For the first time in at least 50 years, both gold and stocks experienced huge gains at the same time.Mike Groll/The Associated Press
This was the year when everyone, everywhere, made money. In fact, if you had celebrated New Year’s Day 2025 by downing a few cocktails, throwing darts at a map of the world and then buying stocks wherever they landed, chances are you would have done magnificently.
In Canada, the S&P/TSX Composite Index TXCX rocketed to a 31-per-cent total return. In the United States, the S&P 500 index INX surged to a 12-per-cent return. In Europe, the S&P Europe 350 index EQE-F-NE rewarded investors with a hearty 28-per-cent gain.
Chinese and Japanese stocks, as well as emerging-market equities, spat out returns of 20 per cent or more. Some specialized investors did even better than that. Gold soared 60 per cent while silver more than doubled.
It was a remarkable year and investors have every right to rejoice in their gains. But the lavish returns of 2025 raise a natural question: Can the stock market stage an encore in 2026?
Maybe so. Wall Street, in particular, seems confident that more double-digit returns lie just around the corner. The average forecast from nine major investment banks is for the benchmark S&P 500 index of big U.S. companies to score a 10-per-cent gain in 2026, according to a recent Financial Times survey.
Much of this bullishness stems from the frenzy around artificial intelligence. No surprise there. The AI stampede is driving an epic boom in everything from microchip production to data centre construction.
More mundane factors also look encouraging, especially in regard to the U.S. economy. Falling interest rates and sliding oil prices will probably give U.S. consumers and businesses more money to spend in 2026. So, too, will the tax cuts in Donald Trump’s One Big Beautiful Bill Act, as well as the wealth effect from stock market gains.
It seems nearly churlish, therefore, to point out reasons for caution. But let’s do so anyway, if for no other reason than to remind ourselves that stocks don’t always go up like they did in 2025.
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One excellent reason to be at least somewhat wary heading into 2026 is valuation. U.S. stock prices look astonishingly expensive on whichever metric you care to use. Canadian stock prices also seem to be getting rather pricey.
The simplest way to demonstrate this is to compare current share prices with corporate revenues over the past year. This price-to-sales comparison sidesteps any potential accounting trickery that might inflate profits. It focuses instead on just two simple and transparent numbers: how much stocks are selling for and how much money companies are taking in.
In both Canada and the United States, the price-to-sales ratio is at its highest in at least 20 years. Other time-honoured yardsticks – price-to-earnings ratios, price-to-book ratios, equity risk premiums – tell similar tales. To put it bluntly, investors are paying jaw-dropping amounts for stocks.
They are doing so despite the massive uncertainty around AI. It’s possible that the new technology will revolutionize society as some proponents predict. It’s also possible that it will turn out to be an expensive detour, like the virtual-reality craze that swept through the tech industry a couple of years ago.
For now, AI’s real-world payoffs remain slippery and elusive. Much depends on whom you ask. In July, a study from researchers at the Massachusetts Institute of Technology found 95 per cent of organizations are deriving zero return from their investment in AI initiatives. A few weeks later, a study from the Wharton School of Business found that 75 per cent of businesses are deriving a positive return from their generative AI projects.
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So go figure – and then figure some more because even if AI does begin to deliver a torrent of practical payoffs there are big questions over who, if anyone, will make money from it. As a host of companies vie for a piece of the market, new generations of chatbots might well offer increasingly powerful performance for less and less money. The economist and pundit Noah Smith recently raised the possibility that AI will turn out to be like the airline industry – huge and important, but not all that profitable.
If you feel confused about where all this is headed, join the club. One final reason for caution about the market in 2026 is that buyers are showing a distressing lack of discrimination. They are snapping up all types of assets. It’s difficult, though, to discern what their underlying thesis is.
Gold’s meteoric ascent this year offers a case in point. Typically, gold is a defensive asset that shines when the future is uncertain. It does well when stocks are on the ropes, then loses its lustre as optimism grows.
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Not this time, though. In 2025, for the first time in at least 50 years, both gold and stocks experienced explosive gains at the same time. “This is at odds with the historical pattern of lacklustre gold performance during risk-on phases” for the stock market, the Bank for International Settlements pointed out in its quarterly review, published this week.
The BIS, an international organization of central banks, speculates that the appetite for precious metals “may underscore market participants seeking at least some safe asset exposure in the event that things turn sour.” Then again, it acknowledges that gold’s big rise may simply reflect investors chasing whatever is going up in price.
Right. So gold may be going up because people are turning cautious. Or it may be going up because they’re rushing to embrace risk.
In today’s manic, exuberant, everyone’s-a-winner market, both of these contradictory explanations seem plausible. It’s precisely that lack of a coherent narrative that should give investors some second thoughts about what lies ahead. We should all hope for a profitable 2026. We should also brace for the possibility of something else entirely.