27 Jan 27th January 2026

Markets Last Week

Last week was exciting but also a good lesson in how markets influence Trump’s action.

Things got exciting when Trump was talking tough on taking Greenland. Markets had their biggest fall since October. Then the very next day Trump wound back his rhetoric and said he was close to a deal with Denmark. No deal has appeared yet though.

Here in Australia, the majority of our wealth is linked to real estate. The US is different. Most of their wealth is linked to the Stock Market. US citizens don’t like it when their stocks drop and politicians don’t like negative news.

The same thing happened last year when Trump announced his tariffs. Stocks dropped suddenly and he quickly changed stance. Stock markets promptly recovered.

In November the US will hold mid-term elections. It is usual for the incumbent (Republican) to lose seats. Trump will want stocks to be strong this year going into the mid-terms so he has the best chance of holding his seats.

Therefore, I doubt he will do anything to cause a significant stock market shock.

Which all means, if he does or says anything again that causes markets to sell down rapidly, you can be assured he will reverse course promptly and stocks will recover. Just like they did last week.

So, we can all relax and not worry about what he will do next.

Venezuela

I have been spending too long trying to work out why The US invited the President of Venezuela to attend the US for a holiday on a free flight. Yes, we all know the country has lots of natural resources, in particular, oil. But, after years of neglect and mismanagement, they don’t have the infrastructure to get it out of the ground. Trump invited the big oil guys to take a look at what would be needed.

I just can’t see them doing anything to develop that resource.

Doing so would take more than $100billion in investment and take the best part of a decade to build.

The reason they won’t is because there is no political certainty their investment will not get stolen from them.

Back in 2007, Exxon, Conoco and Chevron lost their assets when the President of Venezuela, Chavez, effectively seized those oil fields for the state. This is why Trump has been saying Venezuela stole US oil assets.

Once bitten, twice shy.

Darren Woods, chief executive of Exxon had this to say

“We have had our assets seized there twice and so you can imagine to re-enter a third time would require some pretty significant changes from what we’ve historically seen and what is currently the state.”

“Today it’s uninvestable.”

I did think that maybe there was a trade here in oil service companies but now I have changed my mind.

What it will take to see further gains this year

At the start of every year we see predictions for where the index will end the year. This year analysts are all convinced we will see more gains.

Which got me thinking about what it would take for this to happen

At present, with the S&P500 basically at 7,000, it is trading at 22.3 x 12-month forward earnings. This is the same multiple as the start of 2025.

Over the last 10 years this multiple has ranged between 14 and 23. So we are at the top of that band. But if you go back to 199-2000 the multiple was 24x so we have precedent to move higher.

For the index to gain another 15% this year we need either earnings to surprise to the upside by 15% or for investors to become even more confident of the future and expand the multiple.

Analysts are actually very good at predicting earnings. At the start of 2025 they predicted the S&P500 earnings for the year would be $274 per share. We are now seeing Q4 earnings and it looks like we will come out with earnings of $271-$272 per share for 2025.

It is quite amazing how accurate the analysts were for a full 12 months of earnings from 500 companies to be just 1% off in the end.

Based off this we can say their prediction for 2026 will likely be accurate and they are saying earnings will come in at $310 – at increase of 14%

History says earnings rarely increase more than 12%, so it is unlikely companies will significantly beat that $310 figure.

Which just leaves multiple expansion as the reason for index gains in 2026.

If that multiple were to expand to 24x, then we would get an index 8% higher in 2026.

Or, if investors are willing to keep that 22x multiple, then using 2027 numbers (because we are talking end of 2026 targets here) gets a 14% index rise.

We enter 2026 will very high S&P500 valuations, but the path to higher prices requires nothing more than a continuation of stable economic conditions and predicted earnings growth. That combination has gotten the index to 7000 and it is reasonable to believe that another 12 months of the same will yield modestly higher valuations and stock prices.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.