Hong Hao: The market in 2026 will be very unusual, and the commodity market trend will continue.

Well-known economist Hong Hao’s market predictions over the past two years have been insightful and relatively accurate. Today, he shared his outlook for the 2026 market at an event.

Unlike his previous views, this time Hong Hao clearly pointed out the potential volatility and challenges the market may face in the Year of the Horse (丙午马年). He provided a detailed analysis of the challenges facing major asset classes and key national markets, especially highlighting issues in overseas AI industries, U.S. stocks, and the dollar interest rates.

He also expressed a relatively optimistic view on domestic equities and commodities markets, suggesting that there may be no need to rush into bottom-fishing in the Hang Seng Index. For specific details, refer to the following (first-person perspective, with some parts omitted).

Key quotes:

1. This year is the Year of the Horse; the Bing Wu (丙午) belongs to the Li Gua (离卦), with the Heavenly Stem and Earth Branch all associated with fire. The Chinese often say “Red Horse, Red Sheep,” indicating this will be an extraordinary year.

2. Since January, the market has deeply felt the impact of these changes: historic surges and crashes in gold and silver, rare events like the continuous two-day circuit breakers in the Korean stock market, and geopolitical shifts such as the Venezuela incident in January and the current Middle East-Iran conflict.

3. The Middle East is now engaged in a non-conventional war. Since the U.S. hasn’t played by the usual rules, we can’t expect Iran to do so either. And indeed, Iran has not followed conventional tactics.

4. For the market to “stabilize” in the future, we must see a turning point in the war—not the end of the war, but a shift in its trajectory.

5. Financial markets price expectations, not what has actually happened. The current valuation of AI may be overdone, possibly ahead of what can be realized in the future.

6. The semiconductor cycle is gradually peaking, but U.S. institutions and retail investors are heavily positioned in semiconductors; high cycle and high positions form a typical and unfavorable combination.

7. 2026 marks the 17th year since 2009, at the center of a 35-year cycle. At the cycle’s peak, any situation could lead to dramatic changes.

8. Gold, as a safe-haven asset, is good for hedging geopolitical risks and stock portfolio risks. If a risk-off market trend emerges, gold is likely to remain in demand.

9. Liquidity conditions suggest copper prices may still have room to rise; oil prices are surging due to geopolitical tensions. This aligns with our June last year sequence: Gold/Silver/Precious Metals → Industrial/Non-ferrous Metals → Energy/Oil → Agriculture.

10. Comparing the 10-year government bond trend with commodity prices shows commodities lead 10-year U.S. Treasuries by about 10 years. Therefore, I believe the 10-year U.S. Treasury yield is more likely to rise than fall during this “divergence.”

The world has undergone dramatic changes

Since November 2025, we’ve observed significant upheavals in the global market.

This year is the Year of the Horse; the Bing Wu (丙午) belongs to the Li Gua (离卦), with the Heavenly Stem and Earth Branch all associated with fire. The Chinese often say “Red Horse, Red Sheep,” indicating this will be an extraordinary year.

Since January, the market has felt these shifts: historic volatility in gold and silver, geopolitical events like Venezuela in January, the ongoing Iran conflict, and sharp swings in storage sectors and Asian markets.

Many of these historic fluctuations are unprecedented in our data history, especially in precious metals. Recently, Korea’s stock market experienced two consecutive circuit breakers, which is rare.

Currently, the market is pricing in the risk premium for geopolitical uncertainty. I believe there is no definitive conclusion yet. Even if you ask former President Trump or U.S. generals, they might not know either.

Most market consensus expects the war to end in about four weeks, around late April. About two-thirds of voters believe it will end by then. But since this is an unconventional war—unlike traditional conflicts where leaders are often considered “untouchable”—we can’t expect Iran to follow normal rules either.

Iran is now fiercely counterattacking. Although many believe its missile stockpiles are nearly exhausted, its series of strikes against neighboring countries show it is not an ordinary nation and is not playing by conventional rules. The blockade of the Strait of Hormuz is underway, and oil prices are soaring.

Capturing the Key “Turning Point”

For the market to “stabilize” and fully price geopolitical risk premiums, we need to see a turning point in the war.

We don’t need to assume the war will last exactly four weeks or wait until then to see how the market prices it; we only need to identify the turning point.

This could be, for example, a pro-U.S. organization emerging in Iran; or the Strait of Hormuz’s shipping capacity returning to over 70% of normal; or a decisive blow to Iran’s nuclear facilities, or evidence that Iran’s nuclear sites have been completely destroyed—all of which could be considered a turning point.

When these turning points occur, the market can gradually “reinvest,” and risk premiums will be fully priced in.

