The story so far of 2026 has been all about rotation. The “Magnificent 7” stocks (Apple, Alphabet, Amazon, Microsoft, Meta, NVIDIA, and Tesla) have lagged the S&P 500 by a wide margin, but other areas and groups have taken the baton. The lifeblood of a bull market is rotation, and we find this market action to be quite bullish.
It’s true that worries about tariffs and geopolitics are back in the news. We don’t ignore these concerns, as they can indeed cause short-term volatility, but the fundamentals remain quite strong.
The next few weeks will be the heart of fourth-quarter earnings season, which we expect to once again come in better than expected, justifying this bull market.
The First Five Days
Historically, when the S&P 500 is higher the first five trading days of the new year (as happened this year), the full year is higher nearly 82% of the time and up more than 14% on average, compared with the average year higher about 72% of the time and up 9.6% on average.
Taking it a step further, a negative first five days takes the full year to positive just over a coinflip of the time and a modest 1% average return for the full year. No, you should never invest based on just one indicator, but we’d still put this in the “better news than not” file for the new year. Oh, and when stocks are up more than 1% those first five days, something we did indeed accomplish this year, the returns get even better, up nearly 16% on average for the full year and higher more than 87% of the time.
But What About Santa?
Yes, we get it. The S&P 500 did fall during the historically bullish Santa Claus Rally (SCR) period this year. (The SCR is the final five trading days of December and the first two of the new year.) Although, in the end, the S&P 500 soared back late during the SCR period and finished down only 0.11%, it was still the first time in history we didn’t see Santa for three consecutive years.
Historically, when Santa doesn’t come to town, it very well could be a warning sign, as we didn’t see Santa in 2000 and 2008, for instance. The good news is the past three times Santa didn’t come, stocks were still up nicely on the year. Of course, you could argue that 2016 and last year not seeing Santa may have been a clue of some rough seas coming early in those years.
Put It All Together
Jeff Hirsh, CEO of Almanac Trader, is the master here (as his amazing father, Yale, literally invented the Santa Claus Rally indicator), and he says to get the full picture, you need to look at a combination of the SCR, the first five days of the year, and January’s full month return. Should we see a positive January (off to a good start in 2026), then this trifecta would still be classified as overall net bullish for 2026.
Lastly, we found five other years that didn’t see Santa but had a positive first five days of the year. Q1 under this scenario could be rather weak, but the full year managed to do well overall. Peeling back the onion showed that two times the full year was negative, but the returns were only very slightly in the red, and the other three times all saw double-digit gains for the full year.
Let’s see how January shapes up, but we’ve been in the bullish camp for three years now, and the good news is we still think a wave of policy and earnings strength may carry investors forward this year and it could be another solid one for the bulls.
What Is the Inflation Data Really Telling Us?
The December Consumer Price Index (CPI) release was an important one because it closes the book on 2025. Here’s how headline and core CPI inflation (ex food and energy) have ended each of the last four years:
By itself, the drop in inflation is more than welcome, and allows the Fed to focus on labor market risks. But … there are quite a few buts.
The December print for core CPI was a bit of a surprise because it came in a tad soft. Core CPI rose 0.24% month over month (m/m) in December, a tad below expectations for a 0.30% reading. Note that 0.24% m/m translates to an annualized pace of 2.9%. Here’s the thing: The 3-month annualized pace is just 1.6%, which means inflation has collapsed over the last quarter (Q4).
But not quite. As it turns out, the CPI readings are being skewed by the lack of data collection in October and how the Bureau of Labor Statistics (BLS) is filling in the blanks. The BLS has decided to assume a 0% m/m increase for rents and owners’ equivalent rent (OER) in October. Without getting into the technical details, that leaves the pace of housing inflation a lot lower than it would normally be if there had been data collection in October.
- In September, rents were up 3.4% year over year (y/y). That fell to 2.9% in December.
- In September, OER was up 3.8% y/y. That fell to 3.4% in December.
Yes, private market data suggests rents are easing, but the big drop from September to December is solely due to the messy data situation. This matters a lot to the overall inflation numbers because housing makes up about 34% of CPI and 42% of core CPI. All this to say, take the overall headline and core CPI number for 2025 with several grains of salt.
Lower Gasoline Prices Offset by Higher Electricity and Utilities Prices
The good news in 2025 was that oil prices fell and drove gasoline prices lower. The nationwide average gasoline price fell from $3.06/gallon at the end of 2024 to $2.83/gallon at the end of 2025. CPI for gasoline showed a decline of 3.4%.
The problem is that prices for energy services (electricity and utilities [piped gas]) surged in 2025:
- CPI for electricity rose 6.7% in 2025, up from 2.8% in 2024 and well above anything we saw in the 2010s. This is a direct result of surging power requirements amid the AI boom.
- CPI for utilities rose 10.8% in 2025, up from 5.0% in 2024 and close to the highest pace we saw in the 2010s. This tends to move with natural gas prices, but that gets to how commodity prices other than oil moved up in 2025.
