Key Takeaway
- Expectations for another year of robust equities returns are being bolstered by AI-driven capital expenditures and regulatory tailwinds.
- With a very narrow margin for error, analysts predict that earnings for non-“Magnificent7” stocks will expand at a rate twice as fast as in 2025.
- There are also growing political and geopolitical dangers, including as U.S. military involvement overseas and populist affordability policies.
- To assist manage risk in this setting, investors might wish to give quality-focused methods and portfolio diversity top priority.
Morgan Stanley’s Global Investment Committee projects near double-digit percentage returns for the S&P 500 Index, with a target of about 7,500, and anticipates that the bull market will extend into a fourth year as 2026 gets underway. Even greater profits are anticipated by many strategists.
Wall Street is using the “AI capex boom” as a rallying cry, and there are hardly any concerns about a recession. However, it’s important to consider if we’re on stable ground when optimism becomes the norm.
Benefits of Technology and Policy
Investors continue to see GenAI investments and productivity improvements as the primary drivers of growth, despite recent market concerns over the rise in artificial intelligence-related capital expenditures. This narrative has been further supported by fiscal, monetary, and regulatory support:
Fed rate cuts: In 2025, the Fed lowered interest rates by 75 basis points, and in 2026, the markets anticipate another 50 basis points.
“Qualitative easing in stealth”: The Fed is subtly bolstering market liquidity by reinvesting maturing bond proceeds into short-term Treasury bills rather than reducing its balance sheet.
Purchases by Fannie Mae and Freddie Mac: These government-sponsored companies are carrying out an order to buy billions of dollars’ worth of mortgage-backed securities in an effort to lower borrowing prices.
The “One Big Beautiful Bill” Act (OBBBA): is a comprehensive piece of legislation that combines significant tax and spending initiatives aimed at boosting the economy, while also extending the tax cuts from the Trump administration.
Investor confidence has only increased as a result of these improvements and a more hospitable regulatory environment for some industries. However, the market appears fragile due to the enormous expectations, and even minor errors could have a significant impact.
A Market With Elevated Expectations
A very optimistic prediction is at the core of investor optimism: analysts predict 14% to 16% annual growth in earnings-per-share (EPS) in 2026. To put that into perspective, this forecast would double the rate of earnings growth compared to 2025 for the 493 stocks in the S&P 500 that are not “Magnificent 7” mega-cap tech businesses.
That leaves the market with a very narrow margin for error and sets a very high standard. Since the ten largest stocks in the index make up over 40% of its total value and equities valuations are already high, any earnings letdown may swiftly throw markets off balance.
Geopolitical and Political Hazards
A move toward populist affordability politics at home, which includes ideas like capping credit card interest rates, has already hurt the stock prices of several businesses and may have an impact on their profits.
Geopolitical flashpoints abroad, such as NATO’s position in Greenland, where strategic interests are growing, and the U.S. intervention in Venezuela and civil upheaval in Iran, add layers of concern. These hazards are real and growing, not remote.
Despite all of this, valuations are high and “risk premiums,” or the extra return investors anticipate for taking on greater risk, are still low, indicating some market complacency.
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