Peering into 2026: Prepare for Momentum Tailwinds

My former colleague Fred Meissner revealed a disturbing contrarian warning in a recent weekly commentary: “The most concerning story: recently I was on a panel for the CFA Society of San Francisco. All three analysts had the same outlook, which is my base case – a yearend rally followed by problems in the first part of 2026.”

It seems that everyone is looking for a rally into year-end, followed by weakness in the new year. Here is where I differ from that consensus. I believe the stock market should rally into year-end, followed by continued bullish tailwinds, at least for the first half of the year.

My long-term market timing model remains on a buy signal. As a reminder, this model flashes a buy signal whenever the monthly MACD of the NYSE Composite (bottom panel) turns positive and sells whenever the 14-month RSI flashes a negative divergence.

 

The bull is alive, and it’s helped by three major tailwinds going into 2026, namely a stimulative monetary policy, a stimulative fiscal policy, and strong price and fundamental momentum.
 

 

An Accommodative Fed

Let’s begin with the prospect of an easier monetary policy. While there is some doubt about when the Fed will cut rates at its December FOMC meeting, the market consensus calls for three more quarter-point rate cuts before the current easing cycle is complete.
 

 

In addition, the Trump White House’s influence on Fed policy is expected to push the central bank in a dovish direction. In an interview on FOX Business, Treasury Secretary Scott Bessent appeared to rule out Governors Bowman and Waller as Fed Chair and look for someone who is more in tune with Trump’s desire for lower rates [emphasis added]:

The decision to cut rates by 25 basis points, I applaud. But the language that went with it tells me that this Fed is stuck in the past…we’re going to find a leader who is going to revamp the entire institution in terms of process and inner workings.

 

 

A Supportive Fiscal Policy

While the 2025 economic outlook was mired by uncertainty over trade and fiscal policy, the passage of the OBBB Act set into motion a strong fiscal impulse for 2026–2028. Tax cut provisions are front-loaded, while spending cuts demanded by the deficit hawks are back-loaded. The economy and the stock market should enjoy a fiscal growth tailwind in 2026.
 

 

Dario Perkins of TS Lombard observed, “This year we had a 1% of GDP fiscal tightening thanks to the tariffs. Next year, that swings to a 1% easing due to the tax cuts, assuming the tariffs stay in place.”
 

In addition, the Supreme Court arguments in Learning Resources v Trump, the case challenging the legality of IEEPA tariffs didn’t go well for the Trump Administration. All three of the liberal justices expressed skepticism over Presidential authority to impose the “emergency” tariffs, and so did three of the conservative justices, Barrett, Gorsuch and Roberts.
 

As a consequence, the Polymarket odds of a Trump victory at the Supreme Court skidded badly in the wake of the hearing. While the Trump Administration could find some workarounds should it lose its case, the chances of easing trade tensions and further fiscal easing postulated by Dario Perkins are supportive of stock prices.
 

 

This combination of easy monetary policy and fiscal policy are reflationary and unfriendly to bond prices, but friendly to stock and gold prices.
 

 

Momentum, Momentum

Lastly, equity investors are enjoying the dual tailwind of price and fundamental momentum into year-end and 2026.

The market experienced a rare price momentum-based Zweig Breadth Thrust buy signal when it recovered in April after the “Liberation Day” panic. A historical study of six-month S&P 500 advances above 22% shows that the index was up 95% of the time six months later at an average rate of 8.34%.
 

 

The market leaders in this advance have been the Magnificent Seven, which is admittedly a concern because of the narrowness of the leadership.
 

 

However, the latest quarterly earnings reports from the hyperscalers virtually guarantee further capex momentum in the near future. Hyperscalers expressed universal concern over capacity constraints. While cautious investors may believe the boom will not end well, fundamental momentum tells the story that short-term momentum is alive and well:

Alphabet CFO: “We still expect to remain in a tight demand-supply environment in Q4 & 2026.”
Microsoft CEO: “We now expect to be capacity constrained through at least the end of our [2026] fiscal year”
Amazon CEO: “Overall in the industry, maybe the bottleneck is power. I think at some point, it may move to chips, but we’re bringing in quite a bit of capacity. And as fast as we’re bringing in right now, we are monetizing it.”

 

The tech-heavy NASDAQ 100 recently experienced a relative breakout (dotted red line). These stocks are not extended, as evidenced by the normalized NASDAQ 100/S&P 500 ratio (black line), indicating further upside potential.
 

 

Lastly, in case you are worried about the non-Magnificent Seven part of the market, the S&P 500 just experienced a solid Q3 earnings reporting cycle. EPS and sales beat rates are above their historical averages, and EPS estimates are rising strongly. This is another sign of strong fundamental momentum – and not just from the AI market leaders. Concerns about elevated valuation are mitigated by the heavy lifting done by rising earnings estimates.
 

 

 

In conclusion, I am bullish on the S&P 500 into year-end and the early part of 2026. A combination of easy monetary policy and stimulative fiscal policy represents reflationary macro tailwinds. In addition, the stock market is enjoying support from positive price and fundamental momentum.