The Halftime Score
The 2025 bull market delivered exceptional returns, but the 2026 'normalization' phase faces a steep valuation hurdle and a leadership crisis at the Fed.
| Index | 2025 Total Return | 2026 Forecast (GS) |
|---|---|---|
| S&P 500 | 17.9% | 12.0% |
| Nasdaq-100 | 21.02% | -- |
| Dow Jones | 14.92% | -- |
| Russell 2000 | Data Pending | -- |
The U.S. equity market enters 2026 following a resilient 2025 where the S&P 500 (GSPC) delivered a 17.9% total return. This performance was underpinned by a 4.3% Q3 GDP surge and a Federal Reserve that pivoted to three rate cuts in the second half of the year. However, as we move into the first half of 2026, the narrative is shifting. The 'easy money' made through multiple expansion is being replaced by a requirement for rigorous earnings growth to justify a forward P/E ratio that has reached 22.0x.
H1 Winners & Losers
H1 Winners
- SanDisk ($SNDK): +559.4% — The top performer in the S&P 500 for 2025, riding a massive memory cycle recovery.
- Alphabet ($GOOGL): +66.0% — Led the 'Magnificent 7' as AI integration began showing material bottom-line impact.
- NVIDIA ($NVDA): $4.53T Market Cap — Reached a historic valuation milestone on the back of $187B in trailing revenue.
H1 Losers
- Market Breadth: 42.5% Concentration — The 'Magnificent 7' accounted for nearly half of the index's total return in 2025, leaving the 'Other 493' lagging.
- Fixed Income: 4.23% 10Y Yield — Bonds faced renewed pressure as yields on the 10-Year Treasury (TNX) climbed from late 2025 lows.
- Fed Credibility: Criminal Probe — Reports of an investigation into Chair Jerome Powell have introduced a political risk premium into U.S. assets.
The performance dispersion in 2025 was stark. While the Nasdaq-100 (IXIC) benefited from the AI infrastructure buildout, the broader market struggled to keep pace with the tech titans. The concentration of returns in just seven names remains a primary structural risk for the index as we head into the remainder of 2026.
What Surprised Us
Upside Surprises
- The 4.3% GDP print in Q3 2025 shattered consensus estimates of a 'soft landing,' suggesting a 'no landing' scenario instead.
- Inflation (CPI) cooled to 2.7% by December 2025, allowing the Fed to cut rates even as growth remained robust.
Downside Surprises
- The reports of a criminal probe into Chair Jerome Powell served as an exogenous shock to market stability.
- The 10-Year Treasury Yield (TNX) rising to 4.23% in early 2026 despite the Fed's easing cycle indicates a growing term premium.
The primary lesson from the past six months is that macro resilience can coexist with institutional instability. We observed the strength of the U.S. consumer alongside the sudden emergence of 'headline risk' at the highest levels of monetary policy. This duality—strong fundamentals vs. political uncertainty—defines the current regime.
Thesis Check
The core framework for 2026 hinges on whether earnings can grow into the current 22x multiple.
Thesis 1: The AI Capex Supercycle
January Call: AI spending would broaden from chips to software and services.
H1 Result: Supported by Alphabet ($GOOGL) and NVIDIA ($NVDA) results, though software adoption remains in earlier stages than hardware.
Status: ON TRACK
Thesis 2: Monetary Normalization
January Call: The Fed would reach a 'neutral' rate of 3.0% by mid-2026.
H1 Result: The Fed Funds Rate sits at 3.50-3.75% after a 25bps cut, but the Powell probe has complicated further policy clarity.
Status: AT RISK
H2 Outlook
Revised Year-End Targets
- S&P 500: 6,100 (prev: 5,800)
- 10Y Yield: 4.00%
- Fed Funds: 3.25%
The year-end target for the S&P 500 (GSPC) is adjusted to 6,100, representing a projected 12% total return for 2026. This view assumes that the 4.4% unemployment rate remains stable and that the potential political transition at the Fed is handled without major market dislocation. The bull case relies on a successful 'hand-off' from the Mag 7 to the broader market as earnings growth accelerates in cyclical sectors.
Risk Radar
Primary Risk
Valuation Compression: At 22x forward earnings, there is limited margin for error. If Q4 2025 earnings show a deceleration in margins, the index could see a significant drawdown to align with historical averages.
Disclaimer: This content is for informational and educational purposes only and does not constitute financial advice, investment advice, or any other type of advice. Past performance is not indicative of future results. All investments involve risk, including the potential loss of principal. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions.
