Can an aging bull learn some new tricks to continue pleasing its owners? Already a third of the way through its fourth year, the bull market in 2026 is trying to draw on fresh reserves of support that differ markedly from the ones that got the advance started and kept it rolling. Each core driver of the S & P 500 's near-doubling off the October 2023 low is either being questioned or supplanted by another hoped-for source of propulsion: AI supremacy giving way to Old Economy revival; growth-stock cash-generation receding in favor of productivity promises; disinflation allowing for lower policy interest rates morphing into a "run-it-hot" nominal-GDP surge with fewer rate cuts; and a supposedly "hated" market with a high wall of worry transformed into an instrument of retail-investor aggression to buy every dip and overplay each momentum move. From the start, this has been an uptrend energized by AI. Yet for the past three months, the AI sector has broadly stalled. The Magnificent 7 stocks and the Global X Artificial Intelligence ETF (AIQ) have both lagged the equal-weighted S & P 500 by about ten percentage points since the end of October. AIQ 6M mountain Global X Artificial Intelligence ETF (AIQ), 6 months Was that the date when Meta's relentless capital-spending plans, reiterated during an otherwise strong quarterly report, that triggered a crisis of faith in this theme? Or Netflix's uninspiring third-quarter results followed by its decision to bid for Warner Brothers Discovery ? (Netflix hired bankers for the bid at the end of October, draining faith from the "tech compounder" cohort. Take a look at a one-year chart of Spotify against Netflix, both are down hard in recent months even though only one is trying to lever up to acquire a legacy-media business.) NFLX SPOT 1Y mountain Netflix vs. Spotify, 1 year Or perhaps the fall was when the gears engaged for the "cyclical upswing" trade, the Federal Reserve having resumed rate cuts in September while tax-law stimulus pulled into sight. Small caps, cyclicals to take the lead? Whatever the catalysts, the vaunted "broadening" trade has played out quite well, within its inherent limits. Cyclicals, small-caps, banks are all outperforming since the peak in AI dominance. My consistent view here has been that a broader market is not necessarily a more stable or rewarding one in aggregate. It's great for active stock pickers and perhaps delivers a reassuring macro message that the sectors most sensitive to the economic rhythms are leading. But the S & P 500 has been unable to surmount its late-October highs on repeated attempts, and if Mag7 stocks continue to be treated as a "source of funds" to buy Caterpillar and Citigroup , the strategists' collective upside index target of 7600 becomes tougher to achieve. And, for that matter, big bank stocks have traded down since the group started reported generally strong earnings the week before last. The rip in the small-cap Russell 2000 , which outperformed every trading day this year until Friday, says a bit less about the real economy than about pent-up buying in lagging, leveraged, lower-quality stocks. For now, the small-cap breakout to a new high should be respected after so many head fakes since 2021. It would be healthier, perhaps, if the S & P Small Cap 600 – higher-quality, profitable small companies — were to start narrowing the gap with the Russell 2000. I keep pointing out that the upper reaches of the Russell 2000 is a roster of speculative "story stocks" such as Bloom Energy , Credo Technology , Oklo , Joby Aviation and IonQ . Fun stuff, but hardly the salt-of-the-earth plays on the core of the American economy. Getting back to the old rules of the bull market fraying: The persistent leadership and premium valuations of the handful of largest tech platform companies has for years been justified largely by citing their copious and effortless production of free cash flow. Now that Alphabet , Microsoft and Meta Platforms are flooring the accelerator on data-center capex, free-cash-flow growth has dwindled and the Nasdaq 100's price-to-forecast-FCF for the year ahead has stretched to 32 from around 24 in late 2023. This valuation indicator is now higher than it was in late 2021 before the tech-led bear market, even as the Nasdaq 100's forward P/E has moderated from almost 29 in October to a current 26. It remains true that the hyperscalers can afford this level of investment and are apparently satisfied with the way user demand and revenue tied to AI capabilities is ramping. But the idea that these companies can do it all while building a shareholder surplus and repurchasing a material amount of their stock carries less weight today. Before writing off the Mag7 exceptionalism idea, it's important to note that there have been these interludes before, multi-month periods when the Nasdaq 100 has sagged and the market's salubrious powers of rotation have allowed the rest of the market to bear the load for a while. And we now enter a week when most of the biggest tech bellwethers will be reporting earnings with the bar of expectation and relative-performance lower than usual. A re-rotation back toward secular-growth stocks would make some sense here, perhaps more so because it would catch the consensus a bit wrong-footed. Running it hot? Credit the market for hanging in there as the projected Fed rate path has grown less dovish. Market pricing now foresees fewer than two full quarter-point rate cuts in the cards for 2026, down from three in November. This reduction in anticipated Fed loosening has been more digestible thanks to former growth dynamics. The Citi U.S. Economic Surprise Index has burst upward in recent weeks and is now close to its highest levels in two years. This raises the specter of the Fed nearing the terminal rate for this cycle before too long. Another indication of a certain level of maturity for this bull market though not necessarily a damaging one. A Fed comfortably on hold is among the more bullish atmospheric factors, as the first nine months of last year showed us. Questions on the "run-it-hot" theme: Has the cyclical-stock outperformance already paid in advance for the benefits? Is the recent sharp drop in the consumer savings rate a sign the tax-refund bonanza was pulled forward? Will longer-term Treasury yields stay in their benign range as all this unfolds? There are other ways to read these dynamics, for sure. Morgan Stanley strategist Mike Wilson has been arguing that last year a series of "rolling recessions" ended, giving way to an early-cycle setup for the majority of the economy and stock market that will drive superior earnings growth in 2026 that will more than justify current valuations. This outcome is not in the bag, but it's surely in the mix. Finally, a word on the behavioral changes among investors who have been conditioned by generous three-year gains and a series of "V" bottoms off panicky corrections to buy each modest pullback and press their bets on high-velocity price moves. Aggregate sentiment is decidedly optimistic, by most measures, though not at unstable extremes. Tony Pasquariello, head of hedge fund coverage at Goldman Sachs, has said in recent weeks that clients' positioning is a "plus 8" on a scale of minus 10 to plus 10. Retail-trader engagement is pressing new highs based on options volumes and JP Morgan's gauge of individual-investor flow into single stocks. Last week there were victory laps taken after Tuesday's 2% S & P 500 decline on the Greenland "Sell America" redux scare was quickly bought , with some equating it somehow to the bounce last April off a 20% mini-crash low. Is it a good thing that investors are starting to believe the market is inured to any shock, with the Greenland tiff laughed off and Justice Department offensive against Fed Chair Powell almost forgotten two weeks later? Erratic flows across macro markets are hard to ignore. Gold and silver going galactic on dollar-debasement fears and shadowy rumors of hoarded supplies, a flash surge in the Japanese yen Friday accompanied by talk of potential central-bank intervention, memory-product makers globally going vertical on acute physical shortages of low-value-added chips, the Nasdaq Biotech Index surging precisely in lockstep with the Russell Micro Cap Index. All this, while equity indexes have held near record highs, corporate-debt spreads are subdued and bond-market volatility remains sleepy. A kinetic, somewhat contradictory market moment for sure, yet one that has so far left the uptrends intact and the optimists emboldened.
