Five for Friday

Entrepreneurship, Downturns, Breadth, S&P Inclusion, and Happy Holidays

1. New biz

With both the recap of 2025 and the outlook for 2026 so well covered, I aimed the year’s final Five for Friday at thinking about the most important theme and chart not for the next few years, but for the next few decades. In that attempt, I settled on this one, which shows the number of high propensity business applications in the U.S. Put simply, entrepreneurialism is the straw that stirs the economic drink—it drives job creation, fosters innovation, and spurs healthy competition, among other things. Without new ideas, economic dynamism withers on the vine. That is why it is so heartening to see that in the 2020s, despite a global pandemic, geopolitical tensions, tariff uncertainty, historic inflation, and all the other things that pundits and strategists endlessly fret over, new business formation soared to multi-decade highs.

Shares of stock are ownership stakes in real companies, and the profits of those companies accrue to its shareholders. That is the reason the stock market has created so much wealth over the last century, and why entrepreneurialism is a key cog in that machine (as an example, Nvidia—one of the great wealth-creating stocks of the last half century—was founded in a Denny’s only about 30 years ago). The economic environment is far from perfect, but the good news is that “perfect” has never been a requirement for entrepreneurs to thrive—or for markets to rise.

2. Selloff

Despite the longer-term focus I began this piece with, I also have a prediction for 2026: the stock market will have a double-digit selloff. I know, I know…that sounds grim. But it’s really not that bold. Over the last three decades, the S&P 500 has seen an intrayear drawdown of -10% or greater in 20 separate calendar years (the average drawdown over that period is -16%). Being prepared for this level of volatility is simply table stakes. That said, these selloffs have also proven to be great buying opportunities. Since the Great Financial Crisis, we’ve had 10 selloffs of 10% or greater. If you had bought stocks at the moment each selloff turned into a -10% correction, your average return over the next year would have been over 20%. Selloffs in bull markets are typical fare, and we should be prepared to take advantage when they pop up.

3. Concentration

Within the last 10 days, the following indexes made new all-time highs: the S&P 500 Equal Weight (i.e., the “average” large-cap stock), the Russell 2000 (small-cap stocks), the Russell Microcap (even smaller stocks), and the MSCI All Country World ex-US (global stocks). One of the most incorrect and potentially damaging narratives from this year was that market concentration alone was a reason to be bearish; that the bull market was propped up by only a handful of Big Tech / AI stocks and that any weakness from that group would bring serious pain. But here we are in mid-December, with a majority of the Magnificent 7 having underperformed the S&P 500 year-to-date, and the stock market is still tracking for a tremendous year. It was never about just seven stocks, and the market is healthier for it.

4. Inclusion

One question I get every so often is whether a stock being added to the S&P 500 leads to outperformance. While the thesis makes sense—once added to a widely-tracked index, many funds are required to buy the stock—the data doesn’t back it up. Over the last decade, just under 200 stocks were added to the S&P 500 organically (not by spinoff or merger) and the median 1-year forward return for new inclusions was 7%, while the median 1-year forward return for the S&P 500 was 14% (and roughly 60% of new inclusions underperformed the index in their first year). Plenty of stocks have bucked that trend, but on the whole, S&P 500 inclusion is not a strong foundation to build an investment thesis on.

5. Happy holidays

To everyone reading, an infinite thank you for your time and trust, and Bah Humbug to bear markets.

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

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