We’ve been making a list and checking it twice — trying to figure out which catalyst could make markets nice. Again, we challenged ourselves to determine the single-most important catalyst to drive markets higher in the new year and put it atop our wish list for Santa Claus.
You may recall that last year, we wished for a mid-cycle acceleration. We must have been on Santa’s nice list this year for a change, because we did start to get an acceleration in economic growth as measured by real GDP growth. From the -0.6% print in first quarter, we rebounded to 3.8% in second quarter and the third quarter estimate is presently 3.6%. It remains to be seen whether this trend will ultimately continue in 2026 given the fever pitch of purple haze policy uncertainty from the tariffs and government shutdown that hit in fall 2025 and may still be influencing fourth quarter GDP forecasts.
Additionally, earnings growth over the course of 2025 has been a consistent upside surprise for investors. Recall, we finished 2024 at 10.4% year-over-year growth. For 2025, we expect S&P 500® earnings growth to finish at approximately 11.4%, and current forecasts for 2026 are 14.2%. We had expected valuations in 2025 would be highly dependent on the path of earnings growth and interestingly, growth surprised to the upside all year, which helped drive strong positive equity market returns.
Further, the path for valuations has been interesting to monitor this year. The S&P 500 is sitting near an all-time high ($6,887), with next-twelve-months earnings per share for the index also at an all-time high ($307 per share) and the next-twelve-months price-to-earnings ratio for the index is essentially at the same level where we started the year (22.4x). Economic growth is accelerating, earnings growth is upside surprise-ing, and valuation multiples are cooperating. Getting back on Santa’s nice list? Priceless.
This year, our ask of Santa is for… blue skies as the purple haze of policy uncertainty dissipates! If Santa can clear the haze, investors might finally get a smooth-flying sleigh ride. Our song of the year, “Purple Haze” by the Jimi Hendrix Experience, served us well in 2025 given the hazy macroeconomic outlook on several issues.
