What's next for the most hated bull market?
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The stock market has achieved a third consecutive year of double-digit gains, with the benchmark S&P 500 index rising 16.4% for 2025. That has happened only five times since the 1940s.
Why it matters: You wouldn't know that based on the vibes on Wall Street, where the three-year-old bull market is being questioned constantly and on a day when stocks ended the final trading session of the year solidly in the red (down 0.74% on Wednesday).
- Despite the downbeat mood, strategists see stocks continuing to gain in 2026 thanks to their biggest bet and fear: AI.
State of play: Investors spent 2025 getting used to risk, and learning they can make a lot of money when they stomach it.
- In January, China released an open-source AI model, DeepSeek, putting pressure on the broader tech rally. Investors got over this fear after the company reported a cyberattack, but the threat looms for 2026.
- The real shock came in April, when President Trump rolled out unexpectedly large, sweeping global tariffs. Investors waited for tariff-driven inflation to show up, but that never materialized outside of a few sectors, so stocks recovered by May.
- The Federal Reserve cut interest rates three times in 2025, as tension between chair Jerome Powell and Trump raised concerns about the independence of the central bank. Investors are monitoring the strength of the labor market and how lower rates could impact inflation in 2026.
- The final earnings season of the year brought more doubts about the AI trade: Oracle missed on key metrics, Meta announced major capex plans, and Wall Street got tired of all the Big Tech debt going around.
What they're saying: Pain is getting processed faster, and investors are treating shocks like events they can trade on rather than signals that tell them they need to exit, Mark Malek, chief investment officer at Siebert Financial, wrote in a note.
- "Investors are becoming more accustomed to living with risk as a permanent backdrop rather than an occasional visitor," he said, adding that the key question is whether that's resilience — or just investors becoming numb to the dangers.
- Investors spent about 65% of 2025 feeling bearish, according to the AAII investor sentiment survey. The VIX, a measure of volatility, spiked to record levels not seen since the pandemic — or previously, the global financial crisis.
Between the lines: Even when stocks were making back-to-back record highs, the vibes were negative on Wall Street, as investors waited for the next shoe to drop.
- That shoe begins and ends with the AI trade, according to JPMorgan, which said in its 2026 outlook that to believe in stocks performing you have to believe the AI bubble isn't bursting any time soon, since nearly half of the market is now tied to the tech theme.
Yes, but: Despite the gloom, stocks keep rallying because of, not in spite of, the AI rally.
- That is in part what's driven every major strategist tracked by Bloomberg to predict a positive return for stocks in 2026.
- "The bigger risk is not riding the rally," Max Kettner, chief multi-asset strategist at HSBC, tells Axios.
What we're watching: The return on all this AI investment.
- 2026 is the year investors want proof that AI can make money.
- Any news that calls that into question will likely weigh on stocks.
- Anything that signals this was all worth it could cause exuberance.
The bottom line: Regardless of whether stocks go up or down in the new year, the lesson of 2025 appears to be: Investors won't be relaxed either way.
