Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

The S&P 500 and Dow Jones Industrials climbed to new highs on Wednesday but closed the session lower in the wake of patchy U.S. employment data, while bond yields, oil, and metals prices also posted notable declines. 

More on that below. In my column today I look at what equity valuations can tell us about relative stock market performance. If 2025 is any guide, expensive U.S. stocks at the start of this year suggest Wall Street could underperform once again.

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Mixed U.S. employment bag

U.S. job openings in December were much lower than expected, and the 'quits' rate remains low because workers are terrified of giving up their jobs and not finding another one. On the other hand, layoffs fell sharply, and the employment index of the services ISM unexpectedly jumped in November. 

So, a mixed bag of U.S. labor market indicators for investors to chew on ahead of the all-important December payrolls and unemployment rate numbers on Friday. The labor market is soft, but not collapsing.

* Let it loose

Record high stock prices, tight credit spreads, and anchored bond yields - apart from you, Japan - in the first few trading sessions of 2026 mean global financial conditions are the loosest in four years, according to Goldman Sachs indices.

There will be market dips, as evidenced by Wednesday's reversal on Wall Street. But it's a broadly bullish picture: $70 billion of US corporate debt issued Monday and Tuesday, Google and Amazon-backed Anthropic planning a multi-billion fundraise, and investors putting money to work. Too bullish? 

* Japan's bond decoupling

Japanese government bonds continue to crumble, with yields on 20-year maturities and beyond hitting new highs on Wednesday. The move was particularly notable, contrasting with the rally in euro zone and U.S. debt prices.

Even more notable, perhaps, is the yen's reaction. Or lack of reaction. Dollar/yen has been remarkably stable, stuck in a narrow 155.70-157.30 yen range in the last two weeks. Renewed JGB market weakness and broad-based dollar strength is having little impact, but for how much longer?

The new year has gotten off to a roaring start for U.S. equities, with the S&P 500 and Dow Jones breaking new records, and investors are anticipating a fourth consecutive year of double-digit returns. But elevated valuations could yet spoil the party.

The optimism is palpable, and why not? The artificial intelligence capex boom is accelerating, the Federal Reserve is on track to lower interest rates further, and a fiscal stimulus bonanza is coming down the pike - all while economic activity and earnings growth continue to hum along nicely.

Little wonder then that analysts expect the S&P 500 to deliver near 10% returns in 2026, even after three consecutive years of double-digit gains have lifted the index by a cumulative 80%. The more bullish year-end forecasts of 8,000 and above imply at least 15% upside.

The most compelling counter-argument to this bullish consensus, however, is perhaps the most obvious: valuations. 

The best indicator of where an index will be at the end of the year relative to expectations and its peers remains its starting point. There will always be exceptions, of course, but relatively cheap markets on January 1 tend to perform better by December 31. And vice versa.

This should give Wall Street bulls some pause.