Perhaps in honor of the Super Bowl, stocks were higher on Monday and Friday last week (reminds us of the two sides of a goal post) but saw massive selling the other three days. Sparking the selling were relatively new worries over AI potentially disrupting business models in several industries, as well as continued worries that the seemingly endless spending on AI might not show corresponding profitability on the other side. At the center of the storm, software names were hit very hard and cryptocurrencies crashed, with Bitcoin cut in half from its October 2025 peak and down more than 14% just on Thursday.
Yet, as we peel back the onion, there are many potential positives. We saw a huge surge in 52-week highs on the New York Stock Exchange and S&P 500 last week. Yes, technology lagged, but the S&P 500 was flat on the week, as money flowed into other areas of the market. Small caps and midcaps soared, with midcaps quietly moving to new highs. Sectors like energy, materials, and industrials have all done well as the market has rotated away from growth and into value. Lastly, the S&P 500 equal-weight index (which weighs all 500 names equally compared with the well-known price weighted index, which is top-heavy in technology) made more new highs as well, showing that the average stock is doing just fine.
We’ve long said the lifeblood of a bull market is rotation, and the action this year is overall quite healthy. We remain optimistic that technology will take back the baton eventually in 2026, as we believe many names have been unfairly hit amid the broad selling, with still-solid earnings growth creating some very attractive valuations out there for investors willing to nibble when things are down and scary.
The Dual Tailwinds Are Alive and Well
What really drives long-term stock gains? It is earnings, and earnings continue to be very strong. According to FactSet, fourth-quarter S&P 500 earnings were expected to be up 8.2% on December 31, 2025, and they are all the way up to 13.0% currently. More than 75% of the nearly 60% of the S&P 500 that has reported has beaten earnings estimates, and more than 70% have turned in better revenue than was expected.
But even more impressive is that we are looking at profit margins of 13.2% in the fourth quarter, which would be the highest in the more than 15 years for which FactSet has data. We’ve long called higher profit margins and higher profits the dual tailwinds to this bull market, and they are still firmly intact. Higher profits and higher profit margins likely mean higher stock prices in 2026.
Dow 50,000
Friday saw another amazing milestone for investors, as the Dow closed above 50,000 for the first time. We are a long way from the sub-7,000 level seen during the Great Financial Crisis, but this is why longer-term investing has been so advantageous. Things aren’t always going to be fun for investors, but knowing that over the long run stocks tend to trend higher and buying even when times are scary is a great way to accumulate wealth over time.
Congrats to those investors who stuck with their investment plans, even when it might not have felt like the thing to do. Since just 2020, we’ve seen a once-in-a-century pandemic and a 34% bear market, another 25% bear market in 2022, then another near 20% bear market last year around Liberation Day. Yet, through it all, our economy continued to grow, earnings soared, and investors were rewarded. Here’s a fun list all of the major Dow milestones in history.
Politics and Investing Don’t Mix II
Two weeks ago, we took a look at how political biases have often led investors astray, something we believe applies equally to both sides of the aisle. As we noted, markets have gone up (and down) during Democratic and Republican administrations and have had bull and bear markets under both parties. As we wrote then, many investors who didn’t like President Obama let it influence their investment choices and missed out on eight great years for markets. The same happened during President Trump’s first term. And then President Biden. And now we’ve seen the same with Trump 2.0.
For that piece, we looked at broad markets. For this one, we want to look at specific policy takeaways. If we can’t get broad markets right, do we at least have hints about which areas of the market might outperform? It’s always tempting to make big policy predictions after an election—especially a presidential election that sees a big ideological switch—and then make predictions about certain sectors and themes that could benefit from these policies.
After President Trump’s re-election, there were several seemingly intuitive opportunities to “take advantage of” with the new administration, including:
- An American resurgence, implying buy American and fade international, more so with America’s added economic “leverage” that would allow it to dictate terms.
- A wave of deregulation favoring financial and energy companies.
- Pulling back from renewable energy, implying fade renewables.
- The end of “woke,” so sell all that ESG stuff.
- A cryptocurrency surge on the back of a much more favorable regulatory environment.
Long story short, it didn’t quite work out this way. In fact, it was the opposite. Since Inauguration Day in 2025, US stocks have underperformed international stocks, energy and financials underperformed the broad S&P 500 index, and clean energy stocks and ESG stocks outperformed the sectors that might have been expected to outperform. Crypto, fair to say, has gotten smashed, with Bitcoin down 33% (other cryptocurrencies are even worse). That’s especially bad considering stocks and bonds are in the green over the past year. The fact that Bitcoin and the rest of the complex have struggled amid a weak dollar environment is especially notable, particularly when competing diversifiers like gold have shined especially bright.
It’s not just the past year. We saw this same story play out during the Biden, Trump 1.0, and Obama administrations.
- US stocks outperformed international stocks to a much greater degree during the Obama and Biden administrations.
- Financials outperformed during the Biden and Obama administrations, and underperformed a lot during Trump 1.0.
- Energy outperformed significantly during the Biden administration (the other side of this was inflation), but was terrible during Trump 1.0 and did better during the Obama administration (despite the crash from 2014-16 as the shale bubble burst).
- Clean energy stocks had returns of about 3.7x the S&P 500 during Trump 1.0, while they fell significantly during Biden’s and Obama’s terms.
- ESG stocks also outperformed during Trump 1.0, while underperforming during the Biden and Obama administrations.
I’d have gone back to the George W. Bush administration, but it was sandwiched between two recessions, and politics didn’t seem so salient then (at least within the investing realm). Plus, betting on all these different themes and sectors was harder. But even during the eight years of the Bush administration (2001-09), things didn’t quite play out as one might expect under a Republican administration. From January 20, 2001, through January 20, 2009:
- US stocks underperformed international stocks: the S&P 500 fell 31% while the MSCI All-Cap World Ex US Index gained 1.5%.
- Financial stocks fell 65% (remember the financial crisis?).
- Energy stocks did outperform, gaining 63% in a “lost” eight years for stocks, but this was driven by foreign demand for oil rather than anything that happened in the US (shale happened after 2009).
All this to say, be careful of political narratives and policy-driven market predictions, especially immediately after an election. There will be plenty of that this year considering it’s a midterm year. With this stuff, you need to not just get the policy right—you also need to the get the policy implications for companies right, and then the potential impact on their stocks. As with everything related to investing, what really matters is what is or isn’t priced in, and that’s not easy to figure out.
The good news is that stocks tend to go up irrespective of who the president is, unless you get a big recession that upends profits. But that’s not our base case now, as we outlined in our 2026 Market Outlook: Ride the Wave.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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