The S&P 500 is closing out 2025 with its third straight year of gains, locking in a bull market that has now run for 38 months and counting.
Since 1958, when the index took its modern form, the S&P 500 has finished higher in three‑quarters of all calendar years. Even more striking, it has delivered 20% or bigger gains in 19 separate years, while posting declines of any size in just 17.
Those long‑term odds line up with what investors are seeing right now. Earnings forecasts point to a double‑digit rise next year, while the Federal Reserve has already cut rates by 1.75 percentage points over the past 15 months and is expected to move lower again.
That backdrop explains why Wall Street projections for 2026 are clustered around another 10% or better advance. Recent trading has not changed that view, with the index spending the last two months moving sideways within 3% of record highs.
Wall Street leans bullish as valuations cool
That stretch of flat trading has played a role in cooling parts of the market. Several AI‑linked stocks lost their sense of inevitability, speculative behavior eased, and pricing pressures relaxed.
The Nasdaq 100 now trades at a forward price‑to‑earnings ratio of 26, which sits a couple of points below its two‑year average. Its valuation premium over the broader S&P is the narrowest it has been in more than six years.
Optimism remains heavy, though expectations are now higher. FactSet shows 57.5% of analyst ratings on S&P 500 companies are marked as Buys, matching the highest level seen since February 2022, a moment that came just before a nine‑month bear market.
Bespoke Investment Group noted that the index’s trailing three‑year return of 87% at its October peak ranks in the top 5% of all such periods on record. History shows gains usually continue after similar runs, but they tend to be far weaker than average.
Election cycles also sit in the background. Some past midterm election years have produced long stretches where prices went nowhere, suggesting muted upside and months of stalled momentum in 2026.
Even so, broad trends never act alone. This year’s 16.2% gain did not come from only a handful of names. The equally weighted S&P 500 has risen 10.7%, though the gap still shows the risk of holding too little exposure to the biggest stocks.
If Nvidia, Alphabet, and Broadcom had finished the year flat, the index’s gain would have been about one‑third lower.
Defense stocks deliver rare high‑risk rally
Away from tech, defense stocks produced one of the market’s loudest moves. The S&P 1500 Aerospace and Defense group, made up of 24 companies, is heading toward a 41% jump, its strongest year since 2013, helped by demand in commercial aerospace.
That return is more than double the S&P 500’s rise and roughly 16 percentage points ahead of the Magnificent Seven, according to data from CNBC.
In Europe, weapons makers such as Rheinmetall, Saab, and Leonardo climbed as governments moved to sharply increase military budgets.
In the United States, established players like RTX and Northrop Grumman logged double‑digit gains, supported by enthusiasm around military spending and projects like the Golden Dome missile‑defense program.
Concerns that President Donald Trump’s administration could push contractors to rein in buybacks and dividends barely slowed investor demand.
But Kratos and fellow drone maker AeroVironment issued mellow outlooks in Q3, and their shares fell hard, pulling AeroVironment down roughly 40% from its October high.
Even after the pullback, Kratos trades near 100 times expected earnings for the next year, while Palantir sits above 190. By comparison, RTX is valued at 27 times earnings, and Lockheed Martin, known for the C‑130 Hercules transport plane, trades at 16.
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