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Stock Market Update

The S&P 500 is hovering just below record highs as massive catalysts get underway. This week features the final Federal Reserve rate-setting meeting that will be chaired by Jerome Powell, who looks set to be replaced by Kevin Warsh following a key procedural vote in the Senate. While the Fed held rates steady as widely expected, the meeting statement saw the most dissenters since 1992 with most against language indicating an easing bias. The central bank is becoming more divided on the appropriate path of monetary policy, and Warsh will take control in the face of rising inflation pressures from commodities. Core measures of inflation that exclude food and energy prices haven’t been below the Fed’s 2% target in over five years. Market implied odds don’t show any movement on the fed funds rate until the end of 2027 (chart below).

If anything, the inflation picture could get worse as gas prices top a national average of $4.00 per gallon while President Trump looks set to extend the U.S. blockade of the Strait of Hormuz in order to extract concessions from Iran on a potential peace deal. The blockade means that tanker traffic through the Strait will remain limited, cutting off 20% of the world’s daily oil product consumption. But the impact extends beyond energy markets, with the Middle East accounting for around 45% of urea production used in nitrogen-based farm fertilizers. Tanker traffic carrying fertilizer has ground to a halt as well (chart below), which could place upward pressure on food prices from higher fertilizer costs as well as the impact on crop yields from fertilizer shortages.

Investors will also have to contend with earnings reports from several AI hyperscalers, where optimism over AI infrastructure spending is playing a key role in positive earnings revisions. There are plenty of catalysts to drive volatility in either direction over the near-term, which is why it’s key to remain disciplined to identify proper chart setups among fundamentally strong companies.

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Stock Market Update

A rally in the S&P 500 that took the index to record territory over the 7,000 level is also one of the strongest 10-day gains in history. The 9.8% rally in the S&P over 10 days to mid-April ranked among the 20 strongest ever. Extremely bearish positioning by institutional funds such as CTA’s and risk-parity strategies likely played a significant role in the gains since the end of March, with one estimate pegging a recent five-day equity purchase at $86 billion for CTAs which would rank as one of the largest buy programs in history. The unwind of bearish positions has run its course, with overall estimates of positioning now running near neutral levels (chart below).

With the S&P 500 and Nasdaq back at record highs, that means valuations remain stretched above historical averages and that earnings growth will be critical to support gains in the indexes going forward. While there is significant uncertainty around the impact to consumer spending and expenses incurred by various businesses from the ongoing war in the Middle East and surging energy prices, forward earnings estimates are doing something peculiar. Earnings revisions for 2026 are now up approximately 4% since the start of the year (green line in the chart below), which compares to the typical revision that drifts lower based on historical data. With the first quarter reporting season about to pick up, it will be crucial to monitor forward earnings estimates for any changes in trend since the start of the year.

Earnings growth will be a necessity to driving the rally further, and is a significant factor in fueling chart breakouts among individual equities as well. That’s why you’ll find most of the chart setups shared below belong to companies in the midst of strong revenue and earnings growth along with positive analyst revisions.

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Stock Market Update

The stock market is having one of its strongest periods in history, with the S&P 500 up 10.7% over the past 11 trading sessions. It ranks as the fifth quickest recovery to record highs following a deep pullback. The S&P closed firmly above the 7,000 level for the first time in history despite the ongoing uncertainty in the Middle East that sparked a 9% drawdown in the index into late March. I’ve argued that bullish conditions for a rally formed after a key group of institutional investors (CTAs and risk-parity) built up extremely bearish positions. What you’re seeing now is a positive feedback loop as improving momentum and falling volatility draws fund flows back into the market.

But there are reasons to be skeptical about the durability and longevity of current rally. One has to do with seasonal trends, where a period of bullish seasonal tailwinds peaks later this month and doesn’t resume until July based on the past 20 years of calendar returns. A drawdown could be more pronounced if the presidential cycle continues tracking in the chart below. You can see that the S&P 500 tends to find its peak about now ahead of mid-term elections, and then recovering during the final quarter of the year.

