We start this edition of Market Factors with a warning about equity returns for both the near and medium term. The next section outlines the best indicator to watch as 2026 approaches, and the diversion highlights a research report on knowledge levels and conspiracists.
Traders work on the floor of the New York Stock Exchange on November 21, 2025 in New York City.Spencer Platt/Getty Images
Outlook
Investors in risky stocks have one eye on the exits
The onslaught of 2026 market outlook reports suggests that Wall Street has already switched focus to January, but at least one strategist sees a “precarious” risk for the next five weeks.
JPMorgan cross asset strategist Fabio Bassi is concerned about crowding in high beta stocks – those that move five per cent, for instance, when the index moves one per cent - and how that may end abruptly if overall market volatility continues. He writes, “the reversal of long high beta, such as second order AI, vs. short low vol remains a precarious risk in the short term as investors may de-leverage gross exposure into year-end.”
Mr. Bassi’s framing of his unease, in terms of the pair trade, is interesting. The potential unwind of the long high beta/short low vol involves both selling of high-risk stocks and the buying of low volatility companies in sectors like consumer staples, health care and utilities. This makes it easy for us to follow the potential trend as drastic outperformance of low volatility sectors amid overall selling would make the unwind obvious.
As an aside, previously I would have listed telecoms among low volatility stocks. But, there’s so much going on in terms of content, streaming and competition that I’m not sure they fit anymore. Domestically, I note that Telus Corp. stock hit a 52-week low on Monday.
The JPMorgan strategist is generally constructive on markets for the medium term, expecting the recent strong profit results from Nvidia Corp. to translate into solid returns from the broad AI complex. Importantly, Mr. Bassi sees less support from Federal Reserve rate cuts next year (relative to 2025), which means narrow market leadership and even more investor concentration into large-cap technology stocks.
This sounds to me like a recipe for investor heartbreak. The strong implication that investors in high-risk stocks have their eyes on the exit, and after a brief hiatus in low volatility stocks (to cover the pair trade) asset flows will be directed into already-expensive megacap tech stocks, makes Mr. Bassi’s use of the word precarious very apt.
To make matters potentially even wobblier, Citi’s top U.S. equity strategist Scott Chronert described the virtual end of the Magnificent Seven in a Friday research report. The seven stocks are no longer moving together - Nvidia and Google have pulled away from Meta Platforms, Tesla and Amazon.com. The potential problem here is that assets will all flow into three companies instead of seven: Nvidia and Alphabet and potentially Apple Inc.
I might just be in a bearish mood but I’m tempted to reduce risk in my portfolios. The longer technology leads the market, and leadership narrows, the more nervous I will become.
Economy
U.S. growth even more important than usual for markets
I’ve been reading the year ahead prediction reports as they’re published. Some, like Morgan Stanley’s Michael Wilson, are bullish and others, like RB Advisors’ Richard Bernstein, urged investors to play defense. I have yet to see a compelling argument either way.
For me, the year will come down to U.S. economic growth – indications on the labour market have been weak of late – and the cyclicals versus defensives index is the way I’ll be following this.
AI-focused technology stocks will continue to lead as long as growth remains weak, in my opinion. Earnings growth will be scarce outside of the AI beneficiaries in a weak economy. Improvements in economic data, on the other hand, will see investment assets flow from expensive tech to economically sensitive sectors like banks, industrials and consumer goods.
Diversions
Conspiracy-minded have lower knowledge base
The Dunning-Kruger experiments underscored humankind’s propensity to overestimate their intelligence and a study by professors from the University of Colorado, Portland State University and Brown University took things further. (Thanks to the Marginal Revolution site for tipping me recently to the research)
The study concluded that anti-consensus views are generally held by people overestimating their knowledge levels. The experiments underpinning the results avoided the problem of merely claiming that anti-consensus views are automatically wrong and signal low knowledge by giving test subjects a quiz on non-controversial topics first.
The questions in the quiz involved questions like “The oxygen we breathe comes from plants” and “all insects have eight legs” where the answers are irrefutably proven. The overall results from the study found that those with more wrong answers on the original quiz were more likely to hold non-consensus (or to define it a different way, anti-expert) opinions.
The essentials
Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.
Globe Investor highlights
The Globe’s Joe Castaldo does a deep dive into the AI bubble, and how it may pop
Northland Power has traded the size of its dividend for the promise of growth. David Berman sees a possible investment opportunity
Tom Bradley sees a lot of reasons not to cheer for private equity coming to the investing masses
Ken Fisher answers some key questions from investors right now
Quick hits
Oracle Corp., thanks to debt funded AI-related spending, has seen the cost of its five-year credit default swap triple since the end of June (.3682 per cent to 1.1086 per cent). If I have to keep following CDS prices my financial crisis-related PTSD is going to kick in.
There aren’t any sectors I’m really excited about at the moment. Natural gas is closest, copper next (although I already own First Quantum), I’m always up for a cheap health care stock and if peripheral plays on the AI theme like Corning Inc., Dell Technologies, or Datadog Inc. get really, really cheap I might take a punt. Datadog is trading at 483 times trailing earnings so i might have to wait a while.
I don’t normally follow consumer sentiment surveys – they are historically not consistently correlated or uncorrelated with future equity market returns – but the U.S. surveys are starting to indicate extreme grumpiness. The University of Michigan survey regarding current economic conditions hit a 70-year low on Friday.
See our full earnings and economic calendar here