S&P 500 Closes Third Consecutive Year of Gains as Bull Market Extends into 2026

• How Has the S&P 500 Performed Historically?
• Why Is Wall Street Optimistic Despite Cooling Valuations?
• What Role Do Election Cycles Play?
• Why Are Defense Stocks Rallying?
• Key Takeaways for Investors
• FAQs

The S&P 500 has wrapped up its third straight year of gains, defying historical trends and setting the stage for continued growth into 2026. With earnings projections strong and the Fed easing rates, Wall Street remains bullish despite recent sideways trading. Defense stocks are surging, while tech valuations cool—here’s what’s driving the market and what to watch next.

How Has the S&P 500 Performed Historically?

Since 1958, when the index took its modern form, the S&P 500 has closed higher in three out of every four calendar years. Even more impressive, it’s posted gains of 20% or more in 19 separate years, while recording losses (of any magnitude) in just 17. This long-term Optimism aligns with what investors are seeing today. Earnings forecasts predict double-digit growth next year, and the Federal Reserve has already cut rates by 1.75 percentage points over the past 15 months, with further reductions expected. This backdrop explains why Wall Street’s 2026 projections anticipate another 10%+ rally. Recent trading hasn’t shaken this outlook—the index has moved sideways for the past two months, staying within 3% of all-time highs.

Why Is Wall Street Optimistic Despite Cooling Valuations?

The recent stagnation has cooled some market segments. AI-related stocks have lost their "inevitable" aura, speculative behavior has eased, and pricing pressures have relaxed. The Nasdaq 100 now trades at a forward P/E of 26, slightly below its two-year average, with its valuation gap to the S&P 500 at a six-year low. Optimism remains robust, though expectations are higher. FactSet notes that 57.5% of analyst recommendations for S&P 500 companies are "buy" ratings—matching February 2022’s peak, just before a nine-month bear market. Bespoke Investment Group highlights that the index’s 87% three-year rolling return at its October peak ranks among the top 5% of such periods historically. Gains typically continue after such runs, though at below-average rates.

What Role Do Election Cycles Play?

Midterm election years often see prolonged price stagnation, hinting at muted 2026 gains. But macro trends never act alone. This year’s 16.2% rally isn’t just a few stocks: the equal-weighted S&P 500 ROSE 10.7%, though the gap underscores the risk of underweighting megacaps. Without Nvidia, Alphabet, and Broadcom, the index’s gain would’ve been a third lower.

Why Are Defense Stocks Rallying?

Outside tech, defense stocks are among the market’s top performers. The S&P 1500 Aerospace & Defense Index (24 firms) is set to surge 41%—its best year since 2013, fueled by commercial aerospace demand. This dwarfs the S&P 500’s rise and tops the "Magnificent Seven" by ~16 percentage points (CNBC data). In Europe, arms makers like Rheinmetall and Saab have soared as governments hike military budgets. U.S. players like RTX and Northrop Grumman posted double-digit gains on defense-spending optimism (e.g., the Golden Dome missile shield). Even concerns about potential buyback/dividend limits under a TRUMP administration haven’t dented demand. However, drone makers Kratos and AeroVironment sank after cautious Q3 guidance—AeroVironment is down 40% from its October high. Post-drop, Kratos trades at ~100x next-year earnings, Palantir at 190x, versus RTX’s 27x and Lockheed’s 16x.

Key Takeaways for Investors

1.: Megacaps drove 2023, but equal-weight performance shows broader strength.
2.: Further rate cuts could extend the bull run.
3.: Geopolitical tensions are fueling sector growth.
4.: Some AI and defense stocks still trade at extreme multiples.