I would not base any investment decision or outlook based on seasonals alone, which is why I’m also watching confirmation from breadth. I’ve previously noted to Hub members that advance/decline stats coming off the late March low have been lackluster and failed to trigger any meaningful breadth thrust metrics despite the sharp gains. Participation by the average stock is also lagging the indexes on the rebound. The equal-weight S&P 500 remains below its record high and is not confirming the cap-weighted S&P’s new record. The NYSE advance-decline line in the chart below is another way to track the performance of the average stock. It’s also failing to confirm the new high in the S&P.

The breadth divergences noted above are short-term in nature at this point and the average stock could catch up in the days/weeks ahead. But it’s worth noting especially as seasonal tailwinds go away and I’ve noted the absence of high quality setups, which is a big change coming off the lows in April last year. We’re still adding a couple new positions over the past week, but will continue being very selective in our chart setups.

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Stock Market Update

A (fragile) two week ceasefire between the U.S. and Iran delivered the spark that ignited bullish conditions recently building. The combination of oversold breadth, positive divergences, and bearish sentiment and positioning provided the right ingredients to see a massive rally unfold. As I highlighted in Sunday’s Market Mosaic, the presence of positive breadth divergences was only adding to the bullish setup over the near-term. The ceasefire and potential reopening of the Strait of Hormuz helped drive a massive rebound that saw the S&P 500 recover key moving averages (MAs) on a huge opening gap. The chart below shows the S&P gapping above both the 200-day MA (green line) and 50-day MA (black line) in a single trading session.

The situation might feel familiar with the one-year anniversary of the stock market’s recovery from the trade war and subsequent pause on tariffs. While follow through on the rebound remains to be seen, it’s worth noting that breadth statistics on yesterday’s advance fell well short of the thrusts trigged one year ago. The chart below shows the ratio of advancing stocks to declining stocks on the NYSE. That ratio finished the day at 4.4 compared to 37.2 last year that helped trigger several breadth thrust indicators, which typically bodes well for the S&P 500’s forward returns looking ahead on longer time frames.

While the underwhelming A/D performance doesn’t have as positive implications for longer-term returns, the recent cluster of strong A/D ratios could help the S&P 500 follow through on a strong period of seasonality that runs through April. We added several positions to the model portfolio to take advantage of breakouts.

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Stock Market Update

The S&P 500 just posted its worst quarter since 2022, with a drawdown hitting both equity and bond markets to start the year. But a combination of oversold conditions and bearish positioning helped spark a rally that could be boosted by a positive feedback loop. The catalyst for the rally came from comments by President Trump that an end to the war with Iran was within sight, while negotiations with Iran at least appear to be materializing. That was enough to spark a sharp rebound in equities, especially given that a key category of institutional investors had pushed bearish positioning to extremes seen around episodes like last year’s trade war and the depths of the pandemic selloff (chart below). Moderating volatility levels and improving momentum could continue helping draw institutional fund flows back into the market.

With oversold breadth and bearish sentiment reflected in both positioning and survey data, it’s no surprise to see at least a relief rally take hold. It’s also worth remembering that a period of positive seasonality runs through the end of April for the S&P 500. But a longer-term recovery in the stock market will come down to the rate outlook on both the short- and long-end of the yield curve. Based on comments from Federal Reserve Chair Jerome Powell and market-implied odds, the Fed looks set to keep rates on hold for now while the 30-year Treasury yield hovers near the highest level since 2007. Challenges on the inflation outlook still poses a major risk, especially with the prices paid component of the ISM’s most recent manufacturing survey hitting the highest level since June 2022. Back then, the Consumer Price Index surged to an annual increase of 9%. The chart below overlays the prices paid component (blue line) with CPI (red line).

