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, US economy remains

strong and projected to grow next year.

Number two, the Fed is in the process of

cutting interest rates and they have

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 going

to 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 going to burst.

And people are still saying that, all

right? Number two,

the labor market is weakening. So the

recent report showed that the

unemployment rate is now at 4.5%

which has 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 uh

Supreme Court of the US, SCOTUS, is now

going through the tariffs imposed by the

Trump administration last year and

they're going to rule whether it is

illegal.

Now if you look at Polymarkets, a lot of

people are now predicting that they're

going to rule the 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 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 who say that, why

do they say that? Because they look at

certain metrics like the PE ratio. And

they say the PE ratio is high based on

historical averages. You've heard that

argument many times. Now, currently the

forward PE 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 PE 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 PE than it was

five years ago. But as you guys know

from my videos, PE 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 PE of 30 could be cheap

if the earnings are growing at 20-30%.

But a stock with a PE of five could be

expensive if the earnings are not

growing. So PE by itself is quite

meaningless. We have to look at the PE

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 PE ratio

divided by the growth of the earnings.

This gives you a better uh valuation

perspective, right? So as of December

uh 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,

'20 '22, '23. It was at uh over 2.4

times here. It was higher here. It was

higher here. It was higher here. It was

higher here. It was higher here. So if

you look at the 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 like

throws that overvalued argument out the

window. But I've got more and I've

showed you this before, but just to

reiterate, uh 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, yep, 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

would argue that a lot of these earnings

of the companies are coming

uh from AI CAPEX expenditure and they're

spending so much on CAPEX.

Um

are they spending too much and are they

going to is it going to 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 buildout to previous

CAPEX buildouts during the US telecom

boom in the 1990s, the US ICT hardware

boom, US electro 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 are just at the early stages of

this AI CAPEX buildout. 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

uh 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 bargain. So what are

some of these companies? Well, here is a

sneak peek. You can see that uh you have

got companies in the industrial sector,

uh which are undervalued or very

undervalued. So example, 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 United Health

that is still undervalued. You've got

technology companies like Maxar. Some of

them are undervalued. Like Meta is

undervalued after the recent pullback.

We've got Microsoft is undervalued.

We've got Accenture

under the technology sector, which is

undervalued. We've got um ServiceNow,

which is undervalued. So quite a number

of high-quality companies are

undervalued. And some of them are fairly

priced.

Uh like Amazon, like Broadcom, for

example, like Mastercard, uh 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 moat.

They've got sustainable competitive

advantage

that protect them from competition for

at least the next 20 years.

The ones in yellow have got a narrow

economic moat.

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 moat. 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

uh 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 using options. Or I may

enter the stock itself, but I have a

stop loss in case uh it reverses.

Because the ones in red are more risky.

They drop,

they may not come back. All right? 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. All

right? It's a matter of patience. And

the ones in yellow are pretty uh durable

as well.

Okay. So that's the first

uh bearish reason uh that I have come up

with this quarter. Now the second reason

to be bearish is that the labor market

has been weakening.

So

uh 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 2

years. And now the unemployment rate is

above 4.6%, which is a 4-year

high.

Now, is this something to be worried

about? And does an increasing

unemployment rate signal

a potential recession? The answer is

yes.

Historically. So historically, when the

unemployment rate goes up,

it's a leading in- indicator of

recession.

However,

this time is a bit

different. I know that sounds very

cliché. But this time is 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? Okay? 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 need 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

uh the un- 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 a gigantic

AI is automating

entire workflows in many industries like

finance, like law, like like encoding in

in IT companies. So companies are able

to increase their output. They're able

to

uh sell more products and services

without adding more employees.

So this chart shows you clearly

that, you know, 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 um another 1 million, I

need 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,

in on average, you only need two people

for every 1 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 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 let not yet learned AI to

fit into the AI economy. So the clerical

staff, the junior developers, you know,

they can't fill the new roles.

So what's the lesson? Is this good or

bad?

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 going to make more profits with

less people. You've got more profit

margins. But it's bad if you are an

employee

who doesn't know AI. So the 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

upskill

Yeah, upskill 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 start before she starts

working, she's now taking a 6-months

AI course

uh from the um SMU, Singapore Management

University, a certification AI. Because

I I told them I said, "Unless you're

AI-trained, you're not being you're not

going to be able to get a job very

easily

uh in in the in the industry today." All

right? So you've got to do that. Yeah?

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 in other words,

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 uh profit margins

of the companies in the S&P 500 have

been increasing

very steadily. And now it's 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 and secure

if you own assets

in this new AI uh 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

uh just came in lower than expected at

2.7% in November. It's the lowest since

July. Now of course, uh there are

arguments that the government will shut

down,

so many of the components of the CPI

were missing. So they're saying that oh,

this is a report.

Maybe. Yeah, maybe. Yeah. 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, none. Okay, that that to me

that's a bit of There is

inflation. It is higher than than the 2%

target.

But it is on a downtrend. Now, of

course, if

um

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 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 poly market

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

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 listen to me. I want

someone who not go against me. I want

someone who who 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 in the before June next

year, which is the first half. All

right, so something to be worried 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 before just before

the midterms, again the market gets very

choppy again.

But if the

um

if the the the Democrats win the House

and the Republicans hold the Senate, and

of course Trump is Republican White

House, that is good for markets. Because

the markets love a gridlock

a gridlock government. When the

government is gridlock, 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 is 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? It

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 concern, 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

would 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 in 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 in 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.

Where the market drops less than 10% is

called a pullback. If the market drops

10% or more 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 3 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 6 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

a bigger than a

bigger than a 3% drop but less than 10%.

It's called a pullback, right? So, we

had, you know, drop 4.4%, 3.3%, 3.3%,

3.4%, 3.2%, and more more recently drop

5.7%. And in April, thanks 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 want to buy great companies, but we

buy them

when people are fearful. We buy them

when they are discounts. And they 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 going to

happen, but it will happen. It will

happen. But my guess is that most of it

is going to 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, all 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 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 want to 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 want to check out my

online courses, go to how to invest

and how to trade the financial markets

and create an income from all around the

world.

If you want to 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 Khoo, and may the markets

be with you.