As the clock strikes midnight on 2025, the U.S. equity market is celebrating more than just a new year; it is marking the entrance of one of the most resilient bull markets in modern history into its fourth year of life. Despite a tumultuous twelve months defined by "tariff shocks," a historic government shutdown, and a radical shift in fiscal policy, the S&P 500 (INDEXSP:.INX) is closing the year at approximately 6,940, representing a staggering 18% gain for 2025 and a cumulative surge of nearly 95% since the dark days of October 2022.
However, the jubilant mood on Wall Street is increasingly tempered by a "paradoxical resilience" that has pushed valuations to levels not seen since the dot-com bubble. With the Shiller P/E ratio now hovering at 40.7—dangerously close to its 1999 peak—investors are grappling with a market that appears "priced for perfection." As we enter 2026, the critical question is whether the "Great Rebalancing" currently underway can sustain the rally, or if the weight of 7% fiscal deficits and a "reality check" on artificial intelligence will finally break the market's stride.
The current bull market was born on October 12, 2022, amidst peak inflation fears and a hawkish Federal Reserve. Since then, it has defied every recessionary forecast, surviving the regional banking crisis of 2023 and the high-rate environment of 2024. The year 2025, however, proved to be its most volatile chapter yet. The market's momentum was nearly derailed in April 2025 by a "tariff shock" following sweeping executive orders from the new administration, which triggered a sharp 19% drawdown in the S&P 500.
The recovery from that spring slump was fueled by a combination of aggressive fiscal stimulus and a pivotal shift in monetary policy. In July 2025, the passage of the "One Big Beautiful Bill Act" (OBBBA) injected fresh liquidity into the economy through permanent tax cuts and direct consumer stimulus. This was followed by the Federal Reserve’s long-awaited easing cycle, which saw three 25-basis point rate cuts in the latter half of the year, bringing the federal funds rate to a range of 3.50%–3.75% by December. This "soft landing" that transitioned into a "no-landing" scenario allowed the Nasdaq Composite (INDEXNASDAQ: .IXIC) to finish 2025 up 21%, though the rally's composition began to shift significantly in the final quarter.
The final weeks of 2025 have been characterized by a massive capital migration, as fund managers lock in gains from the "Magnificent Seven" and rotate into cyclical and defensive sectors. NVIDIA (NASDAQ: NVDA), the poster child of the AI revolution, remains a top performer for the year but has faced "valuation fatigue" in December as investors demand more tangible proof of AI-driven productivity. Similarly, Microsoft (NASDAQ: MSFT) has transitioned from a pure growth play to an "execution story," with its stock price becoming increasingly sensitive to cloud-margin fluctuations.
Conversely, the "Great Rebalancing" has minted new winners in the "S&P 493." JPMorgan Chase & Co. (NYSE: JPM) and other financial giants have thrived as the administration’s deregulation agenda and a steepening yield curve boosted net interest margins. The energy sector, led by ExxonMobil (NYSE: XOM), found renewed life in late 2025 as domestic production incentives and geopolitical tensions kept oil prices buoyant. Meanwhile, the AI infrastructure trade has broadened to include utilities like NextEra Energy (NYSE: NEE), which are benefiting from the insatiable power demand of new data centers. On the losing side, multinational retailers and tech firms with heavy exposure to Chinese supply chains have struggled to recover from the volatility of the spring tariff announcements.
The current market environment draws striking parallels to the late 1990s, particularly regarding the Shiller P/E ratio’s climb toward the 44.0 level. Much like the internet boom, the AI-driven rally of 2024 and 2025 has been built on the promise of a generational shift in productivity. However, the macro backdrop of 2026 is vastly different from 1999. Today’s market is operating under a massive fiscal deficit, projected to hit 7% of GDP in 2026, which has kept core inflation "sticky" at nearly 3%.
This fiscal dominance creates a unique ripple effect: while the stimulus from the OBBBA supports consumer spending, it also limits the Federal Reserve’s ability to cut rates further. The "protectionist virus" that emerged in early 2025 also represents a departure from the globalist trends of previous decades. Historical precedents suggest that bull markets entering their fourth year have an 86% probability of continuing, but the "margin for error" has arguably never been thinner. The market is now essentially a bet on whether AI can deliver productivity gains fast enough to offset the inflationary pressures of a high-deficit, high-tariff economy.
As we move into the first quarter of 2026, several short-term hurdles await. The market is closely watching a January court decision regarding the Executive Branch's influence over Federal Reserve personnel, a case that could introduce unprecedented political volatility into central bank policy. Strategically, corporations are expected to pivot from "AI experimentation" to "AI monetization," with Q1 and Q2 earnings reports serving as a litmus test for the hundreds of billions spent on capital expenditures over the last two years.
Potential scenarios for 2026 range from a "melt-up" toward the 7,500 level if earnings growth accelerates, to a "valuation reset" if inflation remains stubbornly above the Fed's 2% target. Analysts warn that the S&P 500 is currently trading more than 10% above its 200-day moving average, suggesting that even a healthy bull market may need a period of consolidation or a "meaningful breather" before it can tackle the next leg higher.
The US bull market of 2022–2025 has been a testament to the power of technological innovation and fiscal support. As it enters its fourth year, the transition from a "top-heavy" tech rally to a broader, sector-wide advance is a healthy sign for long-term sustainability. However, the extreme valuation metrics and the looming fiscal deficit cannot be ignored. The "Great Rebalancing" is not just a trend; it is a necessary adjustment for a market that has become overextended.
For investors, the coming months will require a shift from passive index-chasing to active, quality-focused selection. Key indicators to watch include the S&P 500's ability to hold the 6,790 support level and the 10-year Treasury yield's reaction to the 2026 deficit projections. While the bull market is far from dead, it has reached a mature phase where the easy gains have been made, and the path forward will be dictated by hard earnings data rather than speculative hope.
This content is intended for informational purposes only and is not financial advice