While short covering and positive seasonals could help push the rally further over the near-term, the outlook for rising inflation poses a serious risk to the rate outlook and market valuations. There are still sectors and industries showing relative strength, which is where we want to focus our attention for new trades. Keep reading to see:

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Stock Market Update

Stocks are attempting to bounce back from an extremely oversold condition, but one key hurdle remains in the way. Across the major exchanges, the percent of stocks trading above their 20-day moving average (MA) dropped to just 18% at one point last week. Along with other indicators like the McClellan Oscillator, various breadth metrics pointed to oversold levels while investor sentiment turned increasingly bearish across both survey and positioning indicators. Those are ideal conditions to support a rally, with the S&P 500 rebounding off last week’s lows at the 6500 level. But so far, the index is struggling to recapture the 200-day MA (green line in the chart below) which has served as resistance on several occasions this week.

While breadth, sentiment, and positive seasonality over the coming month are all tailwinds for equities, investors are being forced to contend with a rapidly changing dynamic when it comes to monetary policy. As forces driving inflation show no signs of easing, the outlook for rate cuts is growing uncertain as various market-based indicators are now pointing to the prospect of rate hikes in the year ahead. The 2-year Treasury yield now sits above the upper bound of the fed funds target, and fed fund futures now favors a hike in 2026. At the same time, longer-dated yields are approaching key levels. The chart below shows the 30-year Treasury yield, which is forming an ascending triangle pattern. A breakout would put the 30-year at the highest level in nearly 20 years.

The interest rate backdrop is quickly shifting to a headwind on both the short- and long-end of the yield curve. While that could pressure equity prices, I believe the near-term setup favors bullish action in the indexes. With that in mind, it’s important to keep a close watch on our trade setups that are showing relative strength and nearing key breakouts. Keep reading to see:

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Stock Market Update

A big problem is brewing for the Federal Reserve. The same day that the Fed concluded its latest rate-setting meeting and voted to keep rates steady, the Producer Price Index (PPI) for the month of February gained more than expected. The headline PPI jumped by 3.4% compared to last year while the core figure that excludes food and energy prices increased by 3.9%. PPI inflation will often lead changes in consumer inflation measures, with inflation reports not yet reflecting the breakout of war in the Middle East and ensuing impact on energy prices.

During his post-meeting press conference, Fed chair Jerome Powell acknowledged the economic impact of the war on Iran is uncertain while also reiterating the Fed’s long-term inflation target is 2%. But the Fed’s preferred measure of consumer inflation (the PCE price index) hasn’t been below that level since February 2021 (chart below) while the central bank’s updated economic projections shows the median forecast for PCE inflation rising to 2.7% in 2026 versus 2.4% in the prior estimate. As I’ve outlined frequently, leading indicators of inflation and inflation-sensitive sectors are warning of higher price levels ahead, and that was before the jump in energy prices.

Not surprisingly, the S&P 500 has moved into a regime of strong negative correlation to oil prices. The longer the conflict in the Middle East drags on, the more upside pressure on oil prices and impact on the outlook for monetary policy. Traffic through the Strait of Hormuz remains at a standstill (chart below), which is impacting energy and fertilizer supplies. While stocks could still rally in the near-term from an oversold condition, the longer-term outlook is facing serious challenges from inflation and the interest rate outlook.

For our model portfolio, we continue trimming open positions hitting trailing stops while focusing new exposure on industries showing relative strength, including one one new addition this week. Keep reading to see:

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Stock Market Update

Uncertainty over events in the Middle East is causing a spike in volatility across energy markets. Oil surged to nearly $120 per barrel to start the week before falling back to $86 currently on reports of a coordinated release of strategic oil reserves from several countries. The International Energy Agency (IEA) announced that a record 400 million barrels of oil will be released, or about a third of total emergency reserves. While the move may immediately weight on sentiment around oil prices, the reality is that it will take time for the oil to come to market. The impact on oil prices will have a spillover effect to the stock market, where the S&P 500 has become very negatively correlated with oil price movements (chart below).

