Why markets may be stronger than they seem

2026 has already been eventful for investors. From new geopolitical tensions to renewed concerns over trade policy, there is no shortage of unsettling headlines.

However, as 2025 reminded investors, earnings can still grow and stocks can still rise even in a volatile news environment.

My research focuses on identifying patterns and probabilities in market history that can help inform the current outlook. Currently, my historical analysis suggests that stocks may continue to rise, and that the outlook could be particularly bright for technology, consumer discretionary, and health care stocks.

Here's more on 3 key themes for investors to consider now.

1. Some investors fear a bubble—but the data doesn’t support it

All historical market bubbles have been marked by high valuations—but not all periods with high valuations have been bubbles. I think we’re in the latter scenario.

Some investors highlight the S&P 500^® Index’s high cyclically adjusted price-to-earnings (CAPE) ratio, a metric that divides current stock prices by the last 10 years’ inflation-adjusted earnings. They point to historical data showing that, on average, high CAPE ratios have been followed by weak 10-year returns. And they note that the market’s current CAPE ratio of 40 is the highest it’s ever been outside of the dot-com bubble of the late 1990s.

All that is true. But my analysis finds that the most important factor affecting 10-year returns hasn’t been valuations—it’s been whether the period ended in a crisis. Since 1932, almost all the 10-year periods with high starting CAPE and weak returns concluded during either World War II, the inflationary recessions of the early 1980s, or the 2008 financial crisis. When 10-year periods began with high CAPE ratios and did not end during one of these crises, they delivered 10% average annualized returns—better than the market’s historical average.

The CAPE ratio at the start of each period did have an impact. Among 10-year periods that didn’t end in a crisis, those with low starting CAPE ratios had higher average returns. But whether a period ended in crisis mattered more. For example, 10-year periods that started with low CAPE but ended during a crisis had annualized returns of just 5%, on average.

The takeaway: The historical connection between high valuations, as measured by the CAPE ratio, and weak long-term returns may not be as strong as it appears.

Corporate overinvestment has historically been another sign of a bubble. Some investors worry that’s happening today, given huge companies’ investments in artificial intelligence (AI). But the data suggests otherwise. As of last year, S&P 500 companies were generally spending about 86% of their cash flow on capital expenditures (capex), on average. That’s actually significantly lower than the average pace of capex spending since 1962 (128% of cash flow). It’s also far lower than the levels seen during the dot-com bubble (when many companies were spending around 150% to 400% of cash flow on capex).

In the tech sector, annual cash flow exceeds capex by a wide margin, and it has since 2002. And the sector’s results are underpinned by powerful fundamentals: Technology company earnings have grown faster than the rest of the market’s since 2022.

2. Contrarian signals may point to further market strength

Several indicators that could seem negative may actually signal potential opportunity in the stock market. One is the fact that stock investors look much more fearful than bond investors.

I like to gauge relative fear in the stock and bond markets using the ratio of the CBOE Volatility Index (VIX) to high-yield credit spreads (the VIX index is a proxy for the level of volatility in the stock market; credit spreads represent the additional yield bond investors demand in exchange for taking on credit risk). A higher ratio implies that stock investors are more fearful than bond investors. A higher ratio has also historically tended to precede stronger stock market returns.

Recently, the ratio climbed to the top 3% of its range since 1990. Historically, when this ratio has reached the top 3% of its range, the stock market has gone on to return 24% over the next 12 months, on average. (This is one reason bonds have a reputation as the "smarter” market.)

Investor sentiment is another contrarian signal, and it’s telling a similar story. It recently fell to the bottom 10% of its range since the 1980s. While such extreme pessimism may sound ominous, it has tended to precede strong gains. In fact, 6-month periods that began with bottom-decile sentiment have produced average returns of about 8%, looking at market data since 1987.

If these signals seem counterintuitive, then just remember: The more worried investors are, the easier it is for things to turn out better than expected.

3. Surprising signals for consumer discretionary and health care

I’m also watching several sector-specific contrarian indicators. Take consumer sentiment, which has been hovering near all-time lows. It seems natural to assume such negativity spells bad news for the consumer discretionary sector: If people feel bad about their finances and the overall economy, you’d expect them to pull back on nonessential purchases.

Yet history tells a different story. Since 1970, when sentiment was in the lowest 5% of its historical range, consumer discretionary stocks outperformed the market by an average of 7 percentage points over the next 12 months. The likely reason: Pessimism was already priced into the market, leaving room for upside if conditions improved.

Health care is another sector that has been flashing a contrarian signal. In recent years, the sector has faced weak earnings and declining valuations. Counterintuitively, that backdrop has been a good setup for subsequent outperformance in the past. Periods like these have tended to produce both higher odds of market-beating returns over the next 12 months and relatively strong risk-adjusted returns.

That said, while I believe the health care sector’s near-term prognosis is good, I remain cautious about longer-term prospects due to declines in the sector's average margins and valuations, which have been playing out over the long term. 

How to search for investing ideas

Based on this analysis and other research, I believe that today’s anxieties could set the stage for future upside potential. I expect leadership from technology and consumer discretionary stocks, and I have upgraded health care in the near term but recommend caution with the sector longer term.

Investors interested in matching investing ideas to these themes can search for stocks using the Fidelity Stock ScreenerLog In Required. Or, to search for mutual funds or ETFs that focus on these themes, investors can use the Fidelity Mutual Funds Research tool or ETF ScreenerLog In Required.