Whalesbook
Outlook Moderates for 2026 Equities
US equities posted a striking 78% gain over the past three years. However, Wall Street bulls are now adjusting expectations for 2026, anticipating a period of more subdued returns. Strategists surveyed by Bloomberg project the S&P 500 will advance approximately 9.2% this year, aligning with the century's average.
This projected growth trails the exceptional rallies of 24%, 23%, and 16% seen in the preceding three years. Sam Stovall, chief investment strategist at CFRA, advised investors to "adjust your sights slightly lower," suggesting a cautious optimism, or being a "bull but spell it with a lower-case B." This sentiment is partly driven by the historical tendency for mid-term election years to present market headwinds.
Historical Headwinds and Shifting Narratives
Recent history offers a cautionary tale. The two prior instances of three consecutive annual gains of 10% or more were followed by market declines in 2015 and 2020. While a 10% gain this year would represent the best four-year stretch since 1999, the market faces significant challenges.
Strategists at BofA Securities, Victoria Roloff and Savita Subramanian, noted that the "growing capital-intensity of big tech spenders that make up an outsized share of the index, elevated multiples, plus cracks in the labor market" warrant a "more cautious stance." They forecast a more pedestrian 4% gain for the S&P 500 this year.
Election Year Jitters and Late-Cycle Signals
Mid-term election years typically see lower market performance, with an average advance of just 3.8% and gains occurring only 55% of the time, according to Stovall. Tom Essaye, founder of Sevens Report, pointed out that such extended rallies often occur in late-cycle environments, potentially preceding cyclical bear markets. He warned that signals for a bear market are "emerging," citing concerns over AI stock valuations and recent testing of key support levels.
Earnings Support Amidst Valuation Worries
Despite these concerns, corporate profits continue to grow, with earnings growth expected to accelerate to nearly 14% in 2026 from 12% in 2025. Keith Lerner, chief investment officer at Truist Advisory Services Inc., stated, "This has been an earnings driven bull market." While earnings are likely to remain a driver, Lerner acknowledged that lower returns are probable given historically elevated stock multiples.