While the pullback in oil prices following the surge to $120 helped boost stock prices, technical conditions were aligned for a rally as well. As I outlined in the The Market Mosaic, futures tied to the CBOE Volatility Index (VIX) triggered a signal pointing to extreme fear while short-term breadth approached oversold levels. Other positioning data suggests that substantial buying pressure could boost the stock market on durable signs that tensions are easing and energy products could start flowing through the Strait of Hormuz once again. That’s because hedge fund short exposure in macro products is hitting the highest levels since 2022’s bear market (chart below).

With so much headline risk and volatile price action in equities, we’ve remained slow to add new exposure while trailing open positions with moving averages. The best thing to do in this environment is search out relative strength within new basing structures, as those stocks could be the new leaders on the next uptrend phase. Keep reading to see:

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Stock Market Update

The fallout from the conflict in the Middle East continues having a cascading impact on various sectors of the capital markets. The U.S. and Israel are continuing their strikes against targets inside Iran, while Iran retaliates with missile and drone attacks impacting various countries in the region. From a disruption standpoint, the production and flow of key energy products is being impacted the most. About 20% of the world’s oil and liquified natural gas transits the Strait of Hormuz off Iran’s southern coast, where fears are growing over an extended closure. The chart below shows that traffic in the strait has essentially ground to a stop. It’s also worth noting that the strait is a major chokepoint for ingredients in farming fertilizers like urea where around 35% of global exports pass through.

The threat to rising energy and food prices means the impact of the conflict could be extremely inflationary if a resolution isn’t reached soon. Evidence of inflationary pressures are building even before the turmoil in the Middle East. This week saw an updated report on manufacturing activity from the ISM, where a reading above 50 indicates expansion. While manufacturing sector activity is expanding with a reading of 52.4 in February, the prices paid component surged to 70.5 which is the highest level since mid-2022 (chart below). Price paid tends to lead changes in consumer inflation, with the most recent jump occurring before the Middle East conflict broke out.

While investor attention and headlines are fixated on developments between the U.S. and Iran, I believe the bigger challenge facing equities is the looming rise in inflation and the pressure that would apply to valuations. Keep reading to see:

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Stock Market Update

Relative calm on the stock market’s surface is masking a spike in volatility across the average stock. The S&P 500 is trading in a tight range since the end of October and is bringing realized volatility over that stretch to historically low levels. But there have been massive moves across individual stocks and sectors. Several of the biggest names leveraged to the artificial intelligence (AI) trade are well off their prior highs, while advances in AI is leading investors to flee software stocks. Meanwhile, stocks in capital intensive industries like energy are leading the way higher on the year. The end result is that the difference between volatility on the S&P 500 and realized volatility in the S&P’s constituents is reach the highest levels in over a decade (green line in the chart below).

The rotation underway is an important lesson to not become fixated on prior market leadership. Combining share price momentum with relative strength analysis (relative price movements to the S&P 500) is a great way to stay focused on new emerging leadership and avoid market laggards. It’s also important to be aware of the risks around index investing with ETFs like SPY and QQQ given just a handful of companies dominate the indexes. Given their large allocations and the state of valuations, a drawdown in AI and growth stocks could weigh heavily similar to the aftermath of the 1990s internet bubble. But while tech stocks took the indexes down back then, other market sectors (such as small- and mid-cap value) held up extremely well. The current style box breakdown using returns since the end of October (table below) reminds me of the environment following the internet bubble, where growth stocks weighed on the indexes and masked strength elsewhere.

That is why I’m delivering an approach to Traders Hub members that rotates with the market in order to spot the best trading opportunities. A massive change in market leadership is already underway and is exposing the risks of index investing in vehicles like the S&P 500, while a more active approach is needed to stay one step ahead. Keep reading to see:

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Traders Hub Model Portfolio

Here’s our model portfolio of open positions. You will see them separated into a Stock Trading Portfolio and ETF Investment Portfolio. These positions are sometimes alerted in the chat, but I will send an email alert for new positions when possible.

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These ideas are the end result of my process to identify stocks offering the right combination of growth fundamentals along with a proper chart setup. Live alerts are sent to Traders Hub members only.

