the saying goes, even a broken clock is right twice a day.

Investor sentiment and future returns typically move in opposite directions. When markets are hitting all-time highs and optimism is everywhere, "high sentiment" signals that prices have become expensive, effectively "pulling forward" future gains and leaving less room for growth.

Conversely, when the headlines are bleak and "low sentiment" leads to a market sell-off, assets often fall below their intrinsic value. While the crowd feels "poor" during these dips, the mathematical reality is that their future return potential is rising.

Why Predictions Fail

Even the most intelligent analysts cannot consistently predict the biggest drivers of market outcomes, including:

Major global events: political shocks, conflict, natural disasters, and economic disruptions

Human behaviour: markets don’t move on logic alone, but on fear, greed, and crowd psychology

Timing and magnitude: even if someone gets the “theme” right, they rarely get the timing right

If a pundit possessed a crystal ball that worked consistently, they wouldn’t be looking for clicks, television appearances, or newsletter subscribers. The fact that they are still working, selling, still shouting for your attention, is the only evidence you need that they are guessing just like everyone else. Make enough guesses and you're bound to be right some of the time.

Navigating 2026 Together

While it’s natural to be curious about the year ahead, we remain focused on what works: a solid, evidence-based investment strategy rooted in scientifically examined historical data.

Focus on the "controllables" the tangible levers that actually determine your financial success: spending, earning, saving, investing and the sustainability of your lifestyle.

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US Dollar Depreciation

If you’ve looked at your portfolio recently and wondered why returns felt a little “light” despite the US enjoying a strong year you’re not imagining it.

The Culprit? The US Dollar

Between January 2025 and January 2026, the US Dollar depreciated by 13.5% against the Euro.

For Euro-based investors holding unhedged US assets, that move can quietly eat into returns even when US markets perform well.

Here’s what that looked like in real terms:

• S&P 500 Return (USD): +17.9% (fantastic year)
• S&P 500 Return (EUR): +4.5% (the unhedged reality)

So while the market delivered strong gains, the currency move did much of the damage for Euro-based investors.

Your Result Depends on Your USD Exposure

This isn’t just about where companies are based, it’s about the currency exposure underneath the investments.

For example:

• S&P 500:100% USD exposure
• Global Equity Funds: typically 60–70% USD exposure
• Typical 60/40 portfolio: roughly 39% USD exposure

Investors who are “globally diversified” still carry significant US Dollar exposure.

A Stronger Euro Is a Double-Edged Sword

Currency moves work both ways:

Buying? A stronger Euro secures more USD units for every Euro contributed.

Selling? When converting back to Euro, your purchasing power is lower than it was a year ago.

Hedging reduces these swings but comes with a cost. While currency drag feels brutal in a single year, for long-term investors, it often "washes out" over decades.

In 2025, European and Emerging Market equities finally stepped out of the shadow of US underperformance:

European Equities: 16% - 18%

Emerging Markets: 18% - 20%

The Danger of "Winning" Countries - History shows that even the mightiest markets can stall: Japan: After a legendary boom (1950–1989), the Nikkei took 34 years to recover its peak in 2024. USA: The S&P 500 had its own "lost decade" from 2000–2009, finishing flat after the Dot-com bubble and the GFC.

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The K Shaped Economy

In today’s economic landscape, the recovery and growth we’re seeing hasn’t been uniform, it’s K-shaped. That’s economist-speak for a divide in how different groups experience economic conditions: those with appreciating assets are prospering, while those dependent on wages and incomes are falling further behind.

The Two Global Tracks

On one side of the “K,” high-income earners and asset holders, particularly those in the top 20%, have benefited from rising stock markets and escalating home values. These gains boost wealth and, critically, consumer spending through the so-called wealth effect, where higher asset values encourage more consumption even without selling those assets.

Meanwhile, wage earners the bottom 80%, face persistent pressures from:

• Inflation eroding purchasing power
• High interest rates increasing borrowing costs
• Rising housing costs consuming a larger share of income
• Stagnant wage growth in many sectors

This divergence reflects deeper inequality. According to recent data, the top 20% of U.S. earners now account for roughly 63% of all consumer spending while the top 10% alone contribute nearly half of all spending. The economy is increasingly sustained by the spending habits of a relatively small, wealthy segment of the population.

