There are quiet weeks on Wall Street but there are no meaningless ones. The broad S & P 500 index in the past week barely fluttered the curtains, tiptoeing higher by 0.3%, slowing its two-week, 5.5% rebound rally and finishing just a quarter-percent shy of its former closing high set on Oct. 28. The smooth, if slow, progression reflects a market back in gear after running rough in November, with rotation among sectors supporting the tape and suppressing volatility, the S & P 500 Volatility Index bleeding toward 15 for the first time in almost six weeks. .SPX YTD mountain S & P 500, YTD Yet a close look and careful listen reveal a more emphatic message, that of a market repositioning for a reacceleration of the economy, following the playbook that's often cracked open in an early-cycle phase when the Federal Reserve is loosening policy. Last week against a flattish benchmark, the Dow Jones Transportation Average rose 3.6%, regional banks as a group added 2.7%, and the State Street SPDR Retail ETF gained 2.2%. The small-cap Russell 2000 notched a new record close, which owes something to the lower-quality speculative names that sit among its largest components, but also rhymes with the notion of a pickup in growth coinciding with the Fed executing another rate cut next week. Cyclical sectors more broadly have held their advantage over defensive groups. Goldman Sachs strategists plotted this relationship alongside the Street consensus for real U.S. GDP growth. Both are heading in the preferred direction. Still, note the last time these lines gapped apart to a similar degree at the end of 2024, when the crowd insistently bet on "growth-friendly policies" of the new administration energizing the economy. This isn't to suggest that another growth shock on par with the tariff panic of early this year lies ahead. But it's a reminder that the market lacks perfect clairvoyance about the economic future even a few months hence. No brokerage sees a down year Brokerage-house strategists, for their part, are singing along with the market's upbeat tune as they handicap what's to come in 2026. More than a dozen firms have published their outlooks, and I've read most of them. The average S & P 500 target is around 7600, up almost 11% from here. That's not a gaudy return, but is a bit elevated for the year-ahead average, and no firm sees a flat or down year. There is general agreement in blessing the consensus S & P 500 earnings-growth forecast of 14%, the assumption that profit margins will stay high and the belief that the index can hold most of its valuation (now at 22.5-times forward 12-month profits). A boost to individual tax refunds in the first quarter is at the very top of strategists' talking points, probably overstating the lasting impact. The administration has no doubt aligned fiscal policy to run the economy hotter in 2026, and Wall Street is broadly plugging in this scenario. The consensus expectations above are surely plausible. As I always say, investment strategy is the art of the plausible as much as politics are the art of the possible. Yet it's rare for a year to follow even a believable script written by committee. Bank of America strategist Savita Subramanian is more cautious on S & P 500-level returns next year, looking for a modest lift to 7100, and for "earnings to grow in the mid-double digits but multiples to compress by 5-10%." She sees the AI-buildout story growing choppier, with lower returns on capital, as the money-flow backdrop grows less generous: "Liquidity is full blast today, but the direction of travel is likely less not more - less buybacks, more capex, less central bank cuts than last year and a Fed cutting only if growth is weak." An equity market that "broadens" as capital migrates toward older-economy areas – something so many professional investors wish to see — is not necessarily one that would flatter the headline indexes. And it's again become important to track each tick in longer-term bond yields, which could respond to the same "reflationary" dynamics the equity market is sniffing out by lifting yields far enough to counteract them. Treasuries have been quite benign toward stocks for months, hovering in a moderate range. Still, the 10-year note yield hasn't been able to hold under 4% and last week ticked higher to 4.14%. Not a threatening level yet, but also not far from breaking above an 11-month downtrend line. US10Y YTD mountain 10-year Treasury yield, YTD The starting point for fresh-money buying today's stock market is rather demanding, by some measures. Fidelity's head of global macro Jurrien Timmer calculates a version of the stock-bond valuation model using an implied equity risk premium. It uses current valuation and Treasury yields along with an assumption of 6%-7% long-term earnings growth to derive forward return prospects. From current levels, he says, "the forward 5-year [compound annual growth rate] has always been less than the market's long-term CAGR of 10%. Furthermore, half the time it didn't even exceed the 3% inflation rate. That's not to say the market will be down over the next 5 years, just that it may well be below average." Then again, this market has for years defied valuation-based mean-reversion arguments. The S & P 500 five years ago was above 23-times forward earnings – higher than nearly every reading since 2000 – and since then it has compounded at nearly a 15% annual rate of return. Don't fight the Fed? With the index quickly recovering from its 5% pullback and with short-term rates due to be trimmed further in a few days, the rule that says "Don't fight the Fed and don't fight the tape" is still favoring the upside case. And, for sure, there seems no real edge in betting against the late-December upside bias, even if last year he market skidded to the finish line. Further insulating the bull case: Most bull markets that last three years, as this one has, survive a fourth. The S & P 500's near-17% year-to-date price gain looks perfectly in line with one ought to have expected if told that non-U.S. stocks would be up 28% and the Fed is on the way to completing 175 basis points of rate cuts in 15 months with no recession in view and financial conditions lax. Besides, the S & P 500's near-20% mini-crash last spring, which came two-and-a-half years after a 20%, nine-month bear market, means we aren't "due," in any important respect, for a wrenching payback phase. For now, too, the tape has encouragingly loosened its linkage to crypto prices, which remain close to recent lows even as the equity indexes have largely reclaimed their losses. In other words, not a lot to complain about with 17 trading days left in the year, though plenty to ponder during a quiet moment.
