Stock Market Outlook 2026

As the year draws to a close, stock market analysts and pundits are making their predictions for 2026.

But how good are these stock market predictions?

Well, let’s look at some projections FactSet gave last year about 2025. FactSet is a financial company that serves hedge funds, asset managers, wealth managers and other investing pros.

The results? FactSet was pretty much on the money for its 12-month price target for the S&P 500. In its November 2024 outlook report, the company predicted the S&P 500 could hit around 6,551 this year. And… drumroll… the index blew past 6,500 in August 2025 and hit a record high of 6,901 on December 11 after the Federal Reserve cut interest rates.

So, what do FactSet and other major financial institutions say about the year ahead? Let’s read the tea leaves.

Stock Market Outlook 2026

Wall Street analysts project the S&P 500 will have an estimated earnings growth rate of 8.1% in the fourth quarter of 2025 and 12.4% in the first quarter of 2026. If those predictions hold, then 2026 will start the year after punching in 10 consecutive positive quarters of earnings growth.

When looking at the full year ahead:

• FactSet projects year-over-year (YoY) earnings growth to clock in at 14.5% for the benchmark index. To get a sense of how that compares, FactSet tabulated the five-year and 10-year YoY average earnings growth rate at 14.9% and 9.5%, respectively.

So, the bull market appears to be poised to extend its run well into 2026.

FactSet’s prediction isn’t wildly off from LPL Research. Based on the S&P 500’s history since 1950, LPL Research says historical research indicates that the index could notch a 12.8% gain in the fourth year of a bull market.

Now the big prediction… the S&P 500 is predicted to hit within striking distance of the 8,000-point threshold in the next 12 months. The forecast is generated by crunching the numbers on stock target price estimates.

Fed Rate Policy 2026: Still Taming Inflation

The U.S. economic outlook is positive. A continued rate-cutting cycle by the Federal Reserve could provide additional tail wind for stocks in 2026.

The Federal Open Market Committee (FOMC) issued three consecutive rate cuts of 25 basis points in 2025. The latest rate cut in December slashed the target rate to 3.50% and 3.75%. The FOMC is in the process of normalizing historically high interest rates. Sticky inflation has been enemy No. 1 for the Fed for the past couple of years.

In its latest long-term economic outlook, the FOMC projects core personal consumption expenditures (PCE) index inflation of 2.5% in 2026, with gross domestic product (GDP) rising to 2.3%. Core PCE is the Fed’s preferred inflation measure. Its goal is 2%.

Projections indicate a year-end 2026 fed funds target rate range of between 3.00% and 3.25% or lower. J.P. Morgan Global Research backs this with a forecast that the Fed will drop rates by 50 basis points next year. But they point out that the downside risk is the continued weakening of the U.S. labor market and eroding purchasing power.

It’s also expected that the unemployment rate will continue to rise in 2026. But unemployment is likely to remain modest and not grow at a recession-like pace.

According to Schwab’s 2026 Outlook: U.S. Stocks and Economy, “The labor market is not yet showing signs of recession-level weakness, affordability pressures continue to mount and labor supply will likely stay under pressure, contributing to monetary policy instability.”

Economic stimulus from the One Big Beautiful Bill Act (OBBBA) is also expected to bump up GDP, providing (in theory) a boost to consumers and businesses alike.

K-Shaped Economy 

Several financial institutions are dropping the phrase “K-shaped economy” for 2026. The term was popularized by American economist Peter Atwater during the Covid-19 pandemic in 2020. The K-shaped economy refers to how different economic groups experience different economic outcomes. In a nutshell, it implies that the rich are getting richer and the poor are becoming poorer.

CEOs close to the pulse on American spending habits are seeing this trend unfold.

McDonald’s CEO Chris Kempczinski even described the consumer landscape as a “kind of two-tiered economy.” It’s characterized by upper-income households continuing to spend while lower- and middle-income consumers are “feeling under a lot of pressure.” McDonald’s said spending among some low-income households fell off by double digits.

In fact, Moody’s Analytics shows this spending imbalance in its data collection. Nearly half of U.S. retail spending comes from just the top 10% of U.S. earners.

To pile on the concerns, AI could further amplify what’s already going on in an unhealthy K-shaped economy—automating jobs, algorithmic prices, productivity gains to high-income workers and shifting income from labor to capital.

AI Ecosystem 

With big AI names like Nvidia powering earnings for the tech sector in 2025, it really shouldn’t come as a surprise that the equity market is split between AI and non-AI sectors.

The J.P. Morgan Global Research team estimates that the current AI supercycle will continue to drive “above-trend earnings growth of 13% to 15% for at least the next two years”.

U.S. tech stocks will maintain their edge in investment and anticipated earnings growth well into 2026. We’ll likely see an evolution of the so-called “Magnificent Seven” stocks into a broader, more interconnected group of tech firms woven through an AI value chain.

Magnificent Seven generally refers to Alphabet (parent company of Google), Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

When you look at tech stocks now, it’s likely through the lens of what AI value it creates. Many “enablers” of the AI economy are already megacap or large-cap companies: Alphabet, Amazon, Broadcom and Cisco Systems. Then you have monetizers and adopters like AppLovin, Microsoft, Salesforce, and Alphabet, to name a few. These companies justify their premium values with high earnings.

AI Ecosystem: The Creation of the AI Value Chain 

Final Thoughts

While these AI stocks have a great place in a stock portfolio, you should heed the words of many financial advisors and diversify your portfolio. That means adjusting your portfolio’s allocation to match your financial goals, investing horizon and risk tolerance. It also means looking at other types of investment equities to shield and balance your portfolio from AI volatility.

To build a strong investment portfolio:

Choose a financial approach. If you don’t already have one, decide whether you’re going to do it alone or with a low-cost online brokerage. Online brokerages can help DIY investors build self-directed portfolios.

Evaluate your risk tolerance. If the idea of managing your own portfolio seems nerve-wracking, an automated robo-advisor is a great way to get started. Robo-advisors attempt to align your risk tolerance and investment horizons in their portfolio construction.

Check in with your financial advisor. If you already have a traditional financial advisor, you’ll want to meet with them at least once, if not twice, annually to review and adjust your portfolio allocation.

Even if you don’t have a personal financial advisor, you’ll want to review and retune your portfolio for 2026 so that you stay on track for your own financial goals.