Falling Inflation and Rate Cuts: Are They Good for the Stock Market?

Summary

Park Se-ik reviews the 2025 U.S. market and outlines a 2026 outlook focused on earnings rather than multiple expansion. He notes 2025 gains were driven by earnings growth, with communication services, IT, and industrials leading, while rates are likely to stay range-bound. For 2026, he favors sectors with strong earnings momentum, especially IT, industrials, and communication services, and expects Alphabet and Meta to beat conservative estimates. Choi Ho adds that early-year weakness could be a buying opportunity if fundamentals remain intact.

• 2025 S&P 500 returned about 16%, with earnings growth of 11.7% explaining most of the gain.
• 2026 consensus expects S&P 500 EPS growth of about 13%; rates around 4% suggest limited multiple expansion.
• IT, industrials, and communication services are favored for earnings momentum.
• Communication services estimates look too conservative, especially for Alphabet and Meta.
• Materials estimates are less reliable due to commodity price uncertainty.
• Labor data is improving and falling inflation could allow more stock-friendly rate cuts.
• Early-year market weakness may offer a buying opportunity if fundamentals hold.
• 2025 sector performance was dispersed, with many individual stock winners outside mega-caps.