A Look at Market Predictions

Last week we discussed Wall Street expectations for 2026 being a bit loftier than normal. Of the 18 firms tracked by my research partners at Bespoke Investment Group, all are expecting positive returns for the S&P 500 this year, from gains of a few percent to the high teens. Regardless of the specific numbers, it’s good know what these firms think, even if some consider such consensus a contrarian indicator. So, I wanted to dig into those predictions a bit this morning.

First up is, “Equities, Bubble or Boom?” from JPMorgan simply because they’re first in my inbox. The title says it all and is essentially where most analysts are at this point. While JPMorgan thinks we’re on track for another year of double-digit gains for the stock market, the AI bubble question dominates the list of risks. Earnings growth for the Magnificent 7 keeps being revised upward while the rest of the S&P 500 is being revised down. This means, at least in general, that strategists expect another year when performance from a handful of AI-related stocks (The Mag7 has expanded to maybe ten stocks) lifts the whole market. The gist is that these companies managed to grow so strongly last year amid a middling economy that they should be able to repeat due to continued massive infrastructure investments, having ample cash (on hand and via borrowing capacity) and increasing demand for AI services. The strategists suggest that “… bubbles burst into nothing, but the AI theme is building real infrastructure to meet growing demand.” Further, “The stakes are high, and visibility into the ultimate winners limited, but this looks less like a bubble and more like the tumultuous beginnings of a structural transition.” We’ll see…

Next, we have Morgan Stanley, who is bullish for 2026 and whose forecasts tend to be pretty accurate. Morgan says the US should outperform the rest of the world, which flips the script from 2025. They expect a 14% return from the S&P 500 but, as I mentioned previously, the exact number is less important than the trend. Like other analysts, Morgan sees the trend continuing with several tailwinds for stocks coming from market-friendly fiscal policies, expected interest rate cuts from the Fed, and continued investment in AI infrastructure.

Then we have predictions from Schwab strategists who tend to be conservative, which is a good check on a sometimes-exuberant industry. Schwab seems more focused on stock prices being too high in a US market that’s still being driven largely by the handful of companies already alluded to. This leads to a low margin for error and potentially amped up volatility, but within the context of a market that can churn higher. Schwab still expects more from foreign markets like Europe due to better valuations, higher dividend yields, and domestic spending plans in countries like Germany, so that’s interesting as well.

Last, we have my research partners at Bespoke Investment Group. They suggest that prices are high, but fundamentals are generally good. And we’re starting to see more companies performing better, both AI-related but also in other sectors and styles, such as small caps and dividend-oriented stocks. Rotations into and out of industries, sectors, and styles are healthy but can be unsettling.

Like JPMorgan, Bespoke reminds us that “toeing the line” isn’t in the market’s character. Following the 23 times when the S&P 500 was up from 10% to 20% in a year, median gains the following year were nearly 12% with positive returns 70% of the time. That sounds good but it has only happened three years in a row a few times. And based on market history, the tech-heavy NASDAQ has had five other runs like the last three years and, in year four, was up twice and was down three times, one of which was a 33% drop in 2022. Couple that history with the potentially contrarian indicator of how bullish strategists are and it’s best to expect a bumpy ride this year even amid positive returns.

Also from Bespoke is a summary of the firm’s 2026 Investor Sentiment Report. Interestingly, participants reported the biggest risk for market returns being an economic downturn, even for those who are bullish on stocks. This risk was followed in order of importance by the political environment and persistent inflation. “Other” was tied with “AI bubble” for last place. If anything, this underlines the nervous optimism pervading many positive market predictions right now.

To summarize… while these are only predictions and there are naysayers, most strategists are not expecting the AI Bubble (if we should even call it that at this point?) to pop this year. They’re also not expecting a recession. The US stock market, or at least parts of it, is expensive but still worth it based on growth prospects. And it’s prudent to expect more volatility this year.

So that’s the direction I’m headed in but not blindly. I’m spending even more time fretting over portfolio allocations and looking for rebalancing opportunities based on what the market is doing and not simply based on a calendar. I suggest you do the same if you’re managing your own portfolio.

In the coming weeks we’ll look at other market predictions and scenario-based ways to prepare.

Have questions? Ask us. We can help.