The US stock market is set to conclude a third consecutive year of double-digit percentage gains, raising questions about the sustainability of this momentum heading into 2026. Analysts suggest that strong earnings, a dovish Federal Reserve, and robust spending on artificial intelligence will be essential for the market to maintain its upward trajectory in the coming year.
The current bull market, which began in October 2022, has been fueled by optimism surrounding AI technology, anticipated interest rate cuts, and economic resilience despite recession fears. The S&P 500 index (.SPX) has gained over 17 percent in 2025, building on a 23 percent increase in 2024 and a 24 percent rise in 2023. The market’s performance this year was marked by significant volatility, especially following substantial tariffs announced by the Trump administration in April.
Sam Stovall, chief investment strategist at CFRA, noted that for the market to see another year of significant gains, “everything [needs] firing on all cylinders.” While he acknowledges the potential for a surprisingly strong year ahead, he remains cautious, setting a year-end 2026 price target of 7,400, which would represent a modest 7 percent increase from current levels.
Many strategists, however, are optimistic about 2026, with projections suggesting that the S&P 500 could reach targets indicating over 10 percent gains. Deutsche Bank, for instance, has set a target of 8,000, suggesting a 16 percent climb for the index.
Will Earnings and AI Provide a Lift?
Stock market proponents point to a positive forecast for US corporate profits, with earnings for S&P 500 firms expected to rise by over 15 percent in 2026, following a solid 13 percent increase in 2025, according to Tajinder Dhillon, head of earnings research at LSEG. This growth is anticipated to be more widespread, benefiting a broader range of sectors rather than being confined to a handful of tech giants.
The so-called “Magnificent Seven,” which includes companies like Nvidia, Apple, and Amazon, are expected to see earnings growth of 23 percent in 2026, compared to 13 percent for the rest of the S&P 500. This represents a narrowing of the profit growth gap that was pronounced in 2024, when the Magnificent Seven enjoyed a 37 percent rise against a mere 7 percent for the broader index.
“An improvement in earnings growth for many of the 493 other stocks in the S&P 500 — and we’ve seen some of that already — that certainly would help the stock market get to double-digit returns next year,” Kristina Hooper, chief market strategist at Man Group, commented. However, she cautioned that profit growth is critical, as stock valuations may struggle to expand further from already lofty levels.
The excitement surrounding AI, particularly the massive investments in infrastructure and the anticipated demand for its applications, has been a key contributor to stock valuations. Nonetheless, recent concerns regarding the returns from this capital spending have affected tech and AI-related shares, and analysts believe this will continue to be a central theme in 2026.
“If companies start to pull back on the capex that they have already guided to and the market loses confidence in the returns that the AI investment will generate…you’re probably looking at more of a flat or even a modestly down year,” warned Jeff Buchbinder, chief equity strategist for LPL Financial.
Dovish Fed, Mixed Historical Signals and Wildcards
Another pivotal factor for a robust stock market in 2026 is the expectation that the economy will soften enough to facilitate lower inflation and additional interest rate cuts, without slipping into recession. Fed funds futures indicate that investors anticipate at least two more quarter-point reductions in 2026, following a cumulative 175 basis points of cuts in 2024 and 2025.
The Federal Reserve’s stance is viewed as a crucial driver for market performance, according to Yung-Yu Ma, chief investment strategist at PNC Financial Services Group. Investors are closely monitoring President Donald Trump’s upcoming decision on selecting a new Fed chair, expected early in 2026, as a potential indicator of a more dovish monetary policy.
Historical trends present a mixed outlook for 2026. According to LPL Research, the fourth year of a bull market since 1950 has averaged a gain of 12.8 percent, with positive yearly performances in six out of seven cases. However, midterm election years in the US have typically yielded poorer returns, with the S&P 500 averaging just 3.8 percent growth during those periods compared to 11 percent in non-midterm years, as noted by Stovall.
Additionally, potential geopolitical developments could serve as wildcards. Although tariffs have receded as a market concern, the relationship between the US and China, the world’s two largest economies, could significantly influence market dynamics in 2026. Ma suggested that “there’s actually a possibility for a breakthrough between the US and China that could be a positive catalyst that is not baked into expectations.”
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