By Al Root
The market has been caught in a seemingly endless loop of short-term noise. It's time to break the maddening cycle by getting back to basics, heading into the new year.
There was plenty of noise. There was a Presidential address (no major policy announced), an artificial-intelligence freakout on Wednesday (yikes!), consumer inflation data (fine), and a jobs report (meh). Consumer spending data was OK, excluding cars, along with straggler earnings from the likes of FedEx and General Mills, which reported reasonable numbers. There was also a surprising merger proposed between Trump Media & Technology, an unprofitable social-media platform, and a privately held nuclear fusion start-up, TAE Technologies.
None of it amounted to much. In the end, the S&P 500 index ended the week up 0.1%, while the Dow Jones Industrial Average fell 0.7%, and the Nasdaq Composite gained 0.5%. Despite the AI fears, Nvidia rose 3.4% last week, even after dropping 3.8% on Wednesday, thanks to those AI fears. The market reacts, overreacts, and recovers quickly these days, and a lot of it amounts to nothing. "Markets have evolved over the past couple of decades, information moves faster," says Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.
The week was a metaphor for 2025, endless noise for investors to try to make sense of, with an overemphasis on any one data point, leaving investors overly convinced that something bad is about to happen. Despite the noise, things have turned out remarkably well in 2025, with the S&P 500 up 16% so far this year and clinging to a chance for a third consecutive 20% annual gain.
Investors could choose to follow the same noise/overreaction paradigm in 2026, which means exiting next year with more gray hair -- or less hair altogether. Better to shift to a slightly longer-term focus. We suggest embracing the number 13 -- the 13% earnings growth expected for the S&P 500 in 2026, roughly matching 2025. That number, which implies S&P 500 earnings of about $310 a share, drives Calvasina's 7,750 year-end 2026 price target for the index.
Is 13% achievable? That's a "back-to-basics" question that clients are asking Calvasino. The short answer is yes, so long as Fed policy is stable, the economy grows, and profit margins continue to expand. The latter factor shouldn't be underestimated. "We are in the golden age of margins," she says.
The S&P 500's operating profit margin should hit 17% in 2025, up from about 13% in 2019. It should hit almost 19% in 2026. A lot of the improvement -- and expected improvement -- is coming from information technology stocks. Call it benefits from AI, pricing power, or whatever, but improving profit margins is a big fundamental tailwind that can overcome a lot of risks, including nagging inflation, midterm elections, and geopolitics.
The marker, at 25 times 2025 earnings, isn't cheap, but Calvasina's target includes no multiple expansion -- she values the S&P 500 at about 25 times trailing earnings. Earnings growth can be enough to keep valuations stable. It will be tempting to dismiss that. There will be a lot of numbers -- and shocking events -- coming fast in 2026. But it will be best to wait it out, unless something material happens. "Sometimes you just have to react when facts change," Calvasina.
Instead of fretting over difficult-to-predict events -- a breakdown in private credit markets or a bursting AI bubble come to mind -- investors should worry that 2026 doesn't look like 2025, says TS Lombard managing director and global macroeconomic analyst Dario Perkins. His fear is that the consensus for economic growth, moderate inflation, and falling interest rates will be upended by a nasty reemergence of inflation and higher interest rates.
"Why should we be disturbed by this incredibly dull consensus?" asks Perkins. "Because year-ahead forecasts don't have a great track record."
Ultimately, higher rates would upend the lucky number 13. Until they do, investors should filter out the noise.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 19, 2025 18:03 ET (23:03 GMT)
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