Konstantin Shvarts: 'Prudence and vigilance, not exuberance, will define 2026'

Before turning to my outlook as an investor for 2026, it is important to acknowledge how profoundly the modern stock market – and, more broadly, the entire financial system – has changed over the past decade. Classical, disciplined approaches to investment analysis have largely been pushed aside. What we now observe is a market shaped less by fundamentals and more by liquidity, narratives and collective behaviour.

Since the global financial crisis of 2008, major central banks have repeatedly relied on various forms of monetary easing to stabilise and stimulate economic activity. At different points, the stated objective was to revive consumer demand, expand credit and support the real economy without fundamentally restructuring it. In practice, these policies produced mixed results. While financial collapse was avoided, inefficiencies were preserved, “zombie companies” proliferated, and vast amounts of capital were injected into financial markets rather than productive investment. That capital, in turn, went searching for returns.

At the same time, the rapid expansion of digital information flows and trading platforms opened markets to large numbers of unqualified or inexperienced investors. Many of these participants base their decisions not on analysis, but on social media influencers, headlines and hype. Given that global financial news is effectively shaped by just two or three dominant agencies, market narratives quickly become uniform. Capital flows are then redirected en masse into whatever asset or sector is deemed fashionable at a given moment.

Between roughly 2016 and 2021, this dynamic gave rise to a new type of market environment – one dominated by impulsive, trend-driven behaviour, in which expectations are set and reinforced by a small number of influential players. The result has been extreme concentration of capital, inflated valuations and repeated boom-and-bust cycles.

What defined 2025?

Against this backdrop, the defining features of 2025 were clear: the surge of enthusiasm around artificial intelligence, and a strong rally in gold, followed by silver. Media narratives framed AI as the beginning of a new technological era with virtually limitless potential. Gold was promoted as a hedge against the supposed decline of the US dollar, rising geopolitical instability, and claims that BRICS countries were constructing an alternative global financial system.

Yet a closer look at the facts paints a far more restrained picture. The release of GPT-5, for example, failed to deliver a meaningful leap over GPT-4 and, in some respects, even performed worse. This forced OpenAI’s leadership to cancel promotional efforts and focus instead on refining the existing product. The episode alone should have raised questions about the pace and trajectory of AI development.

From the perspective of someone trained in physics, the original thesis behind the concept of imminent “superintelligence” rested on a simple assumption: that feeding ever-larger datasets into a system would automatically produce ever-higher intelligence. That assumption has proven overly simplistic. While AI has undoubtedly achieved impressive results, there are growing signs that current architectures may be approaching physical and structural limits.

Moreover, the infrastructure required to sustain AI expansion is becoming increasingly burdensome. Data centres demand enormous and growing amounts of electricity, leading to structural power shortages. Hardware becomes obsolete within three to five years, requiring constant and costly replacement. These realities impose hard constraints that markets have largely ignored.

Recalibrating expectations

As a result, the coming years may look very different from the optimistic projections embedded in current valuations. Rather than exponential breakthroughs, we may see a gradual slowdown in performance improvements as technical limits assert themselves. Operating costs will rise, investor enthusiasm may cool, and capital could begin to rotate away from hype-driven themes toward assets with clearer economic foundations.

In this sense, 2025 may ultimately be remembered not as the year AI transformed the world, but as the moment when markets began to recognise that expectations had outrun reality. The era of effortless growth fuelled by cheap money and narrative investing appears to be ending.

This reassessment is particularly relevant given that none of the major AI initiatives has yet produced meaningful revenues, let alone profits. The sector remains almost entirely dependent on investor belief in a distant and highly optimistic future. Once a critical mass of market participants realises that this future has been overstated – or at least postponed much further into the future – valuations could decline sharply, by multiples rather than marginal percentages.

Gold, cryptocurrencies and the search for safety

A similar pattern is emerging in the gold market. While gold does play a role in central bank reserves, its structural limitations are often overlooked. It is costly to store, operationally cumbersome, illiquid in times of crisis, and impractical as a tool for resolving modern financial disruptions. No contemporary crisis can be addressed by physically transferring gold between vaults.

For these reasons, gold will remain a secondary reserve asset rather than a dominant one. Should a major European sovereign or central bank decide that current prices are attractive enough to support fiscal needs and begin selling reserves, the market could experience a sharp correction, like the decline seen in 2011–2012. From today’s levels, much of gold’s upside appears already realised.

Cryptocurrencies warrant separate consideration. Their decline has, in many respects, already begun. The adoption of the GENIUS Act in the United States has paved the way for regulated stablecoins that effectively function as digital extensions of existing fiat currencies. At the same time, the European Central Bank is moving forward with plans for a digital euro.

Taken together, these developments suggest that the current generation of decentralised cryptocurrencies has limited long-term prospects. Bitcoin may still rise in the short term, particularly as large institutions such as BlackRock promote it as a form of “digital gold”. Strategically, however, it is difficult to see how unregulated cryptoassets can survive in their present form once governments and systemically important institutions roll out official digital money. Personally, I would not entrust long-term retirement savings to Bitcoin.

Liquidity, central Banks and market fragility

An important but underappreciated development occurred on December 1, when the Federal Reserve’s programme of quantitative tightening came to an end. The Fed’s balance sheet has declined substantially from its peak, and commercial banks’ liquidity buffers have returned close to their pre-COVID levels of 2018–2019. In effect, a significant portion of the excess liquidity created in 2020 has now been absorbed.

How long this fragile equilibrium will hold is impossible to predict. A sharp downturn in US equity markets could trigger forced deleveraging and accelerate declines across indices. The situation is further complicated by developments in Japan, where interest rates have turned positive for the first time in decades. This shift could prompt capital repatriation, reducing liquidity in US and European markets that have long benefited from the yen carry trade.

While many investors still expect the Fed to cut rates and eventually return to some form of monetary easing, such shifts are not without consequences. Easing policies restructure incentives, alter collateral frameworks and redistribute liquidity in ways that often create new vulnerabilities.

For these reasons, I believe that 2026 is likely to bring a sharp but relatively short-lived correction in major equity markets, followed by recovery once the new liquidity regime is absorbed.

Tokenisation and the next narrative

It remains unclear what the next major narrative will be that attracts concentrated capital flows. However, one candidate stands out: tokenisation. Major financial institutions are aggressively promoting the idea of tokenising everything – stocks, bonds, real estate, personal property and even vehicles. This emerging market is effectively being designed to absorb future waves of liquidity.

Yet convenience comes with serious risks. Tokenised equities traded 24/7 would eliminate the remaining role of human judgment in markets. Even more concerning is the prospect of tokenised personal property, which could be frozen or reassigned with limited recourse. Legal remedies would likely be available only to those able to finance complex, cross-border litigation.

Estonia as a case study

These global dynamics are reflected clearly in Estonia. In 2025, economic conditions remained broadly stable but showed no signs of robust growth. GDP over the first three quarters hovered around zero in real terms, despite nominal growth of 0.3%. Bank deposits grew by about 4%, and local equity indices rose roughly 15%, reinforcing the idea that excess liquidity continues to flow into financial assets rather than productive activity.

Meanwhile, real estate – often described as Estonia’s “oil” – stagnated. Housing prices showed little to no growth, and a substantial volume of new office space is expected to come onto the market, raising concerns about demand.

In this sense, Estonia in 2025 mirrored much of Europe: economic stagnation alongside rising financial markets. Forecasting 2026 remains difficult. As a small, open economy, Estonia’s trajectory will depend largely on broader European developments, which themselves are uncertain.

Vigilance over exuberance

Taken together, these trends suggest that 2026 will reward caution rather than enthusiasm. Sharp corrections, the emergence of new digital assets, and structural shifts in global finance call for careful positioning, disciplined risk management and constant vigilance. The structure of the financial system is changing rapidly, and those who underestimate that shift may pay a high price. Prudence, not exuberance, will be the defining virtue of the year ahead.

 

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