Sam Stovall, Chief Investment Strategist at CFRA breaks down what history says could shake the market and how to position yourself amid potential volatility.
00:00 — Introduction
00:00:20 — Does January Predict the Market’s Year?
00:01:34 — Why Small Caps Are Leading
00:03:03 — Which Sectors Look Undervalued
00:04:07 — S&P 500 Year-End Target
00:05:07 — What Could Push Stocks Higher
00:06:08 — Biggest Risk to the Market
00:07:44 — Stock Market Under Trump’s Second Term
00:09:10 — Best First-Year Market Performance
00:10:13 — Are Safe-Haven Rallies a Warning?
Transcript:
Caroline Woods:
Joining me now is Sam Stovall, Chief Investment Strategist at CFRA. Sam, always good to have you. Thanks so much for being here.
Sam Stovall:
Happy to be here, Caroline.
Caroline Woods:
Sam, I know you love an old adage, so let’s start with “as goes January, so goes the year.” Is that going to be the case, do you think? And how would you describe January so far?
Sam Stovall:
Hello, Caroline. Well, yeah—the Stock Trader’s Almanac popularized that phrase, basically indicating that if we have a positive performance for the S&P 500 in January, the full year tends to see an average increase of a little more than 16%, with the market rising 86% of the time compared with 72% for all years.
So far, we’ve had a positive first five trading days of January, which is sort of an early warning signal for the market. Right now, things do look fairly healthy as we head into the new year, with energy, industrials, and materials on top, while some of last year’s high fliers—financials, information technology, and utilities—are coming in last.
Caroline Woods:
Yeah, we’ve also been seeing this rotation into small caps. If you take a look, the Dow is outperforming the Nasdaq and the S&P, but the Russell is outperforming all three. Do you think that’s a rotation we should expect to continue?
Sam Stovall:
Yes, you’re absolutely right. Small caps have outperformed mid-caps, and mid-caps have outperformed large caps. I think it’s a continuation of the belief that the Fed will continue to cut rates in 2026. Historically, in the second year of a rate-easing cycle, small and mid-caps tend to do well, and the market itself also ends up being fairly strong.
What we’re also seeing is mid and small caps finally catching a break because they’re currently trading at a 27% relative P/E discount for mid-caps over the past 20 years, and more than a 30% discount for small caps. They’re grossly undervalued compared with their 20-year averages. So it’s a good thing investors are rotating rather than retreating—taking profits from prior high fliers and gravitating toward mid, small, and value.
Caroline Woods:
You mentioned some of the outperforming sectors so far in January. Granted, we’re only about 15 days in, but materials, industrials, energy, staples, and real estate are all outperforming tech. As we think about valuations, what areas of the market still look cheap?
Sam Stovall:
When you look across sectors, none—except energy—is trading below its longer-term average P/E ratio. All other sectors are trading at premiums to their 10- and 20-year averages, and most are even above their five-year averages on a relative basis.
Energy is the most attractive, trading at a 26% relative P/E discount to the S&P 500 over the last 20 years. Utilities are trading at a 19% discount, and financials—recently beaten up—are trading at a 14% discount. So we continue to believe that for the full year, last year’s high fliers—communication services, industrials, financials, and tech—will be overall outperformers in 2026.
Caroline Woods:
Okay, so that being said, where do you see the S&P 500 by year-end? What’s your price target?
Sam Stovall:
My price target is 7,400. I start with history and then overlay macro and earnings. Historically, in midterm election years, returns are not very strong—since World War II, the average gain has been just 3.8%, with the market rising only 55% of the time. That’s basically a coin toss.
Those numbers are fairly consistent even going back to 1990. We just scored a three-peat—three successive calendar years of double-digit gains—and only three times since World War II have we seen a four-peat. It’s a very rare situation.
Caroline Woods:
Okay, so doing some quick iPhone math, that looks like about 6% upside from here. What gets it there?
Sam Stovall:
What gets us there is continued optimism around improving corporate profits. In 2025, estimates show about an 11% gain in earnings. What’s interesting is that when Q3 earnings season began, expectations were for about a 7% year-over-year rise, but results came in at more than 15%.
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