Market Commentary

• Every year, stock investors ponder the question of whether there will be a “Santa Claus rally” to finish out the year.
• The S&P 500 has rallied more than 34% off the early April 2025 low and is up nearly 14% on a year-to-date basis.

It won’t be long now until investors start to hear about a topic discussed every year about this time, no matter what stock-market performance has been over the prior 10 or 11 months. Whether the market has been naughty or nice really doesn’t make any difference. Every year, stock investors ponder the question of whether there will be a “Santa Claus rally” to finish out the year.

Technically, the “official” time frame for a Santa Claus rally is the week of trading between Christmas and New Year’s Day. But note that December, historically, is one of the strongest months for stock-market performance looking back over the past 70 years. Indeed, the three-month period from November 1 through the end of January tends to be very good for equities.

But we also like to look at the underlying fundamentals and valuations before getting all wound up with holiday cheer. That may sound a bit like Ebenezer Scrooge, but sometimes all that cheer needs a shot of reality along with the eggnog. And this might be one of those times. We have been favoring taking advantage of pullbacks when they occur (like in early April) and dollar cost averaging into stocks over the course of this year, but it also might be time to take note of what the stock market has done. The S&P 500 has rallied more than 34% off the early April 2025 low and is up nearly 14% on a year-to-date basis.

Do we look for higher stock prices in the coming 13 months? Yes, we do. Our 2026 year-end target range for the S&P 500 stands at 7,400 – 7,600. So even after a nice run higher so far this year, we continue to see further upside through year-end 2026.

We do see some near-term market volatility based on uncertainty over whether a Federal Reserve (Fed) rate cut will happen in December along with concerns about stock valuations and the monetization of artificial-intelligence (AI) spending. Still, there are a number of positive trends in place that give us reason to expect higher equity prices over the next year. These include meaningful tax refunds coming in the spring, deregulation, and a Fed that is poised to deliver further rate cuts in 2026. After a modest slowdown into year-end, we see an accelerating economy as we move through next year.

In the meantime, we have been trimming exposure from the Information Technology and Communications Services sectors as these appear fully valued at this point in time. Our neutral rating on both sectors still translates into noticeable exposure to AI themes. We have been adding allocation into the Financials sector (most favorable) along with Industrials and Utilities, which are tied to the AI infrastructure building thesis. We also upgraded Emerging Markets to neutral and see that asset class as an opportunity to invest in technology at lower valuations.

As the holiday season truly kicks into gear next week, take the time to be thankful for family, friends, and a good stock market.

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Communication Services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the Communication Services sector may also be affected by rapid technology changes, pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector.. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

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