Equities in 2026: What could go right?

Before we look ahead to 2026, let’s take a quick look back to early April 2025. US equities experienced their biggest one-day drop since 2020, and the S&P 500 Index declined to nearly 20% below its February record. Chaotic and confusing tariff policy communications wreaked havoc on the markets—which just as dramatically reversed course by the close of that month. At that moment, it’s safe to assume most investors were not focused on what could drive the market higher and end the year on a strong note. It’s likely they were focused on what—or what else—could go wrong.

For decades, in fact, equity investors have been hyper-focused on what might go wrong. Of course, it’s critical to constantly measure and evaluate risks in the market. However, as we look ahead, perhaps investors should spend more time contemplating what could go right.

The US equity market surprised to the upside in 2025. Stocks across a wider range of sectors proved their resilience in the face of many macroeconomic challenges. Investment opportunities increased as the market broadened, and corporate earnings growth exceeded expectations. The potential in artificial intelligence (AI) became an even more powerful driver of sentiment and investment across sectors well beyond technology.

There will always be headwinds

Despite positive developments in 2025, markets today are concerned about various challenges. We’re seeing reports of worsening sentiment among low- and middle-income consumers, and job creation appears to be softening or even stalling. Other issues include a possible delayed impact from tariffs, ongoing US-China tensions, and—most prominently—the potential for a bursting AI bubble. Investors are also anxious about lofty equity valuations, as the S&P 500 forward price/earnings multiple is in the highest quintile relative to history.¹

Given this litany of concerns, it was no surprise that, as we began the final month of the year, the CNN Fear & Greed Index² was bouncing between its “Fear” and “Extreme Fear” slices. Nevertheless, we are headed for a third consecutive year of double-digit gains for US equities.

The concerns are all reasonable and not to be overlooked, but focusing on these issues alone underplays the forces that have driven the market upward, and how these drivers could push the market even higher in the year ahead.

What could go right?

There’s a lot that could go right from here. At a high level, we have easing financial conditions globally, the result of synchronized rate cuts from central banks. The US banking system has a healthy combination of strong capital ratios and lower-than-average delinquencies. While anxiety over higher price levels has not dissipated, recent inflation trends remain in check, even with the impact of tariffs.

As debate intensifies around the risk of an AI bubble, investors should not lose sight of the long-term power of this emerging and revolutionary technology. The planned investment in AI is staggering and just commencing, with US$500 billion planned from hyperscalers alone. This is also catalyzing an investment cycle in electricity generation and transmission. In the year ahead, we expect AI to continue to offer new subsets of potential winners and a wide array of new use cases. There’s also the potential for a general productivity boom as AI starts to deliver tangible productivity gains.

Other bullish “what ifs” for the year ahead include green shoots in commercial real estate after its sharp pandemic-induced slowdown. Also, corporate incentives from the Big Beautiful Bill and deregulation could spur additional investments from businesses. Geopolitically, a Russia-Ukraine peace plan and a rebuild of Ukraine could provide an economic jolt to European and global companies. And a productive US-China trade deal would ease tensions and boost global equities.

A lot can go right, but the ride may not be smooth

It’s fair to ask—has the market already priced in all this good news? The S&P 500 is more expensive than average, pulled up by high valuations of mega-cap growth stocks (think Magnificent Seven³). However, when looking at these stocks individually, many in this cohort are trading in line with or cheaper than their historical averages. For example, Amazon has never been cheaper than it is today, and NVIDIA is trading well below its 10-year average. Yes, they’re bigger companies, forward growth is likely slower, and AI has injected uncertainty into their business models (as well as creating opportunity). What investors may not appreciate is that S&P 500 stocks—minus the Mag Seven—are trading about 15% higher than their 10-year historical average.⁴ Arguably, their starting valuations were low, and the market is signaling that these companies now have better growth opportunities going forward, helped by broadening economic strength and easing interest rates.

The combination of higher valuations and significant investments in AI with unclear long-term payoffs should bring higher volatility to equity markets. The mid- to late-1990s provide some perspective. The VIX (Cboe Volatility Index) on average, was above 20 during that time, while it has been anchored around 15 for most of the past 10 years.⁵ Despite the higher monthly volatility in the 1990s, the equity market consistently marched higher over time. Recall that following two strong years of equity market gains, Federal Reserve Chair Alan Greenspan famously voiced his concerns about “irrational exuberance” in stocks. This was in late 1996, just before the 33% jump in 1997 and further strong gains until the peak in early 2000.⁶

Given all that could go right, we believe the market will continue to power higher through 2026. What would it take to replicate the mid- to late 1990s? In our view, strong earnings growth combined with a continued high multiple could potentially power the S&P 500 past 8,500—or a 25% jump over the next 12-18 months.⁷ To get there, S&P earnings would need to grow by double digits each of the next two years, eclipse $350 aggregate earnings per share for 2027 and fetch a 24x-25x p/e—lofty for sure, but we believe this is within reason.

Of course, heady equity returns like these are rarely realized in a straight line but rather, are accompanied by high volatility. Empirically, when market multiples are higher, they are usually accompanied by a higher standard deviation of returns. We expect no different in today’s environment.