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Stock Market Update

The minutes of the most recent Federal Reserve meeting from the end of January added to the hawkishness elements. Following the meeting, the Fed’s rate-setting committee upgraded their assessment of the economy while easing fears over weakness in the labor market. The minutes revealed a growing concern over core consumer inflation levels that remain well above target, which prompted “several” policymakers to suggest that higher rates could be needed in order to maintain credibility over their inflation-fighting mandate. The shift to the inflation side of the mandate could intensify further following the better-than-expected January payrolls report. Despite the hawkish tone, market-implied odds continue favoring two 0.25% rate cuts this year (table below).

As detailed in my weekend report, I maintain that the selloff happening across technology and growth stocks leveraged to the artificial intelligence (AI) theme has more to do with the rate outlook versus displacement of industries and economic turmoil caused by AI itself. Valuations in large-cap growth stocks and the largest companies in the S&P 500 are running well above historic averages, and are particularly vulnerable to a less dovish rate outlook. That impacts the discounting mechanism for future expected profits while the outlook for market liquidity can have a massive impact on more speculative stocks. While the rotation away from the AI theme is weighing on the indexes like the S&P 500, the average stock continues to push ahead. The chart below shows the cumulative NYSE advance/decline line, which is a way to track performance in the average stock and is making fresh highs.

Even if the Fed goes an extended period on hold with interest rates, it’s worth remembering that financial conditions are still running much looser than average. That should remain a tailwind for the bull market for now, even if the S&P 500 doesn’t reflect it. The combination of loose conditions and strong market breadth means a positive backdrop for position trading (for now). Keep reading to see:

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Stock Market Update

A stronger than expected payrolls report is driving a mixed reaction in the stock market and keeping a bullish rotation theme in play. The January payrolls report showed that 130,000 jobs were created during the month which was significantly above expectations for an addition of 55,000. The unemployment rate also ticked lower to 4.3% from 4.4% in the previous report. The initial “risk on” reaction across the market was quickly reversed as investors were reminded of the impact on the interest rate outlook. Following the report, the 2-year Treasury yield jumped to 3.52%, which is the lower end of the current range for the fed funds rate (chart below). In other words, the bond market doesn’t expect any further rate cuts for now.

The interest rate outlook is critical to supporting market valuations, particularly in growth sectors. Collectively, large-cap growth stocks trade at a forward price-to-earnings ratio of 27.6, which is 39% above the 20-year average. Growth stocks, whose earnings potential exists further into the future, are the most vulnerable to the discounting mechanism to determine the present value of forward earnings. But it’s not all bad news, as more evidence of a strong economy supports the earnings outlook especially for cyclical sectors. Median earnings growth for stocks in the Russell 3000 (a broad index) has been accelerating since the start of 2025 (chart below), which supports the broadening rally.

A rally into cyclicals and the average stock has been a key feature of the market action since the start of the year, with today’s payrolls report providing another rotation catalyst. While indexes and related ETFs are vulnerable due to their heavy allocation in growth and AI stocks, there are plenty of trade setups and breakouts occurring across the market.

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Stock Market Update

A major stock market rotation is playing out as new leadership emerges in key sectors leveraged to the economy. Many stocks exposed to the growth and artificial intelligence (AI) theme are pulling back sharply, with the downside accelerating in Wednesday’s trading session. Many of the most vulnerable to the downside rank highly based on the momentum and growth factors utilized by quantitative investors, which seeks out stocks showing high growth fundamentals, relative strength, and have performed well over intermediate-term time frames. By one estimate, growth stocks had one of their worst days ever relative to the value (chart below).

While the selloff in mega-cap growth and AI stocks in weighing on the major indexes like the S&P 500 and Nasdaq, it’s not exactly a “risk off” move taking place. Instead, there has been a significant rotation into the average stock including cyclical sectors leveraged to the outlook for the economy. While the S&P 500 dropped by 0.5% in yesterday’s trading, more than 70% of the stocks in the index advanced on the day. Meanwhile ETFs tracking transportation stocks, banks, industrials, and energy all moved out to new record highs. That comes on the heels of the ISM Manufacturing PMI for the month of January that rose to its highest level in four years (chart below) with the leading new orders component surging to its best level since early 2022.

