By Jacob Sonenshine
Stocks ended the year calmly, but as usual, there was little news to trade on in the final weeks. Just wait. January will bring noise -- and volatility.
The S&P 500 index gained 16% in 2025, ending the year at 6845, near its 6932 record high. Yes, it was on track to fall 1.2% this week, with the Dow Jones Industrial Average and Nasdaq Composite dropping 1% and 1.6%, respectively. And Tesla was down on Friday after it reported a slowdown in car deliveries. But all that selling was just profit-taking after a strong first three weeks of December punctuated a great year for stocks.
Overall, the market is relaxed partly because it expects the Federal Reserve to keep cutting interest rates, which would keep bond yields down and help extend the economy's expansion. Big Tech's artificial-intelligence push continues to drive profit growth, and nothing has interrupted that ride yet.
All this explains why the Cboe Volatility Index, or VIX, is holding steady at just over 14. That's down from about 26 after a brief spike in late November and near the low end of its range in the past five years.
The problem: Volatility can easily rise from here. With stock prices near record levels -- reflecting a high degree of certainty about all of the positive points -- the easy ride they've enjoyed will be a lot tougher in 2026. Any slight disappointment is bound to cause prices to drop and volatility to spike.
Consider past stock market returns. The S&P 500 has gained more than 10% in each of the past three years, bringing its cumulative gain to 78% in that period. In the nine instances when the index is up at least 10% three years in a row, the average move the following year is only a 4.6% rise, according to Evercore ISI. Five of those years saw declines, with 2022 dropping 19%.
After the market prices in great news, it becomes more likely to give back some gains, "reinforcing our base case call for volatility," writes Evercore strategist Julian Emanuel.
There are two potential catalysts. The first is fourth-quarter earnings from the big banks, starting with JPMorgan Chase on Jan. 13. Sure, banks could beat earnings estimates, but if they mention, say, waning loan demand in the face of a weakening labor market or a backing away from corporate clients in mergers-and-acquisition activity, or even give conservative profit guidance for the first quarter, the sector -- which has been on a tear in the past year -- could drop.
And if the bank stocks fall, the broader financials sector could easily follow. The correlation between financials and the broad S&P 500 has been close since at least 2009, according to Evercore. Essentially, if banks give investors any reason to doubt their sunny view of the economy, the entire market could fall.
The other potential catalyst for volatility is the Fed. It announces its next interest rate decision on Jan. 28, and if it declines to cut rates by a quarter-point, as expected -- or signals less willingness to cut later this year -- bond yields could pop, which would send stocks lower.
Hold on tight.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 02, 2026 13:19 ET (18:19 GMT)
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