Food Price Inflation Also Picked Up in 2025
Food prices also rose in 2025. Grocery prices rose 2.4% y/y, up from 1.8% in 2024. Several everyday items saw a big pickup in prices:
- Meats: 9.2% y/y in 2025 (2.7% in 2024)
- Coffee: 19.8% (3.8%)
- Baked products like bread: 2.3% (0.4%)
One item that saw a welcome price decline was eggs—prices dropped 21% after a 37% gain in 2024, though that still leaves egg prices 8% higher relative to 2023.
One favorite category we use to gauge underlying inflationary pressure is “full services meals and snacks,” primarily seated restaurants. That’s because it combines several inflation drivers, including:
- Food inflation, and even energy prices (including transportation)
- Rent of restaurant premises
- Worker wages
Inflation for seated dining restaurants rose 4.9% in 2025, up from 3.6% in 2024. That’s a faster pace than anything we saw between the late 1990s and 2020. In fact, over the last quarter, prices rose at an annualized pace of 5.9%. That’s hot, and by itself inconsistent with “normal” 2% inflation.
Core Goods Prices Rose Due to Tariffs, But That May Be Easing
Core goods inflation has picked up on the back of tariffs, which shouldn’t be a big surprise, though it’s not as bad as expected for two reasons:
- A lot of the tariffs have been rolled back. We’re near the “best case” Trump Administration scenario with tariffs at an effective rate of about 10%. Less than 50% of imports are currently being tariffed more than they were in January (with a lot of products getting exemptions).
- Companies are eating more of the tariffs rather than passing them on to consumers (this may be because they’re still working off lower-cost inventory for now).
CPI for core goods (commodities excluding food and energy) rose 1.4% in 2024. That doesn’t seem like a lot, but keep in mind that prices for core goods were falling last year, reverting to their pre-pandemic trend after the big spike in 2021-22. Core goods inflation was running at minus-0.5% in 2024, which means we saw a near 2%-point upswing for these goods in 2025.
Here’s what we saw for several key items:
- Furnishings & supplies: 3.4% y/y in 2025 (vs. minus-0.9% in 2024)
- New vehicles: 0.3% (minus-0.4%)
- Used cars: 1.6% (minus-3.3%)
- Prescription drugs: 2.0% (1.1%)
- Recreational commodities: 1.2% (minus-1.5%)
The good news is that the tariff impact may be fading. Core goods inflation eased to a 0.2% annualized pace in the fourth quarter. Prices have started to flatline, and if the trend reverts to what we saw pre-tariffs, prices should fall in 2026. Still, the chart below shows that tariffs did have an impact by raising prices above where they would have been in the absence of tariffs.
The Problem: Inflation for Services Other Than Housing Remains Hot
Even if you argue that core goods inflation is transitory, which looks to be the case, the fact that core services ex housing inflation is elevated is a problem.
The following table shows inflation for several salient services over the past year, compared to 2024 and even 2019. These are everyday services that households spend money on, and you can see that they’re running above even the elevated 2024 pace, let alone the pre-pandemic (2019) rate.
The Glass-Half-Full View
Higher food and electricity/utility prices combined with elevated inflation for everyday services explains why there’s a lot of angst about inflation and affordability. This would, in turn, explain poor consumer sentiment.
Inflation basically has three main drivers:
- Oil prices
- Housing
- Labor markets
Oil prices have fallen, with perhaps more downside pressure to come, especially if more oil comes out of Venezuela (and maybe Iran). Official housing data is likely to show more disinflation (setting aside data issues temporarily), especially if it follows the trajectory of private rental data.
That leaves the labor market. On the face of it, the labor market is slowly cooling, but hiring is certainly weak. This should drive prices lower, especially for core goods and core services. Core goods have been hit by tariffs, but that headwind looks to be fading.
However, hot core services inflation, as we’re seeing now, is not what you would expect amid a weakening labor market. In fact, we would argue that the strength in core services inflation, especially for things like restaurants, tells you that the labor market is perhaps not as weak as hiring data suggests. We’ve seen this in the labor market data, too, especially in the high employment-population ratio for prime-age workers (25-54), which is at a level higher than at any point during the last two expansions (in the 2000s and 2010s).
Of course, this is a glass-half-full view. But this also means things could heat up further if hiring picks up. This is one reason why we don’t really expect inflation to head back to the Fed’s target of 2% in 2026. Rather, we expect inflationary growth. That doesn’t mean we expect inflation to surge above 3%. That’s not likely in the face of shelter disinflation. But inflation could run at 2.5% to 3%, unless we see significant weakening in the labor market and the economy. But that’s not our base case right now.
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.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly traded companies from most sectors in the global economy, the major exception being financial services.
The views stated in this letter are not necessarily the opinion of Cetera Wealth Services LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Compliance Case # 8724842.1.-0126-C