Why Rising Inequality Matters

Wealth inequality isn’t just a social concern, it’s an economic risk. When a large share of consumption comes from a small group of affluent households, broad-based demand becomes fragile. Middle and lower-income households generally spend a higher proportion of their incomes; when their incomes are squeezed, overall spending can falter.

Higher housing costs, especially, have exacerbated this gap. Prosperous homeowners see equity and asset values climb, while renters and first-time buyers find affordability increasingly out of reach, locking them out of wealth creation and amplifying the K-shaped divide.

What Happens If Confidence Cracks?

A critical underpinning of today’s economy is consumer confidence. When households expect stable incomes and rising asset values, they spend; when confidence falls, spending contracts. Recent indicators show consumer confidence has weakened, dipping to levels that historically signal economic caution.

Here’s where the risk intensifies:

For affluent households, a large portion of perceived wealth is tied up in financial markets. A significant stock market correction, especially one that wipes out trillions in equity value, can quickly erode that wealth effect. Economists estimate that a sharp market crash could reduce consumption by several percentage points of GDP, enough to tip broader economic activity into contraction.

Confidence and Spending

Consumer and business confidence are closely linked to financial markets. Declines in equity prices tend to dampen confidence, leading to reduced spending and investment decisions, a chain reaction that can amplify economic slowdown.

Recession Feedback Loops

If confidence collapses, whether due to a stock market crash, real income pressures, or tightening credit, households and businesses typically cut back on spending and hiring. This self-reinforcing cycle can deepen downturns and extend recessions, much like past periods where confidence dropped sharply and spending dried up.

Bottom Line

The K-shaped economy underscores a critical imbalance: rising asset prices are lifting the wealthy, while everyday earners struggle with basic costs of living. When consumer spending is disproportionately reliant on a wealthy minority, the entire economic system becomes more fragile, particularly if confidence falters or markets correct sharply.

Understanding this risk isn’t just academic, it’s essential for policymakers, businesses, and households navigating ongoing inflation, interest rate pressures, and the looming threat of recession.

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Noteworthy

A partial U.S. government shutdown is currently underway after Congress missed the funding deadline for key appropriations. The principal impasse remains funding for the Department of Homeland Security (DHS), particularly oversight and resourcing for Immigration and Customs Enforcement (ICE).

In the wake of the World Economic Forum in Davos, clients interested in deeper context on the US administration’s overarching foreign and national security strategy may find value in the National Security Strategy of the United State of America document released in November 2025.

In the United States, political focus on interest rates has intensified as policymakers seek to ease housing affordability pressures ahead of November's midterm elections and reduce the rising cost of servicing a rapidly expanding national debt. While lower interest rates would provide short-term relief to households and the federal budget, sustained political pressure on the Federal Reserve risks undermining its independence, a cornerstone of long-term economic stability.

History shows that attempts to use monetary policy or economic growth alone to offset persistent fiscal deficits are unsustainable and often lead to higher borrowing costs and policy missteps. In practice, U.S. Treasury markets often act as the ultimate constraint, reacting swiftly to signs of policy overreach and forcing correction when investor confidence deteriorates.

The 2026 IPO pipeline is poised for several high-profile private companies including, OpenAI, Anthropic, SpaceX, Stripe, Revolut and Monzo, widely anticipated to consider public listings in the coming year, a timely reminder that capital markets reflect the full business lifecycle: rising listings on one end, and rising bankruptcies on the other.

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📚 Recommended resources 💡

JP Morgan Guide To The Markets (EMEA Monthly):

​JP Morgan Guide to the Markets EMEA 31th December 2025.pdf​​​​​​​​​​​

Book recommendations:

Poor: Grit, courage, and the life-changing value of self-belief by Katriona O'Sullivan

Amazon

Dynasty: Scandals, Triumph, Turmoil and Succession at the heart of Dunnes Stores by Matt Cooper

Amazon

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If you’d like support with personal finance education, coaching, advice, or financial technology, I’d be delighted to help, you can reach me using the contact details below.

If you found this month’s newsletter useful, please feel free to share it with family, friends, or colleagues who might also benefit. As always, constructive feedback is very welcome. If there’s a personal finance topic you’d like me to cover in a future edition, just let me know.

Until next month.

Kind regards,

Ken Mason CFP®

Certified Financial Planner™

Tel: (01) 539 2670

Mobile: 083 803 2008

Email: ken.mason@vantagefp.iewww.linkedin.com

Vantage | Master Your Money, Your Way.

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