Like a brilliant football coach’s scripted first drive in a playoff game, Wall Street’s start to 2026 has gone exactly according to plan, the offense in rhythm with a balanced attack resulting in an early lead for the bulls. Not only is the S & P 500 up 1.7% but the tape has broadened just as nearly every play caller has been demanding, with the equal-weighted S & P ahead by almost twice as much. The insistent consensus call heading into the year for a reacceleration in the real economy — propelled by tax-based stimulus and an administration desperate to “run it hot” — has quickly been reflected in market leadership. Banks, transportation stocks, hotels and small-caps are cooking, helping to offset the cooling-off in several of the tech heavyweights that had large1ly led the S & P’s three-year, 80% advance. “Everyone expects [a] boom,” observes Bank of America global strategist Michael Hartnett. And while it can be uncomfortable to bet with a lopsided consensus and Hartnett’s own investor-sentiment gauge is flashing a warning of excessive bullishness, he for now thinks the weight of the evidence still supports the reacceleration thesis: “Fed cutting not hiking, Fed restarting QE buying T-bills, and Trump starting QE buying MBS.” (The president’s order last week to have the government-sponsored housing-finance companies buy $200 billion in mortgages to help lower home-borrowing rates is not, strictly speaking, quantitative easing. But it’s a leveraged source of price-insensitive demand for loans in a non-stressed market as well as a signal that the administration is intent on stoking demand however possible.) This crowd-pleasing pro-cyclical broadening pattern has been underway in some form since around Halloween, when the Magnificent 7 and a motley assortment of lower-quality speculative stocks peaked on a relative basis, giving way to a sideways phase for the headline indexes but a catch-up trade in non-tech cyclical and value plays. .SPX 6M mountain S & P 500, 6 months The S & P 500 had, in fact, failed to exceed its Oct. 29 intraday peak by more than a few points – until Friday, when the mega-cap-led Nasdaq 100 took a turn at the wheel, rising 1% and almost doubling the equal-weight S & P 500’s gain for the day. A soft-ish employment report that morning and lack of a Supreme Court decision on the legality of Trump tariffs seemed to prompt a modest unwind in the “run it hot” rotation, a reminder that those who pine for a virtuous-seeming broadening market might have to accept more restrained index gains. Overconfidence? There’s not much to quibble with in the market’s to-and-fro oscillations among sectors and themes so far. Indexes making record highs is more a bullish sign than a warning. Earnings forecasts are likewise near an all-time peak for 2026, though in recent days have inched a touch lower. Financial conditions are loose. And while the Fed appears on hold for January, the baseline expectation for a refreshed consumer and ongoing capex boom means the market should require less Fed help. When price action is crisp and the fundamental story solid, the main hazards become overconfidence and overvaluation that can result from an over-extrapolation of positive macro trends. Chris Verrone, technical and macro strategist at Strategas Research, notes that there’s been “a little bit of a manic feel to the start of the year.” I feel it as well, the sense of urgency with which investors have implemented the agreed-upon cyclical trade and the fast money running headlong into data-storage stocks to chase a structural memory-chip shortage. Professional investors begin the year with a fresh “risk budget” and in six trading days have been eager to spend it. Strategas’s investor-sentiment composite of eight market-based and survey factors are at a median 80th percentile of their own history. Inputs such as enormous ETF inflows, heavy options speculation and low demand for volatility-protection are elevating these readings. Separately, leveraged funds’ long positioning in Russell 2000 index futures is now at the 94th percentile of readings from the past two years. This is not an outright Sell signal by any means, more a potential emerging issue to be aware of, suggesting the market has a thinner psychological and positioning cushion underneath it to absorb any shocks. The gauge was in a similar spot a year ago, which did not halt the rally but set the scene for the DeepSeek shock to AI stocks and the February momentum reversal that kneecapped the Nasdaq. A relevant question for the cyclical bulls is how much of the anticipated pickup in growth has been paid for up front during the recent rally. It’s hard to contest the standard Wall Street take that elevated valuations rarely impede bull markets at times when earnings are growing and the Fed leaning toward looser rather than tighter policy. We also hear quite frequently that, away from the biggest growth stocks, the market is inexpensive. Yes and no. The valuation of the median large-cap stock, seen in the forward price/earnings ratio of the equal-weighted S & P 500, is a good deal lower than the top-heavy index as a whole. But while the equal-weight P/E is just above 17, it has rarely been much higher outside of the Covid pandemic, when earnings were deeply depressed. A small sampling of well-regarded, high-quality cyclical stocks – American Express, Wiliams-Sonoma and Paccar – are likewise already trading at or near peak multiples relative to their own history. Granted, this might simply be an old-fashioned spoilsport way to view the market. Maybe a genuine boom can keep goosing profit forecasts. Maybe equities were in a sense too cheap in past cycles. Perhaps a genuine technological transformation and productivity bonanza is underway that will make such static P/E-based arguments seem quaintly misplaced. Such a glorious New Era dawning is one thing that could redeem the decision by Corporate America to forgo hundreds of billions in free cash flow in order to build the hoped-for AI future. The capex arms race among the world’s biggest and most profitable companies is depleting the free cash flow that for the past 15 years has been a top reason they were granted stout premium valuations. Right now, the S & P 500 trades at a 3.5% forward free-cash-flow yield – in other words, it’s at 28.5-times the coming year’s free cash flow. Three years ago, this FCF multiple was at 20. A related point, the spending binge will constrict overall share-buyback activity, which has already been running in recent years at lower intensity, the annual total S & P 500 share repurchases last year equivalent to a mere 1.8% of the index’s market value. Again, these are merely broad atmospheric conditions that could coalesce into tricky weather down the road, not an imminent storm warning. I wouldn’t say the market is particularly “due” for a serious gut check given that the S & P 500 had a mini-crash nine moths ago and the subsequent momentum thrust off the bottom continues to underwrite the credibility of this uptrend. On the bright side, the over-eager talk of an AI bubble has quieted in the past couple months, as the Magnificent 7 stocks have diverged and some have faltered. Is the fact that Nvidia shares can’t get out of their own way — and that bitcoin has been dead money since two weeks after the 2024 election — a danger side for risk appetites and the broader tape? Or is the S & P 500’s ability to power to new record highs despite such blemishes a display of durable strength?
