Stocks closed solidly higher on Friday, with both the S&P and Nasdaq closing up for the week.

Thursday's better-than-expected Consumer Price Index (CPI) continued to lift stocks on Friday.

The headline rate for November was up 0.2% m/m vs. the consensus for 0.3%. The y/y rate moderated to 2.7% vs. the previous report's 3.0% and views for 3.1%. The core rate (ex-food & energy) came in at 0.2% m/m vs. estimates for 0.3%. The y/y rate eased to 2.6% vs. the previous 3.0% and expectations for the same.

While some questioned the accuracy, citing flaws in the calculations, which included the likelihood of underestimating the OER or 'owner's equivalent rent,' and goods prices being lowered due to holiday discounts, the magnitude of the surprise was seemingly enough to mitigate those concerns.

On Friday, New York Federal Reserve President John Williams acknowledged those concerns. But believes it likely only understated inflation by "about a tenth" of a percent. And was upbeat about the economy in 2026.

We'll get another look at inflation on Tuesday with the Personal Consumption Expenditures (PCE) index, which is the Fed's preferred inflation gauge. The headline number was last up 0.3% m/m with the y/y rate up 3.0%. The core rate was last reported at 0.2% m/m with the y/y rate at 3.0%.

A confirmation of last week's CPI report could further lift the market as it would increase the chances for a January rate cut.

The CME's FedWatch tool now places the odds for a January cut at 21.0%. Although, the odds for a March cut are still the better odds at 56.6%.

With 2026 soon to begin, many are pointing to expectations for the upcoming tax season and the expectation for large refund checks. Kevin Hassett, the National Economic Council Director said, "we are going to see the biggest refund cycle in the history of America, and people are going to get massive refund checks," and that "the numbers are striking."

He was referring to the tax provisions passed earlier this year that are retroactive to the beginning of 2025. That includes a higher standard deduction, bigger SALT deductions, no tax on (a portion of) tips, no tax on (limited) overtime, a senior bonus which lowers tax on a portion of social security benefits for qualified recipients, and more.

Corporate America will also feel the benefit. Not just with more money in consumers' pockets (after all, roughly 70% of GDP consists of consumer spending), but also from increased R&D expensing, accelerated CapEx expensing, interest deduction relief, and enhanced small-business expensing.

The outlook for 2026 is one of growth. And with stocks being the forward-looking mechanism they are, the pricing in of these benefits should begin well before those benefits are realized. And that bodes well for stocks.

Just 6½ more trading days left in the year. Three and a half days this week (half-day on Wednesday for Christmas Eve, and markets are closed on Thursday for Christmas). Then three more next week. (Markets are closed on Thursday for New Year's Day, but that's 2026 already.)

YTD, the Dow is up 13.1%; the S&P is up 16.2%; the Nasdaq is up 20.7%; and the small-cap Russell 2000 is up 16.2%.

Still expecting an end-of-year rally to lift stocks even higher. And still expecting the S&P to finish up 20% or more for the year.

With the AI trade getting a boost last week, that too bodes well for more gains to come.

See you tomorrow,