Will We Have a 20% Correction in 2026?

Key Concepts

• Market Correction: A decline of 10% or more in the stock market, measured from a recent peak.
• Bear Market: A decline of 20% or more in the stock market, measured from a recent peak.
• Mag 7: Refers to the seven largest US technology companies (typically Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Tesla, and Meta (Facebook)).
• Peak-to-Trough: The measurement of a decline from the highest point (peak) to the lowest point (trough) within a specific period.
• Probability Assessment: Estimating the likelihood of future market events using percentages.

S&P 500 Performance Prediction for the Year

The speaker offers a prediction for the S&P 500’s performance, framing it within a consistent annual approach: predicting either a 20% gain or a 10% loss. Acknowledging a history of frequent 20% gains, the speaker leans towards another positive year, assigning a 75% probability to a 20% gain and a 25% probability to a 10% loss. This is presented not as a precise forecast, but as a probabilistic assessment based on past performance.

Historical Correction Probabilities

A significant portion of the discussion centers on the historical frequency of market corrections. The speaker highlights that, historically, approximately two-thirds (66.67%) of all years since the 1920s have experienced a double-digit (10% or more) correction from peak to trough. Specifically, the speaker estimates an 80% probability of a 10% correction occurring in the current year, justifying this figure by referencing the recent positive market run. A 20% correction (bear market territory) is assigned a 52% probability. The speaker notes the phenomenon of markets experiencing double-digit declines within a year, yet still finishing the year with double-digit gains, having occurred three times in the current decade.

Bear Market Probability in AI Names

The conversation shifts to the likelihood of a bear market specifically within the AI sector. The speaker clarifies the scope, excluding highly speculative companies like Coreweave and focusing on established players such as Nvidia and Google. The speaker asserts that the probability of a 20% correction in AI names is “way higher” than the overall market probability of 52%. While a precise percentage isn’t given, the implication is a significantly increased risk within this sector, given its recent 70% growth in the previous year.

Risk Mitigation and Framing

The speaker employs a rhetorical strategy to avoid being definitively wrong. When pressed for a “yay or nay” bet on whether AI names will experience a correction but still finish the year up, the speaker frames the question to allow for both outcomes to be considered a success. This is explicitly acknowledged as a tactic to avoid incorrect predictions ("You see what I did there? I can't be wrong.").

Overall Market Outlook

Despite acknowledging the potential for corrections, the speaker ultimately states, “I will go on record as saying the market will have another upyear.” This statement is presented with a degree of self-awareness, referencing a past pattern of success with this type of prediction (“75% of the time it works every time”). This suggests a belief in continued market momentum, despite recognizing inherent risks.

Logical Connections

The discussion flows logically from a general S&P 500 prediction to a more granular analysis of correction probabilities, and finally to a sector-specific assessment of AI names. The historical data on corrections serves as justification for the assigned probabilities, and the speaker’s framing of the AI question acknowledges the heightened risk within that sector. The final statement reinforces the overall bullish outlook, despite the acknowledged potential for short-term declines.