Long-term market path 'continues to be up', says Hightower's Michael Farr

Key Concepts

• Market Pullback: A temporary decline in stock prices, typically 10% or more.
• Earnings Growth: The rate at which a company's profits increase over a period of time.
• Cyclical Stocks: Stocks whose performance is closely tied to the economic cycle. They tend to do well during economic expansions and poorly during recessions.
• Magnificent Seven (Mag 7): The seven largest publicly traded companies in the US stock market (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta).
• GLP-1 Drugs: A class of drugs used to treat type 2 diabetes and obesity, such as those produced by Eli Lilly (Mounjaro) and Novo Nordisk (Ozempic, Wegovy).
• Irrational Exuberance: A term coined by Alan Greenspan to describe an unsustainable market bubble.
• Liquidity: The availability of cash or assets that can be quickly converted to cash.
• A1-C: A blood test that measures average blood sugar levels over the past 2-3 months.

Market Outlook for 2026: Anticipating a Pullback Amidst Strong Earnings

Michael Farr, Hightower Chief Market Strategist, anticipates a market pullback in 2026, but believes strong earnings growth will limit the downturn’s severity. He attributes the likelihood of a pullback to historical market patterns, noting that after three consecutive years of gains, a correction is statistically probable, often occurring in February due to seasonal factors and a lack of major economic news. He states, “We haven’t had one for a while. We’ve had three straight years up in the market. A pullback would be normal.”

Unprecedented Gains and the AI Factor

The S&P 500 is poised to finish 2025 with nearly 18% gains, marking the third consecutive year of double-digit percentage increases. Farr acknowledges this is unusual, but argues that the current market environment, driven by Artificial Intelligence (AI), is different. He draws a parallel to the late 1990s tech boom, referencing Alan Greenspan’s warning of “irrational exuberance” in 1996. He points out that despite Greenspan’s concerns, the market continued to rise for three more years, highlighting that “expensive can become more expensive.” Farr suggests a conservative approach of expecting 10% gains in 2026 would be reasonable.

Broadening Market Participation and Cyclical Strength

A positive development Farr highlights is the broadening of market participation beyond the “Magnificent Seven” (Mag 7) tech stocks. For much of 2025, the market was heavily concentrated in these seven companies, representing 38% of the S&P 500. However, this concentration has decreased to 35%, indicating that other sectors are beginning to outperform. Specifically, financials, materials, consumer discretionary, and industrials have been leading performers in the past month, signaling a shift towards cyclical stocks. Farr views this as a “very healthy sign for the markets,” allowing the high-performing tech stocks to consolidate while providing opportunities for diversification.

Healthcare Sector Opportunities: GLP-1 Drugs and Demographics

Farr identifies the healthcare sector as a particularly attractive investment area, citing favorable demographic trends and the potential of GLP-1 drugs. He specifically highlights Eli Lilly (with its Mounjaro drug and upcoming pill formulation) as a “terrific stock” that has performed well over the past three years. He notes the expanding applications of these drugs, suggesting they may address a wide range of health issues. He also mentions Novo Nordisk, despite its recent underperformance, anticipating positive developments with its own pill designed to treat obesity and high A1-C levels. He believes the continued innovation in this area will drive further growth.

Economic Fundamentals and Federal Reserve Policy

Farr maintains a generally optimistic outlook on the economy, stating it remains “fine” and continues to grow. He notes that the Federal Reserve is likely easing monetary policy “a little more than they should,” contributing to ample liquidity in the banking system. He believes this environment supports continued market gains, suggesting the “path of least resistance over the longer term continues to be up.”

Logical Connections

The discussion flows logically from an initial prediction of a market pullback to an analysis of the factors supporting continued growth. Farr connects the historical patterns of market corrections with the current economic environment, acknowledging the potential for a downturn while emphasizing the strength of underlying earnings. He then links the broadening market participation to the overall health of the economy and the opportunities presented by cyclical stocks. Finally, he focuses on the healthcare sector as a specific area for investment, tying it back to demographic trends and technological advancements.

Data and Statistics

• S&P 500 Gains (2025): Approximately 18% (as of the time of the interview).
• Mag 7 Concentration in S&P 500: Decreased from 38% to 35% in the recent quarter.
• Historical Market Pattern: A pullback is statistically probable after three consecutive years of gains.

Conclusion

Michael Farr anticipates a moderate market pullback in 2026, but remains fundamentally bullish due to strong earnings growth, favorable economic conditions, and the transformative potential of AI. He emphasizes the importance of diversification, highlighting the broadening market participation and the opportunities within the healthcare sector, particularly related to GLP-1 drugs. His perspective suggests investors should prepare for a potential short-term correction while maintaining a long-term optimistic outlook.