As a reminder, bull markets are rarely interrupted by geopolitical flare-ups. More often, they are treated as either exacerbating factors in an already weak trend (9/11 attacks, 2022 invasion of Ukraine), revealing moments that boost risk markets (1942 Battle of Midway, 2003 US invasion of Iraq), or just noise that can be safely ignored (US attack on Iranian nuclear facilities last year). The U.S. arrest of Venezuelan President Nicolas Maduro over the weekend would likely provide an excuse for financial markets to get nervous, had stocks entered 2026 with a bang, rather than indecisively grinding around the same index levels they first encountered more than two months ago. If oil normally acts as a transmission mechanism from international conflicts to stock markets, the current favorable levels of oil and the fact that energy is now only a small part of common household budgets suggest that the risks to the economy from price fluctuations are not particularly high. .SPX 1Y Mountain S&P 500, 1 Year Ominous speculation about what happens next and whether U.S. actions will cause rifts with allies or further instability in the region concern the entire world, of course. But when it comes to the direct impact of such issues on investors, it always makes sense to ask, “What exactly should the market reassess today based on these events?” Unless there is an immediate trigger for a reassessment of fundamentals or a redirection of capital flows due to unexpected events over the weekend, the answer is probably “not much.” Market expansion? This leaves us with more routine questions for the market for the first full week of the year. What to make of the S&P 500’s slight weakness through 2025, what the two-month trading range tells us, and how expectations for next year are sorted out. The index fell 1% last week, failing to extend its monthly winning streak to eight, and now stands at a level first reached on October 24th. Apart from disappointing misguided traders concerned about the Santa Claus Rally period (which ends on Monday as the S&P needs to rise 0.9% to avoid a third straight decline in this period), this insensitive action dampened the optimism of short-term traders without undermining the broadly held optimistic consensus. Rotation dynamics since late October continue to favor cyclical stocks and 2025 laggards over the tech giants that have contributed the most to value over the past three years. The S&P 500 index is down slightly since Oct. 29, with the equal-weighted version of the index up more than 1%, with transportation stocks up 6%, financials up 3% and the tech sector down 4%. This is what the “expanding market” looks like, as many observers predict and hope it will look like. A positive macro message is implied given the cyclical leadership, but nothing out of the ordinary for the total wealth of passive index holders and equity holders. This is an AI-driven, mega-cap, technology-driven bull market, and bull markets tend to not see leadership shift to entirely new categories of companies while still maintaining upward momentum after three years. However, the uptrend has been renewed several times due to periods of harmonic rotation away from technology. And this is a bull market that started in an unprecedented way while the Fed continued to tighten, so I don’t think you can say never. A few months ago, Wall Street was captivated by another impressive earnings season, the economy stabilizing as the Federal Reserve resumed rate cuts, and a steady stream of enthusiastic new predictions about AI spending. I asked this question in late September, surveying this wealth of bullish material. “What can we get from a market that already has everything?” At the time, investors were understandably looking ahead to all-encompassing growth in the fourth quarter, which would have likely led to over-optimism and careless speculation. Instead, the market has sought to regain some balance. This turbulent period, with little momentum at the index level and driven by wide dispersion between stocks and sectors, has pushed investor positioning and behavior away from dangerous extremes. Magnificent 7 Struggles BTIG technical strategist Jonathan Krinsky warned that Magnificent 7 has declined in each of the past five days, despite the semiconductor stock’s rally on Friday, which he said has largely led to the group’s tactical turnaround over the past few years. The disparity in performance between the Mag 7s – Microsoft stock clearly struggling as a proxy for the penalty box meta, a new darling Alphabet, doubts about OpenAI’s ambitions, Nvidia sitting on dead money for months as valuations compressed – is certainly a welcome counterpoint to the AI bubble narrative that circulated a few months ago. The daily stock put/call ratio rose to a multi-month high on Dec. 31, which is not a convincing buy signal for stocks, but evidence that the market is a little more hedged and ambiguous than generally bullish brokerage forecasts would suggest. Although the sample size is small, the S&P 500’s historical record of what happens after a seven-month winning streak followed by a down month is more reassuring than worrying in the short term. After the last six such streaks ended, the index rose in each of the subsequent months, according to figures compiled by Nerad & Deppe Wealth Management. Still, this monthly 7-up/1-down pattern has preceded a bear market twice in less than a year, including when it occurred in September 2021. There are a few things worth noting about the unanimously positive outlook from more than a dozen strategists at major retailers. First, this bright theory is completely reasonable and plausible. Stock prices rise about three years out of every four calendar years. Earnings forecasts continue to rise, the Fed is leaning toward at least another rate cut, and higher tax refunds and lower withholding rates should provide some fiscal recovery in early 2026. But second, market handicappers are taking the consensus S&P 500’s 13% earnings growth rate almost at face value, without taking into account the common pattern of estimate erosion. And more pointedly, few people take issue with the S&P’s forward price-to-earnings ratio of more than 22, at a time when valuations are near historic highs. Most people are leaning toward the idea that P/E is an ill-timed tool, that companies today have more resilient business models than in the past, and that valuations are less of a hindrance when earnings are rising and the Fed isn’t tightening. I’m not here to pick a fight with this rationale (rationalization?), just to note how widely shared it is. Ratings reflect built-in expectations, so more expensive markets should be harder to impress. Let’s see if that happens.
