After a breathtaking three-year rally that saw U.S. equities soar by 78 per cent, Wall Street's perennial optimists are still forecasting gains for 2026. However, this year's bullish outlook is tempered with a significant dose of caution, advising investors to expect more modest returns.
A More Measured Bull Run Ahead
According to a survey of strategists by Bloomberg, the benchmark S&P 500 index is expected to advance 9.2 per cent in 2026. This projection is roughly in line with the average total return for the index so far this century. Yet, it represents a notable slowdown from the spectacular performances of the prior three years, which delivered rallies of 24 per cent, 23 per cent, and 16 per cent respectively.
Sam Stovall, chief investment strategist at CFRA, encapsulates the prevailing sentiment. "Adjust your sights slightly lower," he advised in a phone interview. "It's OK to remain a bull but spell it with a lower-case B because we're also bumping up against a historically challenging mid-term election year."
Valuations and History Signal Caution
The primary reason for the tempered expectations is the market's starting point. Stocks are trading at historically elevated price-to-earnings multiples, making further explosive gains less likely. While corporate earnings are still expected to drive performance, the pace of appreciation is anticipated to be lower.
Historical patterns also provide a check on enthusiasm. Stovall notes that the average expected gain matches the historical average for a market's fourth year after three consecutive double-digit rallies. However, recent history is less encouraging: the last two such three-year streaks were followed by annual declines in both 2020 and 2015.
The historical record for mid-term election years is particularly sobering. In these years, the S&P 500's average advance is just 3.8 per cent, with the market rising only 55 per cent of the time. "That's not much better than a coin toss," Stovall remarked.
The Bull Case Versus Bearish Signals
The optimistic thesis for 2026 hinges on expectations that the U.S. economy will accelerate in the first half of the year. Analysts point to potential tailwinds from tax cuts, regulatory easing, and the ongoing economic boost from massive investments in artificial intelligence infrastructure.
However, several prominent voices on Wall Street are urging a more defensive posture. Strategists at Bank of America's BofA Securities, Victoria Roloff and Savita Subramanian, see the S&P 500 adding a mere four per cent this year. In a research note, they cited the growing capital-intensity of big tech companies, elevated stock valuations, and emerging cracks in the labour market as reasons for a cautious stance.
Tom Essaye, founder of the Sevens Report, offered an even starker warning. He suggested that a three-year rally of this magnitude typically occurs in late-cycle environments that often precede cyclical bear markets. He pointed to concerning signals like potential bubbles in AI-linked stocks and the index testing key technical support levels as reasons for concern.
Despite these warnings, the market has consistently defied pessimism in recent years, powered by robust corporate earnings. Notably, earnings growth is actually projected to accelerate to nearly 14 per cent in 2026, up from an estimated 12 per cent in 2025, which could provide a fundamental floor for stock prices. The central question for investors in 2026 will be whether this earnings strength can once again overcome the weight of high valuations and historical headwinds.
