Bullish, With Eyes Wide Open
Thoughts on the Market
2025 is officially in the books — and it wasn’t just a good year for returns, it was a pretty eventful one too.
We weren’t bullish just for the sake of it. The data supported that view, and we hope our research helped you stay ahead of the market and lock in some solid returns.
As we roll into the new year, our view hasn’t changed much. The US economy is heading into 2026 with resilient growth, broader profit drivers, and a policy backdrop that remains supportive for risk assets. That includes meaningful easing, pro-cyclical deficits, and an administration that’s paying close attention to markets.
On top of that, inflation remains well behaved. We expect CPI to drift lower this year as the main inflation drivers — wages, housing, and energy — aren’t pointing higher.
Put it all together and you’ve got a setup where the Fed can cut, but doesn’t need to, while real yields stay steady. In other words, it’s a fairly Goldilocks setup.
At the same time, let’s not get too comfortable — anything from geopolitical surprises to shakeups at the Fed could throw curveballs our way. And let’s just say Trump isn’t exactly known for keeping things predictable.
Still, given the backdrop, a recession isn’t our base case for 2026.
That said, we do expect the stock market to be higher by year-end. But as we like to say, year-end targets are mostly garbage — and we won’t spend much time worrying about where we end the year until at least October.
What does make sense for us is to share some context around what’s reasonable for 2026.
Right now, the average year-end forecast for the S&P 500 points to about a 10% gain. That’s at the top of the usual 8–10% range where most Wall Street targets land — and it also lines up with the S&P’s long-term average annual return since 1950.
But the thing is, that almost never actually happens. Since 1950, the S&P 500 has finished up 8–10% only four times. Most years, it either does a lot better or a lot worse.
If you expect 2026 to be an up year, history suggests you should be aiming closer to a 20% gain, since up years typically deliver around 17%, like last year.
It’s also worth keeping in mind that over the past 76 years — since 1950 — the S&P 500 has had 57 up years and 19 down years, which works out to a solid 75% win rate.
So, while year-end targets are mostly useless, they can still give us a sense of how people are feeling. Right now, not a single one of the 21 forecasters surveyed is predicting a decline. That tells us one thing: the market is feeling pretty bullish.
Normally, a crowded consensus like this might be a warning sign. But we’re holding off on calling it a contrarian signal. Unlike when everyone’s bearish, you can’t always just bet against a bullish crowd. After all, for most of the cycle, the crowd is the market. Case in point: in 2025, every strategist expected a rise… and that’s exactly what happened.
So yeah, expectations are high, but that doesn’t mean 2026 will be a bad year for stocks.
To give some perspective on where an average up or down year might take us, we’ve added those targets to our “S&P 10,000” chart. It shows the S&P 500 possibly hitting 10,000 by April 2028, based on the average bull market length of 5.5 years and a typical 180% return.
To help make sense of these targets — 8000 for a good year, and 5950 for a rough one — we’ve put together a valuation and earnings matrix for the S&P 500. Basically, it shows different scenarios for where the market could end the year, based on forward P/Es and a range of 2027 EPS estimates.
By December 2026, the market will be pricing in 12-month forward EPS, reflecting full-year 2027 earnings.
Right now, the bottom-up estimate for 2027 EPS is around $350 — a level we think is achievable barring any big shocks. We’ve marked that number in our matrix.
Here’s what the numbers tell us: a typical down year (-13%) would take the S&P 500 to about 5950, which works out to a 17x forward P/E. Since we’re currently around 22x, that would mean a 25% multiple drop — pretty unlikely without a big shock.
On the flip side, an average up year (+17.1%) would push the S&P 500 to 8000, with just a small bump in the forward multiple to 23x.
Our view: corporate earnings growth should keep the current US equity rally going well into 2026 — unless something unexpected happens. And hey, upside surprises are always possible, just like last year.
Now, if we assume EPS lands somewhere between $340 and $360 and the S&P 500 ends the year around 8000, that would put the index trading at roughly 22–24x forward earnings. And even at that level, the market wouldn’t be overvalued.
Why? Because multiples are naturally higher today thanks to higher profit margins.
As we’ve said before, the market’s earnings structure and risk profile have changed over time, especially with how much the sector mix in the S&P 500 has shifted. And what we know is that higher profitability demands a higher valuation premium.
To put it in perspective: if you’re comparing today’s 22x multiple to the 10-year average, you’re also comparing it to a period when margins averaged about 12.4%. Right now, they’re closer to 14.7%. That extra profitability makes a big difference.
Using our profitability-adjusted model, today’s P/E comes out to about 16.6x, just a touch higher from its 20-year average of 16.2x.
But this is where it gets interesting. As discussed earlier, if the S&P 500 ends the year near 8000, the index would likely be trading at around 22–24x forward earnings. But by that point, forward profit margins are expected to reach about 15.6%.
Using our scatter chart from our profitability-adjusted model — which plots multiples vs margins — to extrapolate this relationship beyond the historical profit margin range, suggests that earnings multiples in the 22–24 range should be reasonable assuming profit margins around 15.6%.
In other words, a bubble is still a ways off.
So, where does that leave us?
If you’re expecting an up year — like we are — history suggests you should think in terms of something closer to a 17% gain, not a single-digit grind. That puts the S&P 500 around 8000.
At that level, our earnings/valuation matrix points to roughly 22–24x earnings, assuming 2027 EPS lands between $340 and $360 by year-end. That will sound expensive to plenty of investors. But when you adjust for today’s strong profitability, those multiples look entirely reasonable.
So yes, we’ll likely continue to hear the word bubble, as bearish chants only grow louder the more powerful this bull market becomes. But in our view, this market remains fairly valued — not only today, but also 12 months from now, even 17% higher.
Today’s exercise is of course more art than science. Still, we hope it adds some color to what it takes to move the S&P 500.
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