It’s been a whirlwind year for most markets, and stocks have been no exception. After starting the year with steady growth following the election of the Wall Street candidate, Trump’s unprecedented Liberation Day tariffs and impromptu trade war with the world’s second-biggest economy saw equities bomb in early April. The S&P 500 and Nasdaq 100, tanked -18% and -22% respectively to rock investors. As rumours of trade deals began to roll in, however, a new bull market soon ensued, and the two premier US indices have now gained 38% and 49% from their respective 8 April lows to reach new all-time highs at the time of writing (22 December) of $6,863.66 and $25,484.64. And this despite sticky inflation and ongoing geopolitical instability affecting multiple key regions.
With the Santa Rally well underway, it’s hard to tell the difference between genuine growth based on solid fundamentals and the typical festive optimism that tends to inflate stocks around this time of year. Nonetheless, many positive factors do persist for equities, including monetary policy softening by the Fed, stronger-than-expected earnings reports, and some positive macroeconomic indicators. In this piece, we’ll assess all of these and more, as we attempt to trace the stock market’s possible trajectory in 2026.
It’s the real economy, stupid
Despite the relatively healthy state of the US economy, above-target inflation has been one negative indicator that has persisted throughout 2025. Yet it’s important to note that this has come against a backdrop of three much-needed rate cuts by the Federal Reserve, which has slashed its funds rate from 4.5% to 3.75% this year. Ordinarily, lower interest rates risk generating inflation, so it’s actually quite an achievement that the Fed has been able to keep this largely steady, especially with the added factor of a trade war and tariffs making goods artificially more expensive for Americans. Indeed, the latest CPI numbers show price pressure down to 2.7% in November from 3% in September, which would suggest that the door is open for more rate cuts in early 2026. The relationship between lower rates and stock market gains is well established, with cheaper credit making fixed income assets less attractive to investors and consequentially increasing their appetite for risk. When we couple this with an ever-weaker US dollar, which is now down 2% on the monthly and almost 10% YTD, it only really leaves stocks, gold, or crypto as viable investment options. And for the vast majority of investors, stocks offer the ideal balance of risk to reward and accessibility. This will of course also be true in early 2026, and so the chances of this bull market persisting are fairly high. For now, however, the Santa Rally makes it hard to assess whether the fundamentals are strong enough to sustain growth over the longer term. A US Census Bureau retail sales report from 16 December showed sales levels were unchanged from October to September, but naturally the real growth period for these indicators are November and December, the data for which we won’t have until the new year. If these figures meet or exceed expectations, it will bode well for the stock market in Q1 2026.
Working on it
While there’s no doubt that stock market performance has been strong this year, there are still numerous potential threats to the present prosperity. In addition to as of yet unresolved geopolitical uncertainty in key global regions, the latest employment data have begun to worry investors, and the situation is only likely to worsen once the seasonal jobs period comes to an end in January. As Laura Ullrich, Director of Economic Research for North America at the Indeed Hiring Lab put it: the jobs report released by the Bureau of Labor Statistics last Tuesday (16 December) "paints a sobering picture of a job market that may officially be turning frigid after a prolonged cooling period". The non-farm payrolls report showed that the US added just 64,00 jobs in November, marking a significant decline from the 119,000 jobs added in September (the latest month for which data exist). What’s more, the unemployment rate rose from 4.4% in September to 4.6% in November, which while still historically low, does mark this indicator’s highest level since 2021. Quite axiomatically, people who are out of work don’t have the spare capital to invest in stocks, and businesses who can’t afford to hire staff are typically not performing optimally – and this is what makes unemployment a good leading indicator of equities’ performance. In spite of all this, earnings reports have actually been surprisingly strong, with over 50 S&P 500 companies reporting positive EPS guidance. For Q4 2025, the estimated (YoY) earnings growth rate for the S&P 500 is 8.3%, which if it proves correct, will mark the tenth consecutive quarter of EPS growth. Perhaps the premier indicator of wider economic health, GDP growth, is also expected to close the year at +3%, giving stocks strong support, particularly in light of lower rates and yields, both nominal and real.
Trade CFDs on stocks and more with Libertex
Libertex offers a vast CFD offering comprising everything from metals, ETFs, and forex to indices, crypto and individual stocks. In addition to the core US indices like the Nasdaq 100 and S&P 500, Libertex offers both long and short positions in individual stock CFDs, too. For more information or to create an account today, visit www.libertex.org/signup.
