“Price is what you pay. Value is what you get.” — Warren Buffett
Chart of the Day
Good morning!
Fundstrat Head of Research Tom Lee published his 2026 market outlook yesterday, estimating that the S&P 500 could rise to 7,700 points. That would represent a gain of about 12% from Thursday’s close.
I’d like to bring to your attention my favorite chart from his deck yesterday, which he has discussed in his Macro Minute videos before, but in my opinion isn’t getting enough attention. The chart’s timely to look at because of Oracle’s huge flop yesterday, with shares finishing down 11%, after third-quarter earnings showed that revenue came in below expectations.
Oracle’s miss weighed on the broader tech trade, sending the Nasdaq Composite down 0.3%, a rarity when the Dow Jones Industrial Average finished up 1.3%. The database company’s declines reignited concerns that everyone’s jumping into building AI infrastructure with no clear end goal in sight and that valuations remain unreasonably elevated, spurring more bubble fears.
On the valuations aspect, indeed many indicators as of late have either hit levels higher than what was seen during the dot-com bubble, such as forward price-to-sales ratio, or right below those perilous levels, including the forward price-to-earnings ratio and CAPE Shiller ratio.
But here’s the thing: If we go back 10 years to 2015 and look at the top 20 most expensive stocks, in aggregate, seven of the 10 most expensive stocks beat the S&P 500 over the next five years, according to the Fundstrat data team’s analysis.
The way I look at valuations is that they’re one of the many tools available at the disposal of markets nerds to identify whether a stock is worth buying or selling, but by no means are they the sole dictators of what you should do with your holdings.
And it makes little sense to sound the alarm by saying that valuations are below or have crossed the dot-com peak because then it makes you wonder: Is that the ceiling? The answer to that is likely not, especially if earnings keep growing.
Next year, analysts are expecting that companies in the S&P 500 will report the highest ever earnings-per-share at $309.22, according to FactSet data going back to 1996. And even if we adjust that number for what analysts typically overestimate it by, it’s still going to be a record. That means that any highs we might see in the broad-based index next year would be supported by earnings growth, which is a really positive sign.
“I don’t think it matters [stocks] are expensive right now if they’re a good earnings story,” Lee said yesterday. He added that the price-to-earnings ratio could expand next year for the equal-weighted S&P 500.
This is turning out to be perhaps the most talked about bubble that’s going to blow up, yet I see little signs of a pop happening.
Let us not latch onto outdated arguments of high valuations as an argument against the bull market.
Share your thoughts
What are your forecasts for stocks next year? Click here to send us your response.
📧✍️Here’s what a reader commented📧✍️
Q: Are U.S. AI companies making the right choice in focusing on a relatively closed-source business model?
A: I appreciate the relatively closed-source business model of US companies, as it ensures technology exclusivity. While others might choose to give away their technology for free at this stage, I believe it is more beneficial for the US to maintain exclusivity. This approach creates more value compared to freely sharing technologies.
Catch up with FS Insight
At the start of 2025, we said markets had two “puts” — the Fed and the White House — and this would support markets. For 2026, those two “puts” are in play and the theme we see for 2026 is really as follows: a wall of skepticism because of 3-years of >20% gains and now a new Fed. The new Fed is bullish for equities.
Technical
Overall, my expectation is that Equities can likely push back to new highs, but that Small, and mid-cap exposure should be favored for now until stocks like NVDA can begin to strengthen a bit more.
Crypto
Crypto rallied strongly, with ETH and SOL outperforming, and BTC and ETH/BTC testing their respective yearly open levels.
News We’re Following
Breaking News
- Kevin Hassett Says He Would Be Independent at the Fed. Some Who Know Him Worry. BR
Markets and economy
- Hope for More Rate Cuts Is Tempting Buyers Back to Bonds WSJ
- With Fed rate cuts behind us, AI and bonds are now on Wall Street’s mind CNN
- Dow set to extend record as rotation out of tech continues CNBC
- Altman and Musk launched OpenAI as a nonprofit 10 years ago. Now they’re rivals in a trillion-dollar market CNBC
Business
- Behind the Deal That Took Disney From AI Skeptic to OpenAI Investor WSJ
- Costco tops Wall Street’s sales and revenue expectations CNBC
- Oracle’s lease commitments jump by almost 150% as company builds out to meet AI demand CNBC
- Why Broadcom’s stock is falling, even as earnings showed strong AI demand MW
Politics
- Trump Signs Executive Order to Curtail State AI Laws WSJ
- From Chips to Security, China Is Getting Much of What It Wants From the U.S. NYT
Overseas
- Tibetan Activists Say China Has Detained Protesters Who Staged Rare Act of Defiance WSJ
- Wave of Gen-Z Unrest Fells Its First European Government WSJ
- U.S. Issues New Sanctions Targeting Maduro’s Family and the Oil Sector NYT
Of Interest
- Rescued at Sea: How Venezuela’s Machado Survived the Riskiest Leg of Her Escape WSJ
- Investors fear Time just jinxed the AI stock-market rally with its 2025 person of the year MW
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| Date | Time | Description | Estimate | Last |
|---|---|---|---|---|
| 12/15 | 10:00 AM | Dec Oct Homebuilder Sentiment | 38 | 38 |
| 12/16 | 8:30 AM | Nov Oct AHE m/m | 0.3 | 0.2 |
| 12/16 | 8:30 AM | Nov Oct Unemployment Rate | 4.4 | 4.4 |
| 12/16 | 8:30 AM | Nov Oct Non-farm Payrolls | 50 | 119 |
| 12/16 | 9:45 AM | Dec P Sep F S&P Srvcs PMI | n/a | 54.1 |
| 12/16 | 9:45 AM | Dec P Oct S&P Manu PMI | n/a | 52.2 |
| 12/18 | 8:30 AM | Nov Sep CPI y/y | 3.1 | 3 |
| 12/18 | 8:30 AM | Nov Sep Core CPI y/y | 3 | 3 |
| 12/18 | 4:00 PM | Oct Aug Net TIC Flows | n/a | 190.139 |