The combination of recent economic reports and performance of cyclical sectors continues painting a positive picture on the outlook. Given those developments, investors may be questioning the collectively elevated valuations in the S&P 500 and its largest holdings if the interest rate outlook is in question. The action so far in 2026 also shows the growing risks of index investing and why a more active approach is needed to navigate the market.

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Stock Market Update

For the first time since July, the Federal Reserve voted to keep interest rates unchanged at a range of 3.50-3.75%. The move followed three consecutive meetings of cuts, while the underlying tone of the meeting statement and Fed Chair Jerome Powell’s remarks is being interpreted as a hawkish pause. That’s because the meeting statement eased concerns over the health of the labor market while also describing economic activity as expanding at a “solid pace.” While the path of interest rates appears more uncertain in the months ahead, it’s worth noting that the fed funds target range and the 2-year Treasury yield have converged at a similar level (chart below). That signals the bond market is aligned with the current level of short-term interest rates.

Given further evidence of a solid economy and inflation levels that are running above the Fed’s 2% target, it shouldn’t be a surprise that the central bank paused rate cuts. If anything, inflationary pressures should be building with the rally in various commodities including oil and copper pushing broad commodity indexes above key levels as I highlighted earlier this week. Financial conditions also remain near the loosest levels of the past five years, while a weakening U.S. dollar is also bullish for financial conditions. The U.S. Dollar Index touched it’s lowest level in nearly four years this week before stabilizing (weekly chart below).

While investors may react to the more hawkish elements of the Fed meeting, it remains a constructive trading environment given the combination of strong stock market breadth, loose financial conditions supporting the liquidity backdrop, and economic growth driving the earnings outlook.

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Stock Market Update

A flurry of headlines and rising tensions between the U.S. and European Union over the fate of Greenland followed a familiar script. President Trump threatened a new round of tariffs that go into effect February (and increase in June) on European nations opposed to his takeover of Greenland. The EU hit back by suspending the trade deal reached last year and threatened to limit U.S. company access to the European market. Escalating tensions drove a sharp selloff in the stock market along with other major asset classes to begin a holiday-shortened week, with stocks, bonds, and cryptocurrencies posting their worst day since the trade war last April (chart below).

Just when it appeared that investors were facing a jump in volatility, a framework for a deal on Greenland was announced. While details of the deal remain to be seen, Trump did walk back the threat of new tariffs. Stocks responded favorably as investor breathed a sigh of relief that the trade war was not back in full swing. Geopolitical headlines and developments have been proliferating to start the year, which shows the importance of interpreting the message coming from the stock market in order to cut through the noise and make informed portfolio and trading decisions. Breadth has been exceptionally strong to start the year with measures of the average stock making record highs along with key cyclical sectors sensitive to the economy. The rebound in equities following the Greenland deal continues featuring strong breadth, with the NYSE advance/decline ratio coming in at 4 to 1.

Strong breadth on the rally coupled with ongoing loose financial conditions are key ingredients to keep the bull market intact no matter what the daily headlines read. There are also notable sector shifts underway that I’ve shared in the subscriber chat, including infrastructure and energy stocks where we are closely watching new trade setups. Keep reading to see:

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Stock Market Update

A pair of updated inflation reports are delivering a mixed picture on price pressures facing the economy. The Consumer Price Index (CPI) rose by 2.7% in December compared to last year, which matched expectations and the prior month’s reading. The CPI has shown deceleration from the 3.0% level seen in September. But the Producer Price Index (PPI) for the month of November was reported at a 3.0% year-over-year gain which is an acceleration from the prior month and ahead of estimates for an increase of 2.7%. With PPI tending to lead changes in consumer inflation, it’s also worth noting that the Federal Reserve’s most recent Beige Book contained anecdotal comments suggesting that some businesses are now beginning to pass on tariff-related costs to customers as pre-tariff inventories run out.