But when exactly will these happen? I believe no one in the world knows; we can only wait.

Remember, it’s not the end of the war but the appearance of a turning point that signals the market has entered a phase where risk premiums are fully priced.

AI’s valuation may already be excessive

As you know, I have developed some quantitative models to track market and economic cycles, sentiment, positions, valuations, and various fundamental indicators.

The most accurate and frequently used model is our current “cycle model.” Let’s look at the U.S. semiconductor cycle.

Since the beginning of this year, we’ve seen many historic market performances—for example, the Korean stock market rose nearly 50% from the start of the year to its peak, then sharply corrected; driven mainly by memory chip companies like Samsung Electronics and SK Hynix. The market claims that “storage is no longer enough” with AI development.

But examining the short semiconductor cycle, using a series of U.S. semiconductor industry data fitted into a quantitative indicator, from trough to peak and back to trough, typically takes 3–4 years. We also see that the U.S. semiconductor cycle indicator aligns closely with the S&P 500’s direction.

Therefore, if the short semiconductor cycle has peaked (peaking is a process), we can conclude that the S&P 500’s upside potential is limited. The long semiconductor cycle is also gradually peaking, and recent new highs in the major U.S. indices are weakening, with momentum waning.

Semiconductors are a global cycle, not just a national one. They are embedded in all critical computing, software, and AI investments. Since last year, the surge in related prices has fully reflected these expectations. That’s why we pointed out a bubble in the AI sector last October-December.

When I say “bubble,” I don’t mean AI technology won’t continue to develop; on the contrary, AI’s growth may be exponential. But financial markets price expectations, not what AI actually “does.” The market’s valuation may already be excessive, ahead of what can be realized in the future.

Thus, the U.S. semiconductor cycle is gradually entering a short-term peak. Our theme this year is “Hold and Profit,” meaning take profits when the trend is good. For example, storage may have tripled or quadrupled; if future gains are limited, we can take profits. We can’t always sell at the absolute top, but selling at a relatively high point is psychologically better than rushing to sell after the peak.

Risks in the U.S. stock market are higher than expected

Looking back at previous semiconductor cycle peaks—such as late 2015 and early 2016—we made similar judgments: the cycle was peaking, and a significant correction in the U.S. market was imminent.

Indeed, in April 2025, the U.S. stock market experienced a historic correction from its peak to trough. Looking further back, the highs in March 2021 and November 2019 also align with our assessments.

Cycle indicators tell you where you are in the cycle, but what triggers a “cycle reversal” is unknown. The cycle only indicates that at this point, any significant news could catalyze a peak and a sharp decline.

We are now at a cycle top—an indicator based on actual industry data, not subjective judgment; it reflects the most direct manifestation of economic cycle movements.

Looking at positions, the semiconductor cycle is peaking, but both institutional and retail investors are heavily positioned in semiconductors; high cycle and high positions form a typical and unfavorable combination.

Historically, cycle peaks often occur when positions are high because people are more optimistic and feel invincible. But regardless of how strong AI becomes, economic laws still apply. Current positions feel comfortable but are often the most dangerous.

Retail sentiment remains largely unaffected. Recently, during a sharp decline in the U.S. stock market, the opening drop was over two points, but the market recovered half of the losses by close. Even if the U.S. wins the war, it cannot win against the economic cycle—this is a fundamental law. Market sentiment and actual developments are severely mismatched.

Extreme risk insurance prices are soaring. Historically, tail risk premiums have had strong leading indicators for the S&P 500, often leading by 1–4 weeks. We shared in February that tail risk premiums were high, but the S&P 500 remained unchanged, creating a clear divergence.

Combining positions, cycle, sentiment, and sector cycle stages, these divergences suggest that the U.S. market may be overly complacent, with risks higher than perceived.

The dollar is only experiencing a technical rebound

Regarding the dollar, it typically rebounds when approaching the lower trendline. For example, during the massive waves of 2021 and 2020, the 2014–2015 period, and the U.S. debt default in 2011. Currently, the dollar may be experiencing a technical rebound due to war impacts.

Only a few assets are rising: gold, oil, freight rates, and bond yields. The dollar’s rebound indicates a contraction of dollar liquidity in the system; however, this small rebound does not mean a successful breakout of the long-term upward trend over the past decade. If the rebound continues and liquidity tightens, it would be very unfavorable for risk assets, which aligns with previous analysis.

Looking at liquidity indicators, the dollar exchange rate is influenced by multiple factors (war, Fed policies, other countries’ policies), so we can’t rely solely on the dollar to gauge liquidity conditions. We compiled data from major central banks’ currencies and monetary policies worldwide, creating a global liquidity condition index.

