After a period of extreme uncertainty for the US stock market and its wider economy, the tide appears to be turning with the return to work of 600,000 furloughed federal employees and the beginnings of what looks like a healthy Santa Rally. In the past week alone, the US's flagship indices, the S&P 500 and Nasdaq 100, are up an average of 2.5% and, as of 3 December, sat at $6,824.15 and $25,445.48, respectively. That's within touching distance of their recent October all-time highs. Positive factors abound, and analysts have been surprised by a number of key earnings reports, as well as some strong macroeconomic data releases.
Whether these immediate gains can be converted into long-term growth will depend largely on economic and monetary policy, which, in turn, will be directed by inflation and the health of the labour market. The Fed is taking a "wait-and-see" approach ahead of additional rate cuts and the initiation of quantitative easing, but could the time of reckoning be close at hand? In this piece, we'll cover all of these factors and more as we try to determine where stocks could be headed in 2026.
Santa Claus is coming to town
Despite the excessive pessimism created by the record-long 43-day US government shutdown, the early data from this first week of December would suggest that it hasn't been quite as devastating as first thought, and a Santa Claus rally could be on the cards after all. As we mentioned earlier, the S&P 500 and Nasdaq 100 are both up modestly week over week and have just now surpassed their early November levels. What's more, many of the initial earnings reports we've received have significantly outperformed expectations, though these were perhaps overly pessimistic to begin with.
In the budget consumer sector, Dollar Tree easily beat Wall Street profit targets, and the company raised its full-year, per-share profit guidance. Meanwhile, chipmaker Marvell Technologies gained 8.7% after reporting a rise in Q3 revenue on strong demand for its data centre products, as well as its pending acquisition of Celestial AI. But Salesforce totally blew away analysts with 17% year-over-year growth and an EPS of $2.91, which was well above the predicted $2.41. This shows strong performance at both ends of the US economy, which certainly bodes well for the fortunes of US equity markets heading into 2026. And given that stock prices are typically a leading indicator, it's likely that we'll see this shift in expectations priced in sooner rather than later. Obviously, there are more major reports yet to land, including the Mag 7, but the preliminary data would suggest a stronger-than-expected Q4 for US capital.
Hot data
They say no news is better than bad news, but that isn't always the case when it comes to macroeconomic data. Investors often fear the worst and tend to get jumpy, especially in and around annual reporting time. With the shutdown now over, the economic data are finally trickling in, but unfortunately, they aren't quite as good as some might have hoped. The US Manufacturing Purchasing Managers' Index (PMI) fell below expectations to 48.2 in November, which shows that the sector is still contracting.
This is now the manufacturing sector's ninth consecutive month of contraction. Meanwhile, the Volatility Index (VIX), also known as the "fear index", rose 5.44% to 17.24.
It's far from all doom and gloom on the numbers front, though, as early consumer-focused data seem to suggest that the impact of the shutdown might not be as bad as first thought. Wage growth has shown resilience even in the midst of softer hiring. Putting aside the potential inflation risk, a stable labour market with moderate wage growth would give the Fed a reason to ease its monetary policy. After all, the regulator had previously suggested one extra rate cut could be forthcoming in 2025 and has already expressed an appetite for quantitative easing in recent meetings. As a result, the CME's FedWatch tool now has the possibility of a December rate cut at close to 90%. This would, of course, give stocks a welcome boost in an already traditionally positive month. Nonetheless, much will depend on key indicators like the CPI and non-farm payrolls, which could force the Fed to put the brakes on its dovish policy.
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