'Fast Money' traders reflect on what worked for markets in 2026

Key Concepts

• Market Volatility: Anticipation of increased market fluctuations, potentially similar to past events but with different triggers.
• Bond Market (TLT & 10-Year Treasury Yields): Concerns about rising yields and their impact on mortgage rates and the broader economy.
• De-dollarization: The global shift away from using the US dollar as the primary reserve currency.
• Multiple Expansion: The increase in stock prices due to investors being willing to pay more for each dollar of earnings.
• AI Trade (First, Second, & Third Derivative): The investment opportunities related to Artificial Intelligence, ranging from direct AI companies to those benefiting from AI implementation.
• Equal Weight vs. Market Cap Weighted S&P 500: The potential for the equal-weight index to outperform the market cap-weighted index as market leadership shifts.
• Employment Situation: Anticipated deterioration in the employment market as a contributing factor to economic slowdown.

Market Outlook for 2026: Volatility, Bond Yields, and the AI Trade

The discussion centers around the economic outlook for 2026, with a focus on potential market volatility, rising bond yields, and the evolving landscape of the AI-driven market. The overall sentiment is cautious, anticipating challenges despite a relatively strong market recovery in 2025. The year 2025 finished “weak, down about 6% so far this year” with a record of around 125,000 and change in October.

Anticipated Volatility and Market Corrections

Participants anticipate a return of market volatility, potentially resembling the significant selloff experienced earlier in 2025. While the rapid recovery from the April 2025 turmoil surprised many, the expectation is for another volatility event in 2026, likely occurring early in the year. The April event was described as a period of “tariff turmoil” and “markets collapsing” followed by “one of the fastest rebounds.” This event was characterized by correlations going “to one,” a situation historically associated with negative market outcomes. The speakers acknowledge that while repeating the exact conditions of the April event is unlikely, a 10-15% market drop is a regular occurrence and should be anticipated.

Rising Bond Yields and Mortgage Rates

A significant concern is the trajectory of the bond market, specifically the 10-year Treasury yield. There's a consensus that yields are heading towards 4.5%, despite current relatively low levels. This is seen as a critical threshold, as mortgage rates are largely tied to the 10-year Treasury. The expectation is that rising yields will translate to higher mortgage rates, potentially hindering the housing market. The 30-year yields are currently at a low point, but the expectation is for the 10-year to increase due to global factors including global interest rates and a “global debt problem” as well as “this de-dollarization thing.”

Global Economic Factors & De-dollarization

The discussion highlights the influence of global economic factors on the US market. Specifically, the speakers mention the “de-dollarization” trend, suggesting a shift away from the US dollar as the dominant global currency, which could contribute to upward pressure on interest rates.

The AI Trade: From First to Third Derivatives

The AI trade is a central theme, but the conversation moves beyond simply investing in AI companies themselves. The speakers differentiate between the “first derivative” (direct AI companies), “second derivative” (companies benefiting from AI implementation), and “third derivative” (companies enabling the second derivative).

The initial surge in market performance in 2025 was largely driven by “multiple expansion” – investors paying a premium for companies perceived to be benefiting from AI. However, the expectation is that this expansion will need to be supported by demonstrable returns on investment. The speakers believe the “equal weight S&P” will begin to outperform the “market cap weighted S&P 500” as the AI narrative matures.

Examples of “second derivative” opportunities include Caterpillar, whose power business is experiencing rapid growth and whose stock chart resembles that of a semiconductor company. The focus is shifting towards companies that are using or building upon AI technology, rather than just those developing it.

Employment and Homebuilders

Beyond interest rates, the employment situation is identified as a key factor impacting homebuilders. A deterioration in the employment market is anticipated in 2026, which could further dampen demand for housing.

Performance Disparities & JP Morgan Example

The discussion points to significant performance disparities within the market. JP Morgan is cited as an example of a company that “doubled up the performance of the S&P 500” and is trading at a high multiple, a level it hasn’t seen in a long time. This illustrates the concentration of gains in specific companies and the potential for a broader market correction.

Notable Quotes

• “I think we’re in for another type of volatility event in 2026.” – Speaker 1
• “I’m probably the only one here that thinks that [10-year yields going to 4.5%].” – Speaker 1
• “There’s a strong likelihood that whether we’re up or down, let’s say in the first quarter, the first half or the whole year that the equal weight S&P starts to outperform the S&P 500.” – Speaker 2
• “If you think about this kind of application layer [of AI]… that’s where the opportunities are going to be across lots of different sectors.” – Speaker 2

Synthesis/Conclusion

The overall takeaway is a cautious outlook for 2026. While the market demonstrated resilience in 2025, several factors – rising bond yields, global economic pressures, and the need for demonstrable returns from the AI trade – suggest increased volatility and a potential shift in market leadership. Investors should prepare for a more challenging environment and consider diversifying their portfolios beyond the companies that have benefited most from the initial AI hype. The emphasis is on identifying companies that are effectively implementing AI or enabling its adoption, rather than solely focusing on AI developers.