Before I put away the keyboard for the Holiday Season, I thought it might be a good idea to look ahead and see what the historical cycles have to say about the outlook for the stock market in the coming year.

Yes, it is certainly true that investors have a lot to consider as we head into 2026 such as the outlook for earnings, the state of the economy (and the bifurcated consumer), Fed expectations, the level of inflation, and of course, the AI trade debate (bubble vs revolution). However, if memory serves, something similar can usually be said at the beginning of each and every year.

It is for this reason that I like to go into each new calendar year having some sort of idea about what to expect going forward. To be clear, I do NOT invest according to the cycles, gut hunches, my outlook, or even the stages of the moon. But I have found that looking at what the historical cycles look like can oftentimes provide a decent roadmap for the year ahead.

While I must admit that my crystal ball remains in the shop and markets are often influenced by unforeseen events – like geopolitics, political policy, economic surprises, and/or even bubbles bursting – historical cycle analysis has proven to be a useful guide over the years.

As I've mentioned in the past, sometimes this work is eerily accurate, other times, not so much. But as a conceptual input for framing the outlook for the coming year, I find it is an exercise worth doing.

Long-time readers know that the S&P 500 Cycle Composite is the work of Ned Davis Research Group and is a blend of three key historical patterns: the one-year seasonal cycle (capturing typical intra-year trends), the four-year Presidential election cycle (reflecting tendencies around political activities), and the ten-year decennial cycle (highlighting decade-based rhythms). This composite averages daily data from 1928 through 2024 to project a "typical" path for the S&P 500 in 2026.

As I've written a time or twenty, the key here is although it is impossible to predict what will happen (and/or when) in Ms. Market's game, the Cycle Composite is often very good at hinting at what might be coming round the bend in the coming months.

For example, 2025 was definitely not your average year and the markets strayed from the cycle projections significantly at least a couple times. To review, first things were upended early by "Liberation Day" and the ensuing tariff fears – thus the market dove when history projected a rally. Then the market rallied during the traditionally weak fall period. Neither of which were in sync with the market's historical tendencies.

But with everything now almost said and done, I note that the S&P 500 is pretty darn close to where the Cycle Composite projected it to be near the end of the year.

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Copyright Ned Davis Research Group, All Rights Reserved

The important thing to understand about using this analysis is while there are definitely times when the market goes its own way and ignores cycle influences, stocks often return to the trend indicated by history's trends.

It is for this reason that I like to review the Cycle Composite at the beginning of each calendar year – and then check in on a weekly basis to see how things are going.

So, without further ado, let's look at what the Cycles say about 2026.

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Copyright Ned Davis Research Group, All Rights Reserved

Here's my summary of what the 2026 Cycle Composite suggests about the new year:

Strong Start to the Year (Q1 Rally): The composite kicks off 2026 on a positive note, with the index showing a steady climb from early January. This builds momentum into a notable peak around late February or early March, highlighted by the first yellow circle on the chart. Historically, this aligns with post-holiday optimism and the second year of a presidential term often starting with some residual positivity from the prior year's momentum.

Spring Pullback and Choppiness: Following the early peak, there's a fairly sharp decline through April, bottoming out around mid-spring. The line then rebounds modestly into May but enters a period of volatility through the summer months (June to August). Expect wiggles here—some minor ups and downs—without a clear directional bias, reflecting typical mid-year uncertainty in year-two cycles.

Fall Weakness and Key Low (Q3/Q4 Transition): The most pronounced downside appears in the late summer and early fall, with a steady decline leading to a significant trough around early to mid-October, marked by the second yellow circle. This low point dips near or slightly below the baseline, suggesting potential for a meaningful correction. In the context of mid-term election years (2026 being one), this could tie into heightened political noise, policy debates, or seasonal selling pressure that often characterizes the weaker phase of the presidential cycle.

Year-End Recovery and Positive Finish: From the October low, the composite projects a strong rebound, with the index rallying sharply through November and December to close the year on a high note. The overall projection ends higher, indicating a modestly positive annual return if history rhymes—though far from the blockbuster gains seen in stronger cycle years.

In presidential cycle terms, 2026 falls into the second year of the term, which has historically been the softest of the four, often featuring corrections or even bear markets amid mid-term elections and policy adjustments. That said, the composite's overall upward trajectory suggests resilience, with the net result showing gains for the year despite the mid-year hurdles.

As such, my plan entering 2026 is to give the bulls the benefit of the doubt from a big-picture perspective. However, the Cycle Composite suggests that I (a) keep my enthusiasm in check and (b) be ready for meaningful weakness. Therefore, this does not appear to be the time to abandon a tactical, risk managed approach.

Finally, let's remember that the Cycle Composite is a historical average and clearly not a guarantee of anything. To be sure, real-world events can and often do derail even the most consistent historical/seasonal patterns. However, as long-time readers know, the Cycle Composite tends to be fairly accurate more often than not. As such, I like to use this as one piece of the puzzle in our market analysis.

Thought for the Day:

Wishing everyone a Happy Holiday Season!

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES