2025–2026 MACRO OUTLOOK AND MARKET FRAMEWORK

Thoughts on the Market

December 22, 2025

A Comprehensive Review of 2025 and a Forward‑Looking Analysis of 2026 Risks, Regime Shifts, and Bubble Dynamics

I. 2025: YEAR IN REVIEW

2025 was a year defined by violent macro shocks and euphoric micro narratives -- a combination that produced one of the most paradoxical market tapes in recent memory. Markets endured historic drawdowns, record‑setting rallies, and a series of policy and geopolitical events that exposed deep structural vulnerabilities beneath the surface.

1. Major Events of 2025

A. Tariff Shock and Trade Fragmentation

A new wave of U.S. tariffs and retaliatory measures triggered one of the largest two‑day market drawdowns in history, wiping out roughly $5 trillion in global equity value. The episode underscored how fragile the global trading system had become and how quickly policy shocks could propagate through risk assets.

B. Inflation Persistence and the Policy Paradox

Inflation repeatedly surprised to the upside, driven by energy volatility, supply‑chain friction, and tariff‑related cost pressures. Yet by late 2025, with the exception of the Bank of Japan, central banks were cutting or signaling cuts as growth softened and real rates tightened.

This produced an unusual combination:  rate cuts in an environment of still‑elevated inflation -- a configuration that historically precedes stagflationary drift.

C. The AI Shock: Mania, Momentum, and Market Structure

AI dominated the equity narrative. Nvidia suffered the largest single‑day loss in market history, only to rebound and end the year near a $5 trillion valuation. Simultaneously, China’s DeepSeek “shook the status quo,” intensifying the global AI arms race and raising strategic questions about technological sovereignty.

D. Commodity and Energy Volatility

Oil swung from geopolitically driven spikes to levels reminiscent of the pandemic crisis. The volatility reflected a world where demand uncertainty, OPEC+ politics, and policy interference collided with AI‑driven energy demand narratives.  The battle over access to strategic minerals highlighted the growing competition between the U.S. and China, and ultimately gave China the upper hand in the bilateral struggle over tariffs and trade.

E. Global Political Realignment

The anti‑establishment wave of 2024 translated into a 2025 policy mix of tariffs, subsidies, sanctions, and “Plus One” supply‑chain strategies. (A “Plus One” strategy is a supply‑chain and geopolitical risk‑management approach in which a company keeps its primary production base in one country but adds at least one additional country to diversify risk.) The result was a clear shift toward de‑globalization and industrial policy, embedding higher structural costs into the global economy.

2. How Markets Reacted

Despite repeated shocks, global equities finished the year higher  a -- pattern some analysts described as a “chaotic up‑crash.”

Equities

• The S&P 500 rose roughly 15%, driven overwhelmingly by AI‑linked mega caps.
• Market leadership remained narrow, with concentration levels reminiscent of the late 1990s.
• A notable rotation into Europe, Asia, and EM signaled investor skepticism about U.S. exceptionalism and a search for valuation relief.  These markets outperformed the U.S. and appear to be magnets for further global capital allocations.

Rates and Credit

• Bond markets oscillated between inflation scares and growth scares.
• Credit spreads widened episodically but ended the year relatively contained.

FX and Commodities

• Gold and hard assets surged as fiscal concerns deepened.
• FX markets repriced the durability of U.S. policy and the implications of protectionism.

3. Foreign Markets: Quiet Outperformance Beneath U.S. Headlines

While U.S. equities delivered strong headline returns, foreign markets outperformed on a relative basis.

A. Valuation Relief

Foreign markets entered 2025 at far lower valuations than the U.S., especially relative to AI‑inflated multiples. This created a natural rotation into:

• Europe (value‑heavy, industrial, financial)
• Japan (governance reforms + yen dynamics)
• Emerging markets (commodity leverage + currency tailwinds)

B. Policy Stability

U.S. policy volatility -- especially tariffs -- pushed allocators toward markets with more predictable regulatory environments.

C. Currency Tailwinds

A softer dollar in 2025 boosted foreign equity returns for USD‑based investors.  As I have advised, I remain bearish on the dollar overall for at least another two or three percent drop over the near term before I want to reassess next moves.

D. Sector Composition

Foreign markets benefited from industrials, energy, materials, and financials -- sectors that outperformed the U.S. ex‑AI complex.

Bottom line: Foreign equities outperformed not because global growth was booming, but because U.S. valuations were stretched and global investors were diversifying away from U.S. concentration risk. It is critical that we bear in mind that it was the abysmal real returns of fixed income investments (returns net of inflation) that drove investors to pour record amounts of money into equities in desperate hope of achieving attractive returns on their investments.

4. Gold and Silver: An Explosive Rally That Contradicted the U.S. Equity Narrative

One of the most striking features of 2025 was the massive rally in gold and silver, which surged despite -- and in some ways because of-- record highs in U.S. equities.  There is a strange development here because historically these are classic risk-off investments which investor flee to in times of great uncertainty.  Now it seems that investors are simultaneously loading up on risky assets (stocks with crazy P/E multiples) and risk-off assets as a type of hedge against dramatic reversals in their risky assets.  What this implies is that an extended bear market in stocks could end up with an unexpected sharp sell-off in risky assets as investors run for cover and liquidate their portfolios to cover losses.

A. Drivers of the Precious‑Metals Surge

1. Fiscal Concerns

Rising interest costs, persistent deficits, and political gridlock raised concerns about long‑term debt sustainability.

2. Dollar Doubts

Warren Buffett’s warning that the dollar could be “going to hell” resonated with global allocators.

3. Geopolitical Risk

U.S./China tensions, Middle East instability, emerging Latin America hostilities, and cyber threats boosted demand for safe‑haven assets.

4. Policy Credibility

Central banks cutting rates in the face of sticky inflation weakened confidence in monetary stewardship.

B. Why This Divergence Matters

Gold and silver typically surge when investors fear:

• Inflation
• Recession
• Policy failure
• Fiscal erosion
• Loss of trust in fiat currency

Equities typically surge when investors expect:

• Growth
• Stability
• Policy success

In 2025, both surged. This is not normal.  It signals a market that is:

• Hedging aggressively while chasing upside
• Pricing long‑term macro risk while ignoring short‑term volatility
• Expressing deep distrust in policy even as it bids up AI‑driven growth assets

This divergence is one of the strongest signals that the U.S. equity rally was not fully grounded in macro fundamentals.  Instead, it demonstrates that investors are well aware that their equity holdings are indeed quite risky.

5. Embedded Risks Revealed in 2025

A. Concentration and Narrative Fragility

AI‑centric leadership created a market that was narrow by construction and vulnerable to shocks.

B. Policy Volatility

The tariff shock demonstrated how quickly policy decisions could erase trillions in market value.

C. Inflation and Stagflation Risk

Central banks ignoring sticky inflation -- a classic precursor to stagflation.

D. Fiscal and Sovereign Credibility

Debates over U.S. fiscal sustainability raised questions about long‑term debt dynamics and the purchasing power of the dollar.  Repeated and ever-louder warnings from famous investors like Warren Buffett and Ray Dalio are vivid reminders of the dangerous path of our government’s fiscal profligacy.

6. Is the Market in a Massive Bubble?

A. Evidence of a Bubble

• Extreme concentration in AI mega caps
• Valuation and price action reminiscent of early internet over‑valuations
• Narrative dominance overpowering macro fundamentals
• Historic single‑day losses followed by euphoric rebounds

B. Evidence Against a Universal Bubble

• Significant valuation dispersion across sectors and regions
• Active rotation into non‑U.S. markets
• Real capex and revenue growth underpinning parts of the AI theme
• Markets still reacting sharply to macro shocks

C. Working Conclusion

The market is best described as a selective bubble with systemic vulnerability. AI mega caps exhibit bubble‑like characteristics, but the broader market does not uniformly fit the classic bubble template.

However, the system is fragile because leadership is narrow and valuations are stretched where it matters most.

II. 2026 OUTLOOK: BASELINE SCENARIO (NO UNWELCOME SURPRISES)

Assuming no major shocks, 2026 unfolds as a year of normalization rather than disruption.

1. Growth and Inflation

• U.S. growth moderates toward potential.
• Inflation drifts gently toward the upper end of the Fed’s comfort zone.
• Supply chains continue to heal, and tariff effects fade.

2. Federal Reserve Policy

• The Fed maintains a measured, data‑dependent easing path.  (Of course, you should remember the Fed’s apparent operational rule: “When in doubt, cut rates and support growth – but pretend you are tough on inflation.”)
• Policy remains marginally restrictive in real terms but gradually normalizes.
• Sahm Rule forecasting a near-certain recession is close to being triggered.  Yet another excuse for the Fed to keep a bias towards easing further.

3. Corporate Earnings and Market Structure

• Earnings grow at a mid‑single‑digit pace.
• Market leadership broadens modestly.
• Valuations remain elevated but not extreme.

4. Global Backdrop

• Europe avoids recession.
• China stabilizes through targeted stimulus to try to heal their insanely leveraged and largely devastated real estate sector.
• EM benefits from a softer dollar and improved trade flows.

This is the world investors hope for, i.e. predictable, navigable, and fundamentally stable.

III. LOOMING RISKS: THE FAULT LINES BENEATH THE SURFACE

Even in a benign baseline, several structural risks threaten the 2026 outlook.

1. The Stagflation Trap

A combination of sticky inflation and slowing growth could leave the Fed with no good options.

2. Fiscal Strain and the Dollar Question

Rising interest costs and persistent deficits raise questions about long‑term debt sustainability.

3. Protectionism and Policy Volatility

Tariffs, industrial policy, and sanctions embed higher structural costs and increase the probability of supply‑side shocks.

4. Market Structure Risks

Narrow leadership and thin liquidity create fragility.

5. Geopolitical Undercurrents

U.S.–China rivalry, Middle East instability, and cyber risks remain persistent sources of tail risk.  Could tension with Venezuela force China and Russia to intervene?

IV. THE FED’S STAGFLATION SCENARIO: HOW IT COULD HAPPEN

A realistic stagflation trap emerges through:

1. A Series of “One‑Time” Shocks That Aren’t One‑Time

Tariffs, supply‑chain fragmentation, and geopolitical disruptions raise costs and permanently lift the price level.

2. Growth Slows Simultaneously

Margins compress, hiring slows, and investment weakens.  Unemployment continues to worsen, and the authorities shift into panic mode.

3. Inflation Stops Falling

Sticky services inflation + renewed goods inflation = policy paralysis.

4. The Fed’s Likely Response

• Pause rate cuts
• Shift to “lower for longer”
• Tolerate sub‑trend growth
• Hope supply shocks fade
• Quietly rely on fiscal authorities

This is a credibility‑risking, growth‑sacrificing environment.

V. THE LONG‑TERM DOLLAR QUESTION: BUFFETT’S WARNING

Warren Buffett has issued one of the strongest structural warnings of his career:

1. Fiscal Trajectory Is “Alarming”

Explosive deficits and rising interest costs threaten long‑term purchasing power.

2. Protectionism Erodes Dollar Dominance

Reserve currencies thrive on openness and predictability — both now in question.

3. Buffett’s Portfolio Speaks Loudly

• Record cash reserves
• Increased exposure to Japan and the yen
• Reduced U.S. equity exposure for 10 consecutive quarters

What Percentage of Buffett’s Portfolio Is in Yen‑Denominated Assets?

While there is no explicit percentage disclosed anywhere for how much of Berkshire Hathaway’s total portfolio is yen‑denominated, Buffett has large positions in five Japanese trading houses

• Itochu
• Marubeni
• Mitsubishi
• Mitsui
• Sumitomo

These stakes were increased to 8.5%–9.8% each as of March 2025.  Buffett financed these investments using yen‑denominated debt.

This is explicitly stated: He used low‑cost yen‑denominated debt to fund the Japanese equity purchases.  (This is a great example of how the yen carry play gets activated by major investors.)

While we cannot compute a percentage, we can say:

• Buffett’s Japanese equity stakes are material (near 10% ownership in five major trading houses).
• He has repeatedly issued large yen‑denominated bonds to fund these positions.
• This strategy is large enough that analysts describe it as a major pillar of Berkshire’s international allocation.

This is not tactical. It is a structural repositioning.

VI. CONCLUSION: A FRAGILE EQUILIBRIUM

The 2025–2026 period is defined by a tension between:

• A benign baseline that supports steady returns
• A set of structural risks that could shift the regime abruptly
• A selective bubble in AI mega caps that amplifies fragility
• A fiscal and geopolitical backdrop that challenges long‑term dollar stability
• A global rotation away from U.S. exceptionalism
• A precious‑metals surge that contradicts the equity narrative

The result is a market that can rise -- and did rise -- but one that is inherently unstable, dependent on narrow leadership, and vulnerable to policy or geopolitical shocks.

This is not a crisis call. It is a recognition that the macro regime is shifting, and that investors must navigate a world where the surface is calm, but the foundation is cracking.

What does this mean for the dollar?  The dollar will remain under pressure for a while, and this pressure could potentially accelerate.  I believe we should remain short dollars overall until we have tested and taken out the 2025 lows in the dollar index.  Depending on how things play out, we need to keep an open mind about a sharp dollar decline that reaches surprisingly low levels.

For stocks?  This is tricky.  I still like the idea of a move to new all-time highs before the market tops out and starts an enormous bear market.  It is difficult to pick a specific level on the upside, but I would expect the next leg higher to top out at 7500 on the S&P500, or lower.  My minimum target would be around 7120.  The downside?  I would guess that a decline toward 5950 will be an initial target before we have a significant bounce.  At that point we will need to revisit the overall macro scene and then reassess.  My ultimate downside targets are much more extreme!

The yen?  This is particularly tricky.  The BOJ disappointed the markets last week.  They adjusted monetary policy with their widely anticipated rate hike, but they proceeded to speak so unconvincingly about next steps that the market interpreted their soft tone as an invitation to increase yen carry plays.  Eventually this will backfire on them as they must take a firm stance to stabilize their currency and give investors comfort that they intend to get their inflation under control and create a stable environment for the markets.  Clearly, the ultra-loose monetary policy which they implemented during the 30+ years of massive deflation is no longer the correct monetary stance for the Japanese central bank.  Once the BOJ and Ministry of Finance implement strong measures, the yen will surge. 

Gold?  I have been a mega-bull for years, and I took a pause recently after gold’s massive rally earlier in 2025.  Are we getting ready to launch higher now in a sort of hyperbolic rally?  I haven’t decided yet, but it feels like gold is now on the way to $5,000 after its corrective range trading.  I will write about precious metals in January after I do some more analysis.

In terms of our trading, my team had a terrific year in 2025.  We implemented a variety of options strategies that have performed remarkably well under a wide array of market conditions.  If my team’s trading framework was ever going to get a serious stress test, the wild swings of 2025 were the perfect crucible.  I have traded massive volumes of currencies, options, futures, stocks, and commodities since I started my career at Salomon Brothers in 1984, and I have implemented many different sorts of trading strategies during this period.  I can state categorically, however, that the approach I am using now is arguably the soundest and most repeatable strategy I have devised since I started trading.  The volatility has been low, and the returns have been significant.  We hope to achieve the same sorts of results in 2026.  I would be happy to discuss their approach with you. 

If you are interested in learning more, please contact me at: akrieger@edenridgetrading.com.  In the meanwhile, I want to wish all of you a wonderful holiday and a Happy New Year. 

Wishing you all the best of health, love, and success in 2026.

Andy Krieger