Image Source: Unsplash
 

The economic and market fundamentals appear to be flashing green lights everywhere. Growth is strong, inflation has cooled, and financial conditions have eased. Yet even with clear skies and open roads, experienced drivers know conditions can change quickly. It may not be time to slam on the brakes—but it could be time to keep a foot hovering nearby.

After the Federal Reserve aggressively applied the brakes in 2022 with seven rate hikes—taking the federal funds rate from 0.25% to 4.50%—the stock market declined nearly 19%. Since rates peaked at 5.50% in 2023, the Fed has cut rates six times, lowering them by a cumulative 1.75% to approximately 3.75%. Those cuts have helped pave the way for a smoother ride, providing a meaningful tailwind to equity markets.

That said, the most recent quarter-point cut produced mixed results. Last month, the Dow Jones Industrial Average rose +0.7%, the S&P 500 was essentially flat at –0.1%, and the Nasdaq lagged with a –0.5% decline.

Navigating the Winning Streak
 

We have encountered a few economic speed bumps along the way—tariffs and geopolitical events earlier in 2025, for example—but once investors realized those tariffs were more bark than bite (as I discussed previously in Tariff Sheriff), stocks resumed their impressive run. The market has now delivered three consecutive years of strong returns: 2023 (+24%), 2024 (+23%), and 2025 (+16%).

With these strong gains, today’s environment can feel like cruising on a national highway—clear roads, sunny skies, cruise control engaged, and little traffic in sight. The momentum could continue. Three strong years in a row do not rule out a fourth or fifth. In fact, the late 1990s offer a powerful reminder: from 1995 through 2000, the stock market averaged approximately 29% annual returns through the March 2000 peak (see table below). However, once the technology bubble burst, it took more than 13 years for the market to reclaim new year-end highs.
 

Source: Gemini 
 

After more than three decades of investing, one lesson remains clear: trees can grow for years—but they do not grow to the sky forever. Bull markets often last longer than expected, but they eventually end.

Why the Forecast Looks Rosy
 

Several factors are supporting today’s strong market backdrop:

• Strong Economic Growth: Third-quarter GDP growth of 4.3% marked the fastest expansion in two years (see chart below)
   

Source: Trading Economics
 

• AI-Driven Productivity: GDP growth has remained robust even as unemployment has risen from 4.0% earlier in the year to approximately 4.6% today. Growth outpacing employment is the definition of productivity, and the proliferation of artificial intelligence is accelerating this trend. Large companies such as Amazon.com (AMZN), Microsoft (MSFT), Alphabet-Google (GOOGL), and Meta Platforms (META) have reduced headcount significantly by tens of thousands in recent years while revenues and profits continue to surge (see also Mag 7 Takes Cash to the Bank).
   

Source: Trading Economics
 

• Taming Inflation: Crude oil prices have fallen roughly 20% over the last year, and Owner’s Equivalent Rent (which makes up about one-third of CPI inflation) has been steadily declining—both positive signals for inflation pressures ahead (see chart below).
   

Source: Calafia Beach Pundit
 

• Lapping Tariffs: Tariffs represented a one-time price increase. As we move into 2026, their inflationary impact should diminish as those increases roll off.

• Narrowing Budget Deficit: While debt and deficits remain headline risks, federal spending has been flat over the past year while revenues have increased roughly 10%, according to Scott Grannis (see chart below).
   

Source: Calafia Beach Pundit
 

• Tax Cuts & Higher Refunds Ahead: Many provisions of the One Big Beautiful Bill (OBBB) will be felt more fully in 2026, including 100% bonus depreciation for businesses, higher SALT deduction caps, increased standard deductions, no tax on tips or overtime, and a higher Child Tax Credit (CTC). Collectively, these could result in refunds up to $1,000 higher per individual.

Together, these factors could support continued market strength into 2026. But weather, road conditions, and markets can change quickly.

Reasons to Keep Your Foot Near the Brake Pedal
 

While the road looks smooth, several caution signs deserve attention:

• Elevated Valuations: Forward price-to-earnings ratios (P/E) are at their highest levels since the late 1990s, outside of the brief post-COVID period. (see chart below).
   

Source: Yardeni Research
 

• Animal Spirits Are Back: Speculation has expanded well beyond traditional markets. Prediction platforms such as Kalshi, Polymarket, FanDuel, DraftKings, Robinhood, Coinbase, and others now allow bets on everything from political outcomes to economic data—further evidence of speculative behavior.

• Gold and Silver Speculation: Despite a relatively stable U.S. dollar over the past six months, gold rose +64% and silver catapulted +145% in 2025—moves difficult to justify by fundamentals alone (see chart below).
   

Source: MarketSurge
 

• Investor Complacency: The Volatility Index (VIX), often called the “fear gauge,” currently hovers near 15, well below its long-term average of 20. Historically, true fear doesn’t surface until readings exceed 25.

• Market Concentration: The “Magnificent 7” stocks represent roughly 1% of the companies in the S&P 500 but account for about 37% of the index’s weighting (see Mag 7 Takes Cash to the Bank)—a concentration reminiscent of the late 1990s. When leadership narrows, downturns can be sharper.

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