Thus far in December, equity markets have somewhat churned, feeling “heavy” as many eagerly anticipate the arrival of a year-end Santa Claus rally. While skepticism abounds in the narrative headlines, as we sit here today, the underlying fundamental data continues to support strength into the year’s end and 2026.
Here are many reasons for that strength:
- The much-discussed seasonal strength to end the month.
- Continued dovishness from the Federal Reserve, with new central bankers coming into play next year.
- 2026 economic growth looks to be even stronger than this year.
- Skeptical investors trading a good contrarian signal.
- Stocks are currently oversold.
- Buyers outweigh sellers by a 2.6x ratio since November 21st.
- After no data due to the government shutdown, last week’s consumer price index report was significantly lower than expected.
The last point is the cherry on top. The CPI report gave investors hope that inflationary pressures are cooling enough for U.S. monetary policy to ease even more than anticipated.
Specifically, CPI rose 2.7% year-over-year, which was much cooler than the consensus expectation of 3.1%. Core CPI increased 2.6% year-over-year, which well below the 3% consensus expectation.
The visibility this report provided is important because it will reinforce that the Fed can continue to focus on protecting the employment market rather than having to “fight inflation.”
This means a Fed “put” is now in place for the economy. In other words, the Fed will now have the flexibility that if there is concern about downside risks to the economy, the Fed put will come into play.
This would lift stocks immediately. And it did. The market immediately jumped 1.25% following the CPI release last Thursday morning.
This development was the last ingredient necessary to be confident that the Fed will continue will accelerate its dovishness into 2026. Here are five reasons why:
- This is the first time there will be a Fed put since 2022.
- The December Federal Open Market Committee meeting made it clear how Fed Chair Jerome Powell is not contemplating rate hikes.
- The pace of cuts is now solely dependent on the evolution of the job market, not inflation.
- Quantitative tightening has ended, which means that quantitative easing is beginning.
- The new Fed and Fed Chair coming in 2026 will assuredly be even more dovish than the current composition.
That said, it’s not difficult to find a pundit espousing a “wall of worry” narrative that they claim could derail a year-end rally. In our view, those narratives are a false flag and nearing their own crescendo. Remember, we’ve begun to see buyers step back into the market and most importantly, as always, the fundamentals remain extraordinary.
Analyst Earnings Estimates Increasing
During October and November, for the second quarter in a row, analysts have increased their per-share earnings estimates for the upcoming fourth quarter earnings:
The Q4 bottom-up EPS estimates increased 0.3% from Sept. 30th to Nov. 30:
Not only is this the second quarter in a row that this has taken place, but it’s happening during a time when analysts typically reduce their estimates. For example, during the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of the quarter has been -2.4%.
This development for the second quarter row is bullish for stocks. Also remember how strong last quarter’s earnings ended up following a similar analyst EPS estimate increase.
2025 Earnings Growth of 12.1%
As 2025 ends and analysts have full clarity on calendar year earnings growth, they think 2025 should deliver double-digit earnings growth for the second year in a row. The current estimated year-over-year earnings growth for calendar year 2025 now sits at 12.1%:
That’s significantly above the 10-year average annual earnings growth rate of 8.6%.
And let’s be clear: this is broad-based growth. In fact, 10 of the 11 sectors are projected to report earnings growth, with four of those 10 sectors projected to report double-digit growth:
More importantly, the estimated net profit margin for 2025 now sets at 12.9%:
That’s well above the 10-year annual average of 11%.
Industry Analysts Continue to Increase S&P 500 2026 Price Expectations
Over the past two months, analysts have increased earnings estimates for 2026. From Sept. 30 to Nov. 30, analysts increased the consensus bottom-up EPS estimate for calendar year 2026 by an additional 1.8%:
This increase also has a positive impact on 2026’s expected S&P 500 closing price. Analysts predict the S&P 500 will close 2026 at 7,968.78:
For perspective, the index closed last Friday at 6834.50:
So, if analysts are correct about 2026, it means that we would see the market gain 16.5% from last Friday’s close through the end of next year. Interestingly, analysts have underestimated the final value of S&P 500 in five of the past six years:
So, if historical precedent plays out and earnings strength continues as expected, we might be fortunate enough to experience a fourth straight year of double-digit market price growth.
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