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

• How Exceptional Is This Bull Market Really?
• What's Fueling the Continued Market Optimism?
• Which Sectors Are Showing Particularly Strong Performance?
• Are There Any Warning Signs Investors Should Note?
• Frequently Asked Questions

The S&P 500 is wrapping up 2025 with its third straight year of gains, marking an impressive 38-month bull run that shows no signs of stopping. Historical data suggests this momentum could well continue through 2026, with Wall Street analysts projecting double-digit growth. Let's dive into what's driving this remarkable performance and what investors can expect in the coming year.

How Exceptional Is This Bull Market Really?

Since adopting its modern format in 1958, the S&P 500 has closed higher in three-quarters of all calendar years - but the current run is particularly noteworthy. The index has posted 20%+ gains in 19 distinct years while recording declines of any magnitude in just 17. This year's 16.2% gain builds on previous years' performance, creating a cumulative three-year return that peaked at 87% in October, ranking among the top 5% of all similar periods in history.

What's especially interesting is how broad-based these gains have been. While tech giants like Nvidia, Alphabet, and Broadcom contributed significantly, the equal-weight S&P 500 still ROSE 10.7% - showing this isn't just a story about a handful of mega-cap stocks.

What's Fueling the Continued Market Optimism?

Several factors align to support Wall Street's bullish outlook for 2026:

• Projected double-digit earnings growth
• The Federal Reserve's 1.75 percentage point rate cuts over the past 15 months
• Expected additional rate reductions
• Cooling valuations in previously overheated sectors

The Nasdaq 100 currently trades at a forward P/E of 26, several points below its two-year average, while its valuation premium relative to the S&P 500 is the smallest in six years. This more reasonable pricing, combined with strong fundamentals, suggests room for continued growth.

Which Sectors Are Showing Particularly Strong Performance?

Beyond technology, defense stocks have been market standouts. The S&P 1500 Aerospace & Defense Index, comprising 24 companies, is headed for a 41% annual gain - its best performance since 2013. This:

• More than doubles the S&P 500's return
• Outperforms the "Magnificent Seven" by about 16 percentage points
• Reflects booming commercial aerospace demand and increased military budgets

European arms manufacturers like Rheinmetall, Saab, and Leonardo have similarly benefited from government spending increases. In the U.S., established players like RTX and Northrop Grumman posted double-digit gains, fueled by enthusiasm around projects like the Golden Dome missile defense program.

Are There Any Warning Signs Investors Should Note?

While the overall picture remains positive, some cautionary notes emerge:

• Certain high-flying defense stocks have corrected sharply (AeroVironment down ~40% from October peaks)
• Valuations remain stretched for some names (Kratos at ~100x forward earnings, Palantir >190x)
• Historical patterns suggest returns following such strong three-year runs tend to be weaker than average
• Midterm election years have sometimes brought extended price stagnation periods

That said, analyst Optimism remains strong, with 57.5% of S&P 500 ratings at "Buy" - matching February 2022's peak level (though that preceded a nine-month bear market).

Frequently Asked Questions

How long has the current bull market lasted?

The current bull market has lasted 38 months as of December 2025, with the S&P 500 posting gains for three consecutive years.

What's driving the strong performance of defense stocks?

Defense stocks are benefiting from increased military budgets globally, commercial aerospace demand, and specific programs like missile defense initiatives.

How do current valuations compare to historical averages?

While some sectors like defense show stretched valuations, overall market multiples have moderated, with the Nasdaq 100's forward P/E of 26 below its two-year average.

What historical patterns should investors consider?

Historical data shows that after similarly strong three-year runs, markets typically continue rising but at more modest rates, and midterm election years often see periods of stagnation.