Ever have one of those weeks in the market where nothing dramatic happens on the surface, yet everything feels like it’s shifting underneath?
That was last week. The S&P 500 crawled 0.3% higher—barely enough to notice—yet closed within spitting distance of its all-time high from late October. No fireworks, no panic, just a quiet grind back to the top. If you blinked, you missed the entire round-trip correction from November.
And honestly? That stealth recovery might be telling us more than any 5% surge ever could.
A Classic Early-Cycle Rotation Is Playing Out
Look beneath the headline index and the action gets a lot louder.
While the S&P 500 basically stood still, the Dow Jones Transportation Average jumped 3.6%. Regional banks added 2.7%. The retail ETF rose 2.2%. And—maybe most telling—the Russell 2000 small-cap index actually printed a brand-new record close.
This isn’t random noise. This is textbook early-cycle behavior.
When the Fed is easing and growth expectations are turning higher, money starts flowing out of the defensive mega-caps that carried the bull market and into the “old economy” areas that do best when animal spirits return. Transports, small caps, financials, retail—these are the exact groups that tend to lead when the economy is re-accelerating.
In my experience, when you see this kind of rotation with volatility collapsing at the same time (the VIX dropped toward 15 again last week), it’s usually the market’s way of saying: “I think the worst is behind us, and I’m ready to price in better growth.”
The Growth vs. Cyclical Gap Is Closing—Fast
Goldman Sachs published a great chart last week plotting the performance spread between cyclical sectors and defensive sectors against consensus real GDP forecasts. Both lines are now pointing firmly higher, and the gap that opened late last year—when everyone got carried away betting on immediate “growth-friendly” policies—has almost completely closed.
That’s healthy. It means the market isn’t fighting yesterday’s war anymore.
But it’s also a reminder: markets are terrible at forecasting turning points, even just a few months out. The crowd can flip from overly optimistic to overly pessimistic in the blink of an eye.
Wall Street’s 2026 Scorecard: Everyone Sees Green
I spent the weekend reading through more than a dozen strategy outlooks for 2026. The uniformity is striking.
Average S&P 500 price target sits around 7,600—roughly 11% upside from Friday’s close. That would take the index from today’s ~6,850 level to the mid-7,000s by year-end 2026.
More remarkable? Not a single major firm is calling for a flat or down year. Zero.
- Consensus expects 14% earnings growth
- Profit margins stay historically elevated
- Valuation multiple holds most of its ground (currently ~22.5x forward earnings)
- Fiscal policy runs hot under the new administration
- Fed continues easing unless growth surprises dramatically higher
All of that is perfectly plausible. Honestly, it’s the base case I’m running with too.
But plausible doesn’t mean guaranteed. And when literally everyone agreeing on the same script makes me a little nervous—markets love to embarrass the crowd.
The Contrarian Voice: Bank of America’s Savita Subramanian
“Earnings can still grow mid-double digits, but multiples are likely to compress 5-10%. Liquidity is full blast today, but the direction of travel is likely less, not more—fewer buybacks, higher capex, fewer central-bank cuts, and a Fed that only cuts if growth weakens.”
— Savita Subramanian, Head of U.S. Equity & Quantitative Strategy, Bank of America
She’s calling for the S&P to end 2026 around 7,100—still up, but barely. Her point: the AI buildout is maturing, returns on invested capital are starting to decline, and the easy liquidity tailwind of the past two years is fading.
I think she’s onto something. A broadening market—where capital rotates into cyclicals and small caps—doesn’t automatically translate into higher headline indexes if the Magnificent Seven cohort gives back some of their extreme outperformance.
Bond Yields Are the Sleeper Risk
Treasuries have been remarkably well-behaved for months, with the 10-year yield bouncing in a fairly tight range. But last week it nudged up to 4.14%, and it’s now flirting with an 11-month downtrend line.
If reflationary forces really do take hold—higher growth, bigger deficits, stickier inflation—yields could break higher in a hurry. And history says that when the 10-year moves decisively above 4.5-5%, stocks start to feel it.
Right now the bond market is giving equities a free pass. That may not last forever.
Valuation Reality Check
Fidelity’s Jurrien Timmer ran the numbers on a stock-bond relative valuation model that incorporates current multiples, Treasury yields, and a conservative 6-7% long-term earnings growth assumption.
His conclusion? From today’s levels, forward 5-year annualized returns have always been below the market’s long-term 10% average—and half the time they didn’t even beat inflation.
That doesn’t mean the market is about to crash. It just means the margin of safety is thin.
Yet here’s the funny thing: the “overvalued markets can’t go higher” argument has been spectacularly wrong for years. The S&P was already trading above 23x forward earnings five years ago—higher than almost any point since 2000—and it has since delivered nearly 15% annualized returns.
Don’t fight the tape. Don’t fight the Fed. Those old sayings exist for a reason.
So Where Do We Go From Here?
Near term, the path of least resistance still looks higher.
- We’re 17 trading days from year-end—December seasonality remains strongly positive
- The Fed is widely expected to cut another 25 bps in two weeks
- Financial conditions are still loose
- No recession in sight
- Bull markets that make it to year three almost always get a fourth
Longer term, 2026 feels like a transition year. We’re likely moving from the “liquidity-driven” phase of the bull market (2023-2025) into a “growth-driven” phase. That rotation can be healthy and profitable, but it’s rarely as smooth as the mega-cap era was.
My base case: the S&P 500 grinds toward 7,400–7,600 by the end of 2026 (high single-digit to low double-digit total return), but with a lot more sector churn and probably a 10-15% correction somewhere along the way to keep everyone honest.
The biggest upside surprise would be if growth really does reaccelerate and earnings come in above the current 14% consensus.
The biggest downside risk is still the bond market. If the 10-year breaks 5%, all bets are off—valuation gravity finally shows up.
For now, though, the tape is acting well, breadth is improving, and the trend is still higher.
Sometimes boring is beautiful. And right now, boring feels like the right way to end 2025.
Disclosure: The author holds long positions in U.S. equities but no individual stocks are mentioned in this article.
