Remember that moment in March 2025 when the S&P 500 dropped almost 20% in six weeks and everyone suddenly rediscovered the word “correction”? Yeah, me too. I was staring at my screens thinking we were finally going to get the healthy reset the market desperately needed. Then – poof – it reversed violently, roared to new highs, and here we are in December with the index knocking on 6,900 again. Funny how fast fear turns into greed.
The truth is, markets rarely give us the clean narratives we want. As we close out 2025, investors are stuck between two very different stories – one that screams “party on” and another whispering “be careful what you wish for.” Both have solid evidence behind them. Both can’t be right forever. So let’s stop pretending we can predict the future with certainty and instead do the adult thing: look at both sides honestly and figure out what really matters for 2026.
The Big Pivot That Changes Everything
If you blinked, you missed it. On December 1, 2025, the Federal Reserve quietly ended quantitative tightening. Just like that, the slow bleed of liquidity that had been a constant drag on risk assets for years… stopped. Not slowed down. Stopped.
Think about what that actually means. For the first time since the pandemic madness, the Fed is no longer actively shrinking its balance sheet. Add in the near-certain 25 basis point rate cut next week and the growing odds of more cuts in early 2026, and you have the textbook recipe for what traders lovingly call “risk-on.”
I’ve been doing this long enough to know that when the Fed flips from tightening to neutral (or even slightly accommodative) while the economy is still growing – even slowly – stocks tend to like it. A lot. History shows the S&P 500 has delivered positive returns in 18 of the last 20 rate-cutting cycles when we weren’t already in recession. Right now, recession probabilities according to most models sit below 30%. That’s not nothing.
Why Liquidity Is Still the Kingmaker
People love to overcomplicate markets, but at the end of the day, price is mostly a function of liquidity and positioning. When there’s more cash than good ideas, prices go up. Simple.
Right now, cash is coming back. Overnight repo injections are spiking. Money market funds are still sitting on trillions, but the yield advantage of cash over stocks is shrinking fast with every expected rate cut. Corporate buybacks – which basically went on vacation during the QT years – are already picking up again. And under-invested portfolio managers who missed the 2025 rally are feeling serious FOMO as we approach year-end bonuses.
When the Fed stops draining and starts (or even hints at) refilling the punch bowl, risk assets usually get drunk pretty quickly.
We’re already seeing the early effects. Money is rotating out of the mega-cap growth names that carried the market for three years and flowing into beaten-down sectors like energy, financials, and healthcare. Market breadth – the number of stocks actually participating in the rally – has improved dramatically since October. That’s the kind of thing that turns a questionable rally into a sustainable one.
The Statistical Case Looks Scarily Bullish
Sometimes the market leaves breadcrumbs even technicians like me find hard to ignore. After the sharp March-April selloff and the explosive recovery that followed, we’re now looking at only the fifth instance since 1950 where the S&P 500 has delivered this kind of V-shaped move after a 20% drawdown.
In the previous four cases, the following year was positive every single time. Average gain? North of 21%. I’m not saying history always repeats, but when it rhymes this loudly, I listen.
Okay, But What About All the Red Flags?
Look, I’d love to tell you it’s blue skies and 20% gains forever, but that’s not how any of this works. There are legitimate cracks forming, and some of them are getting harder to dismiss.
- The rally is still ridiculously narrow. Yes, breadth is improving, but the bulk of 2023-2025 gains still came from basically seven stocks. If AI sentiment cracks – whether from earnings misses, regulatory pushback, or simple exhaustion – the rest of the market has a lot of catching up to do in the wrong direction.
- Valuations are nosebleed. Forward P/E ratios on the S&P 500 are sitting above 22x. That’s top-decile expensive by any historical measure. Expensive markets can absolutely stay expensive (Japan 1989 says hi), but they offer zero margin of safety if growth disappoints.
- Household debt just hit another all-time high at $18.6 trillion. Credit card delinquencies are now above 2019 levels across almost every income bracket. Student loan delinquencies are spiking post-forbearance. This isn’t 2008, but it’s not healthy either.
- Private credit – that $2 trillion shadow banking system everyone was calling genius two years ago – is starting to show real stress. Investors are pulling money from BDC funds at the fastest pace since March 2020. When non-bank lenders get nervous, bad things tend to follow.
None of these issues are blowing up tomorrow. Markets can stay irrational far longer than we can stay solvent, as the saying goes. But they are building pressure. The bear case doesn’t need the Fed to suddenly hike rates or for a recession to be announced next quarter. It just needs a catalyst – an earnings disappointment from a major tech name, a nasty inflation print that delays cuts, a credit event in private markets – something to turn liquidity positive into liquidity panic.
So What’s the Most Likely Path for 2026?
Here’s where I land after staring at charts, data, and positioning until my eyes hurt: the path of least resistance is still higher into the first half of 2026, but with growing turbulence as the year progresses.
The liquidity tailwind is simply too strong to fight right now. Between the end of QT, expected rate cuts, corporate buybacks restarting, and the natural year-end chase, stocks probably have another 8-12% upside before reality starts biting. That would take the S&P 500 toward the 7,400–7,600 zone – a level that would make valuations truly absurd and set up a potentially brutal second-half correction or even a full bear market if any of the risks above materialize.
In other words, we might get both bulls and bears in 2026 – just not at the same time. The melt-up crowd gets the first six months. The mean-reversion crowd gets the back nine.
Key Levels I’m Watching Right Now
If you’re trading or managing money, these are the lines in the sand that matter:
| Support Levels | Meaning if Broken |
| 6,744 – 6,757 | 20/50-DMA cluster – first warning |
| 6,598 | 100-DMA – uptrend in question |
| 6,195 | 200-DMA – real trouble begins |
| Resistance Levels | Meaning if Cleared |
| 6,885 – 6,900 | Near-term overhead, old highs |
| 6,920 – 6,940 | All-time high breakout zone |
| 7,000+ | Measured move target, euphoria territory |
Until we lose 6,744 convincingly, I stay constructive. Below 6,195 and we’re having a very different conversation.
What Should You Actually Do?
My base case says stay invested but get picky. Trim winners that have gone parabolic, add to quality names on weakness, keep powder dry for the eventual volatility spikes, and for the love of all that is holy, respect your stops.
The market is going to do what the market is going to do. Our job isn’t to predict it perfectly – it’s to survive the surprises and compound capital over time. 2026 looks like it’s going to give us plenty of both opportunities and surprises.
See you on the other side.
