Several things that stocks have been linked to have gotten better
After experiencing a 5.1% drawdown, the S&P 500 has rallied back strongly starting the Thursday before Thanksgiving. What exactly has the stock market been thankful for? On the positive side, the breadth of the US equity market has improved, bitcoin has stabilized, and fears around private markets have faded. We've also seen better price action in public companies related to private markets. Additionally, expectations for a December Fed rate cut have firmed up, and the University of Michigan consumer sentiment report showed headline sentiment move up ahead of forecasts due to improving expectations.
These are all factors positively correlated with S&P 500 performance or serving as useful tactical indicators for near-term price action. For some other tactical indicators flagged before Thanksgiving, recent trends appear headed in the right direction. The rate of upward EPS estimate revisions for the S&P 500, its top 10 names, and the rest of the index have moved up but failed to recapture summer highs. While earnings sentiment remains strong, it may have peaked.
Valuations tell a similar story. Net trailing price-to-earnings multiples have only shown modest improvement of late. We are also keeping a close eye on retail flows to passively managed US equity funds, which continue to deteriorate. This potential sign of retail fatigue contrasts with investor commentary expressing confidence the retail investor has not yet slowed down.
A few signals have shifted slightly since our year-ahead outlook
Right after Thanksgiving, we walked through the five models feeding into our 7,750 twelve-month forward S&P 500 price target and our thoughts on Growth/Value and Small/Large trades. Since then, a few shifts have emerged in the underlying signals—modest but noteworthy.
Net bulls in the AAII survey have rebounded sharply to a range typically followed by 10.8% average twelve-month forward returns—slightly weaker than the prior update suggesting 15%. By contrast, the GDP model strengthened, with consensus real 4Q26 GDP estimates moving to 2% year-over-year. Currently, this signals a 5.7% S&P 500 move; if forecasts move to 2.1–3%, the signal would strengthen to 10.3%.
These datasets sync with client commentary. Most investors—particularly hedge funds—skewed more bullish on the economy than consensus. Cyclical excitement was driven by anticipated stimulus impacts, including the 2025 tax bill and expected additional measures in 2026. Overall, the tone leaned bullish, with most eager to focus on longer-term trajectories rather than near-term concerns.
Three interesting twists and turns on positioning
EPS quality is flip-flopping again. High EPS quality has begun to underperform, reversing a brief leadership period that had calmed Small Cap portfolio managers. This occurred alongside improved passive flows back into Small Caps and renewed strength in quantum names.
Within the S&P 500, Tech has renewed outperformance while Health Care has faded, though its fundamentals remain solid with strong earnings revisions and flows. It may simply be treated as a defensive alternative to Tech.
Additionally, EPS revisions have re-energized in Energy. Investors showed particular interest in Energy as a cheap sector with positive fund flows and improved EPS revisions. Our latest update indicates S&P 500 Energy remains in slight positive territory on upward EPS revisions.