While consumer and producer inflation gauges are mixed at the end of 2025, it’s hard not to see price pressures pick up in 2026. Evidence suggests that tariffs are starting to be passed on, while the surge in base metals like copper are highly correlated to long-term inflation expectations. Another key development on the inflation front could be in the works, and that’s with a breakout in broader commodity indexes. The iShares S&P GSCI Commodity-Indexed Trust ETF (GSG) tracks a basket of commodities, and is starting to breakout from a multi-year basing pattern stretching back to 2022 that you can see in the chart below. Note that the last inflation wave that peaked in mid-2022 was accompanied by a large rally in commodities.

While precious metals and various other commodities are rallying to start the year, another feature of recent market action is expanding breadth. While the major indexes like the S&P 500 and Nasdaq are struggling for traction as mega-cap AI stocks trade weaker, the average stock continues making new all-time highs. The cumulative NYSE advance/decline line in the chart below is one way to track the performance of the average stock, and continues making record highs following a breakout from a basing period that lasted from September into the start of the new year.

We continue to see good setups developing, including high growth themes where recent smaller pullbacks are helping many setups. We also continue trailing our positions in precious metals and related mining stocks following the jump in gold and silver. Keep reading to see:

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Stock Market Update

Incoming data continues to portray an economy that’s growing at a solid pace, while leading indicators are showing improvement. The ISM’s Services PMI report for the month of December came in a 54.4, which was a modest jump from the prior reading of 52.6. PMI reports are constructed so that a reading above 50 indicates expansion and below 50 points to contracting activity. Components within the report are evolving favorably as well, with the employment index jumping to 52.0 from 48.9 in the prior month (a notable improvement ahead of Friday’s payrolls report). The new orders component, which is a leading indicator of activity, surged to 57.9 from 52.9.

The report is consistent with recent evidence that economic expansion is holding up, with the most recent quarterly GDP report for the third quarter showing activity growing at a 4.3% annualized pace. The Atlanta Fed’s GDPNow model is currently showing fourth quarter GDP growing at a 2.7% annualized pace. By one measure, the performance of the economy relative to its potential is the best in 25 years. The chart below shows the US output gap, which could grow further in 2026 as fiscal stimulus hits along with Federal Reserve rate cuts while the central bank is also expanding the balance sheet once again.

Evidence of broader economic growth is needed to keep the bull market intact and boost the average stock. Investors are used to the “Magnificent 7” doing the heavy lifting when it comes to returns. Last year, the “Other 493” generated a larger share of the S&P 500’s calendar year return for the first time since the cyclical bull market began in late 2022. It’s notable that earnings growth for both the Mag 7 and Other 493 are currently projected to accelerate this year (chart below), with current evidence on the economy supporting the earnings backdrop.

After mostly sitting tight on adding new positions for the past couple months, we’re finally seeing a fresh round of breakouts to start the year. Several emerging growth themes are showing constructive activity as well. Keep reading to see:

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Stock Market Update

The S&P 500 closed out the final trading sessions of 2025 on a weak note. The index has lost 1.3% over the past week, which coincides with a period marking the historically strong Santa Claus rally. While there’s still two trading sessions left to complete the Santa Claus period, the S&P could potentially finish the stretch with a loss for the third consecutive year in a row, which has never happened before. If anything is going to save the Santa Claus rally, it could be a short-term spike in bearish option positioning. The ratio of put volumes relative to call volumes spiked on the last trading day of the year to .92 (chart below). That level shows bets on downside reaching an extreme, which historically has seen the S&P deliver strong gains on average in the days ahead.

While the major market indexes finished out 2025 on a weak note, the full year experienced another round of solid gains. The S&P 500 finished the year up 16% while the Nasdaq rallied by 20%. But I believe it’s the action in other corners of the capital markets that deserve more attention and will remain key themes driving stock market volatility in the year ahead. For instance, the U.S. Dollar Index had its worst return in eight years, while gold and silver went on to gain 64% and 150% respectively. Copper is also breaking out from a multi-year ascending triangle base, and increased 43% on the year. At the same time, Morgan Stanley is forecasting that 2026 will experience the largest copper supply deficit in 22 years (chart below). Since precious metals and commodities like copper have high inflation betas, that’s a warning on the inflation outlook as we head into the New Year.