This indicator has peaked but is likely to decline soon. Over the past 20+ years, the dollar trend has been consistent with global liquidity. Currently, risk aversion has increased, boosting the dollar, while gold also performs well as a traditional safe haven.

Global liquidity conditions have entered a regional high; a decline would mean liquidity contraction, echoing the earlier cycle downturn and risk asset risks.

Looking at the U.S. 10-year Treasury (since 1960), I often use the 850-day moving average, which reflects trend rather than precise timing. About 3.5 years (850 trading days) roughly matches the cycle length. Recently, UST yields have sharply rebounded near the 850-day trend line.

Regarding positions, retail investors are heavily long USTs (believing in rate cuts), reaching the highest levels since data collection began; meanwhile, institutions are doing the opposite, heavily shorting, confident that the 10-year yield will rise.

In early February, we didn’t know about the war or the geopolitical risks, but market prices revealed internal links. We didn’t know “why” it would rebound, but we knew “it” would. Later geopolitical events clarified this, as prices often lead catalysts, indicating future directions.

Gold and U.S. stocks rising together signals trouble ahead

Looking at “gold and U.S. stocks rising simultaneously,” we observed this in November last year. Historically, apart from the late 70s to early 80s, gold and stocks usually don’t rise together; when stocks fall, gold tends to perform (e.g., post-2000).

Therefore, gold is a valuable hedge for investors, often moving inversely to the largest holdings like stocks; the higher the S&P, the more prominent gold’s safe-haven role.

Currently, the S&P hovers near 6800–6900, close to historical highs. Last year, gold and stocks surged together, indicating “storm clouds gathering.” Unexpectedly, this year has evolved differently.

When Trump took office, he said, “I’m not a warlike president; I want to bring peace to the world.” Now, it seems he might be the president who has initiated the most geopolitical crises.

This year is exactly the midpoint of the major cycle

Looking at the long-term cycle of the U.S. S&P 500 (from the 1880s/1890s to today, over 160 years), each return cycle—from low to high and back—averages about 35 years. For example: pre-1939 (about 29 years before the Great Depression and WWII), 1974 (oil crises and Middle East wars), 2009 (subprime crisis and recovery). These low-to-high-to-low cycles are roughly 35 years.

2026 marks the 17th year since 2009, at the center of a 35-year cycle. At the cycle’s peak, any situation could cause dramatic changes, with many unprecedented events.

The Year of the Horse (丙午) is ongoing; only two months in, but we already feel like years have passed, given the geopolitical risks impacting portfolios.

Many say cycles are an obscure ancient science, or that they are just technical analysis. But how to explain the recurring appearance of these cycles? And why do major historical events often occur at cycle turning points? I believe these are worth examining and observing.

Global liquidity generally peaks and then declines

Returning to liquidity, we aggregated hundreds of central bank currency data into a liquidity index. This index is clearly near its peak and beginning to decline.

Looking at gold, over the past 20+ years, its price has closely followed liquidity conditions. We have always emphasized gold as a good risk hedge in portfolios and negatively correlated with stocks. On January 29, 2026, gold surged to an extreme high, then fell from 5500 to 4400, a drop of 1000; silver from 121 to about 70. These all suggest potential changes in liquidity conditions.

But gold remains a good safe-haven asset, whether for geopolitical risks or hedging stock holdings. If a risk-off market trend develops, we believe gold will continue to be in demand.

Commodity markets have not finished their upward trend

Since June 2025, we were among the earliest to predict a “commodity bull market.” Back then, it was mainly gold, silver, precious metals, platinum, and palladium. We said gold’s strength would reflect in non-ferrous metals; then oil and energy; finally agriculture—indicating the economic cycle is entering its late stage.

Cross-validation is crucial in investment decisions; relying on a single indicator is risky. For example, when the short semiconductor cycle peaks, we also look for corroboration from other economic sectors to improve decision accuracy.

Liquidity conditions suggest copper prices may still have room to rise; oil prices are surging due to geopolitical tensions. This aligns with our June last year sequence: Gold/Silver/Precious Metals → Industrial/Non-ferrous Metals → Energy/Oil → Agriculture. Even without war, other catalysts could push oil prices higher; this is the cycle law.

Agriculture is the most defensive sector.

Looking at industrial metals, liquidity conditions lead metal prices by about six months. We believe metal prices still have room to trend upward. War requires large quantities of materials—oil, copper, iron, tungsten, antimony, tin—for weapons and ammunition; war itself benefits metals.

