Financial markets are likely to surge into early 2026 on a wave of euphoria before suffering a sharp downturn later in the year, according to economist Henrik Zeberg.
In this context, Zeberg warned that the 2025 market rally shows the hallmarks of a late-cycle blow-off rather than the start of a durable expansion, he said in a Substack post published January 1.
While he expects risk assets to push higher in the near term, Zeberg argued the advance is setting the stage for a painful reversal once economic reality catches up.
His outlook comes as investor sentiment enters the new year at extreme bullish levels following a strong 2025 for equities and renewed speculation across risk assets.
Market narratives heading into 2026 are dominated by expectations of sustained gains, with optimism centered on technology-driven growth, a soft economic landing, and continued liquidity support. Zeberg acknowledged these factors could fuel further upside early in the year, potentially producing an aggressive melt-up in asset prices.
Disconnect with underlying fundamentals
Despite the bullish tone, he cautioned that the rally is increasingly disconnected from underlying economic conditions. He described the current environment as a late-stage cycle in which markets continue to climb even as the real economy shows signs of fatigue.
In his view, this divergence is not unusual and has historically appeared near major market peaks, when investors focus on momentum and liquidity while ignoring weakening fundamentals.
Zeberg pointed to past cycles in which markets made fresh highs just before sharp downturns, with prices rising even as economic indicators deteriorated. He argued a similar pattern is emerging, driven by fear of missing out and speculative behavior that continues to push prices higher despite mounting risks beneath the surface.
While constructive in the very near term, he sees the rally as a late-cycle phase rather than a durable uptrend, warning that once euphoria fades, slowing growth and weaker fundamentals could trigger a sharp correction.
Early 2026 may still favor risk-taking, but the broader cycle points to a significant bust after the sugar-high rally ends.
Featured image via Shutterstock
Source: https://finbold.com/economist-predicts-2026-market-sugar-high-warns-of-bust-afterward/