I’ll have more to say on my outlook for 2026, which I believe could feature a major market peak if a worsening inflation picture jeopardizes the outlook for monetary policy and sparks bond market volatility. But for now, the backdrop remains very constructive for trading breakouts in high growth themes and industries. Keep reading to see:

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Stock Market Update

An updated look at GDP shows economic activity is holding up much better than economist forecasts. Third quarter GDP grew at an annualized rate of 4.3% compared to expectations for a gain of 3.2%. Within the report, real final sales tends to be a better gauge of underlying demand and accelerated by 3.0% (chart below), which was the strongest gain in a year. The Atlanta Fed’s GDPNow estimate is currently pointing to fourth quarter GDP growing at a 3.0% annualized rate. Along with jobless claims that remain near the low end of the historic range, incoming data points to an economy showing solid growth.

Strong economic activity should be reflected in cyclical sectors and areas of the market leveraged to domestic growth like mid- and small-cap stocks. Breadth continues to track favorably while growth stocks exposed to the artificial intelligence (AI) trade are weighing on the capitalization-weighted indexes like the S&P 500 recently. Growth stock valuations are also more vulnerable to the outlook for interest rate cuts by the Federal Reserve, which is in question following strong economic data. A rotation that boosts cyclical sectors and the average stock is a positive condition heading into 2026 following the heavy lifting by Magnificent 7 stocks and the AI trade.

The stock market also remains within a favorable seasonal period, including the Santa Claus rally over the near-term. That period marks the final five trading sessions of the year along with the first two days of the New Year. Going back to 1950, the Santa Claus rally has delivered a positive return 77% of the time with an average gain of 1.26% for the S&P 500. It’s notable that the last two years have seen negative returns during the period, and that there’s never been a stretch of three negative years during the Santa Claus rally period (chart below).

Another feature of recent market action is in precious metals, with both silver and gold building on record highs which is boosting several of our positions. We’re now holding three positions leveraged to precious metals that are currently up 100% or more. I’m also tracking new setups in several growth sectors that are showing strong basing patterns. Keep reading to see:

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Stock Market Update

For the past several weeks, a rotation has been underway in the stock market. Prior leaders in this year’s hottest trading themes are now lagging badly, including more speculative growth corners of the market like quantum computing and crypto mining stocks. But fund flows are also leaving the “Magnificent 7” stocks leveraged to the artificial intelligence (AI) trade. That’s a problem for the broader market since those stocks dominate the major indexes. The top 10 stocks by weight in the S&P 500 alone account for over 40% of the index (red line in the chart below). Those names played a major role in driving the S&P 500 to record highs, with the Mag 7 accounting for 45% of 2025’s gains. But it works the other way as well when mega-cap growth stocks are pulling back.

The major indexes like the S&P 500 and Nasdaq-100 are reflecting the weakness in mega-cap growth stocks with both indexes losing their 50-day moving average (MA) once again. But that’s masking strength under the hood, which is a trend that’s been intact since heading into Thanksgiving. Stock market breadth has remained strong since then. Even amidst the weakness seen on Wednesday with the S&P’s 1.16% decline, there were actually more stocks advancing than declining on the NYSE. The chart below shows the Invesco S&P 500 Equal Weight ETF (RSP), which is holding its breakout to record highs and trading above the 50-day MA. We’ll see if the average stock eventually catches down to the indexes, but breadth remains a positive condition for the market overall.

With participation remaining strong some measures of investor sentiment shifting back to showing fear, that’s a positive backdrop to see a rally in the final weeks of the year. While the S&P 500 is trading weak recently, the second half of December tends to be positive from a historical seasonal standpoint. And while many Mag 7 stocks may be pulling back, trade setups in other market sectors are evolving favorably. Keep reading to see:

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