Regarding “metals priced in gold,” such as gold-mining stocks, historically, such lows occurred only during the pandemic and in 2008. This indicates market pessimism or underinvestment in metals. Given the war and liquidity environment, the probability of metals remaining at such low levels long-term is low. This is another reason we believe the commodity rally is not over.

Comparing 10-year Treasuries with commodities, commodities lead by about 10 years. So, I believe the 10-year U.S. Treasury yield is more likely to rise than fall now. This matches the inflation expectations driven by war, and the large short positions in 10-year Treasuries, as well as the earlier rebound near the 850-day moving average.

Additionally, the rebound in commodities has not yet reached 50%, and the upward trend likely has more room.

At least now, defensive rotation should begin

Since liquidity indicators typically lead risk assets by 3–6 months, the period from November last year to now is about 4–5 months. We have indeed seen risk appetite change rapidly since February.

To anticipate liquidity trends earlier, we need leading indicators of liquidity. Last November, we forecasted that liquidity would peak and then decline; now, it’s clearly in that phase. With data from February, we expect liquidity conditions to turn downward around March or April, consistent with the dollar rebounding from its 2008 lows.

China’s current account (export conditions) influences U.S. inflation expectations. Over the years, it has increased by over a trillion dollars annually, but Americans believe inflation is under control—I disagree. Whether due to war, other factors, or AI’s material needs, I believe U.S. inflation expectations are not subdued. U.S. Treasury yields are around 4%, while inflation is about 3%. The probability of further rate cuts by the Fed is significantly reduced.

In summary, last November we said that in the next 3–6 months, global liquidity would peak and then decline. The peak phase is also the most lucrative period. Looking back, whether in gold, silver, precious metals, storage semiconductors, or Asian markets, we saw unprecedented phenomena: historic highs in gold and silver, 3–4 times gains in storage sectors, and the fastest year-to-date gains in emerging Asian markets compared to U.S. stocks. These are characteristic of liquidity peaking: risk appetite is wild, and abundant liquidity fuels various stories.

But if liquidity peaks and then contracts, risk assets will be heavily impacted.

Thus, we see the U.S. semiconductor short cycle gradually peaking; the 10-year Treasury yields rebounding from the 850-day trend line; U.S. inflation expectations likely to rebound; and war-related risks, oil, and metals reinforcing inflation expectations. The overall environment is not friendly to investors, leaning toward a “malicious” market environment. At least now, defensive rotation should begin, rather than holding all growth stocks.

Hang Seng Index should wait for a better opportunity

China’s economy is near a cycle high. The Chinese economic cycle and the U.S. semiconductor cycle are mutually corroborative.

Therefore, both the Shanghai Composite and Hang Seng Index face resistance. I believe A-shares will perform better due to RMB appreciation and policy support; Hong Kong stocks are less fortunate, hence the sharp decline.

Hong Kong’s economic cycle indicator shows a low-high-low pattern over about 3–4 years. The last low was on October 31, 2022. The current slowdown is rapid, putting pressure on the Hang Seng Index; the trend is not over yet. The Hong Kong market may have a technical rebound (after a sharp fall), but we choose to wait for a better entry point.

Regarding central banks, they can continue expanding their balance sheets, but they must consider where the new liquidity flows. We don’t want excess capacity again. Historically, current expansion levels are at high points, which could be a key driver of the liquidity peak and subsequent decline. Each peak in expansion significantly impacts risk assets, explaining the Hang Seng Index’s movements.

Furthermore, the central bank’s balance sheet correlates strongly with the Hang Seng China Enterprises Index, with cycles roughly every 3–4 years.

Bank stocks have high upside potential

Looking at banks, their relative returns are at historic lows. I believe the probability of a rebound is much higher than further decline. History shows that after relative lows, the chance of recovery is greater, so banks are more likely to outperform.

Finally, sector rotation: most of the time, if we understand how global liquidity conditions change, we can roughly predict the rotation between growth and value stocks. Currently, growth stocks (including Hong Kong and A-shares’ ChiNext) are outperforming, so their downside is larger than their upside. Given liquidity is expected to peak and then decline, value rotation has likely begun. This aligns with the conclusion that bank stocks are at a relative low, while growth stocks are near historical highs.

This Year of the Horse (丙午), true to its nature, has unleashed a wild gallop. But I often say, volatility creates opportunities; progress happens amid fluctuations.

If we don’t change our previous thinking, investment habits, or worldview, it will be hard to spot opportunities. I believe this year’s volatility will also bring great opportunities.

Risk warning and disclaimer

Market risks are inherent; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should evaluate whether any opinions, views, or conclusions herein are suitable for their circumstances. Invest at your own risk.