December 13, 2025

QuickTakes

MARKET CALL: The Impressive S&P 493

Ready For Broadway In 2026

The S&P 500's Magnificent-7 might be less magnificent in 2026 as their fierce competition in the AI race starts to erode the monopolies they have enjoyed in search (Google), software (Microsoft), retailing (Amazon), advertising (Meta), electric vehicles (Tesla), smartphones (Apple), and GPU chips (Nvidia). The beneficiaries of that competition are likely to be the S&P 500's Impressive 493. A week ago, we recommended underweighting the former and overweighting the latter. We may be on the right track: Since October 29, the MAGS ETF is down 4.2%, while the XMAG ETF is up 1.2% (chart).

The S&P 500 equal-weight index rose to a new record high at the end of last week, while the S&P 500 market-weight index did the same on Thursday (chart). The former is up 10.1% ytd, while the latter is up 16.1% over the same period. We are expecting a reversal of fortune in 2026.

We downgraded the S&P 500 Information Technology and Communication Services industry index to market-weight last week. We also reiterated our recommendation to overweight the S&P 500 Financials sector, which rose to a record high after the Fed cut the federal funds rate on Wednesday (chart). We remain positive on Diversified Banks, Regional Banks, and Investment Banks.

Last week, we also reiterated our overweight recommendation for S&P 500 Industrials. We would do the same for S&P 400 Industrials, though there isn't an ETF for it (chart).

Last week, we upgraded the S&P 500 Health Care sector to overweight (chart). The sector is up 11.6% ytd, lagging the 16.1% gain of the S&P 500. We expect it to lead the S&P 500 higher in 2026.

Within Health Care, the Biotech industry index should outperform in 2026, as it has this year (chart). Mergers and acquisitions should continue to drive the industry higher.

By the way, within the S&P 500 Industrials, transportation stocks have been strong recently (chart). Dow Theory indicates an upbeat economic outlook with continued broadening of the bull market’s leadership in 2026.

If the Brent crude nearby futures price fails to hold at the support level of $60 per barrel, that would reduce inflation and boost economic growth in the US. It would also lift transportation stocks and the overall stock market. We put the odds of this happening at 60%.

The Fed remains dovish despite having already cut the federal funds rate by 175 bps since September 2024. That's sent the Russell 2000 into record-high territory recently (chart). Small caps should continue to outperform in 2026, though their earnings remain lackluster.

A week ago, we also noted that the US accounts for 65% of the market capitalization share of the All Country World MSCI stock price index. We've recommended a Stay Home investment stance since 2010. It has worked well through the end of last year. This year, several foreign stock markets have outperformed, with a weaker dollar boosting their gains in US dollars (chart). Next year may bring more of the same, though we don't expect the dollar to weaken in 2026. So, Go Global.

S&P 500 forward earnings rose to a record high last week (chart). Earnings are still driving the bull market. We are targeting a 10% increase in the S&P 500 to 7700 by the end of next year. That would mark a fourth consecutive year of double-digit gains for the S&P 500 as our Roaring 2020s scenario continues to pan out.

The bull/bear ratios suggest that sentiment is neither too bearish (which would be bullish) nor too bullish (which would be bearish) (chart).

Michael Brush confirms that insider buying activity likewise suggests a rather neutral stance: "After turning extremely cautious in late October, insiders aggressively bought the November weakness. They are neutral now. However, their November foray suggests further bouts of market weakness should be buyable." Michael is a good friend and a MarketWatch columnist who writes a stock letter titled "Brush Up on Stocks."

QuickTakes Archive

Contact us by email or call 480-664-1333.

Copyright (c) Yardeni Research, Inc. Please read complete copyright and hedge clause.