Wall Street Anticipates Smaller Gains in 2026 Following Three-Year Rise

Wall Street’s Cautious Optimism Amid Stock Market Rally

(Bloomberg) — A remarkable three-year surge in U.S. stocks, which has seen a 78% increase, hasn’t dampened the enthusiasm of bullish analysts on Wall Street. However, there’s a hint of caution in this year’s outlook.

“Adjust your sights a little lower,” Sam Stovall, the chief investment strategist at CFRA, noted in a phone conversation on Friday. “Stay bullish, but spell it with a lowercase B, because we also face a historically challenging midterm election year.”

Bloomberg’s survey of strategists indicates an expected rise of 9.2% for the S&P 500 index this year, aligning with its average total return for the century. Yet, this follows impressive gains in the previous three years: 24%, 23%, and 16%.

Stovall pointed out that the anticipated average increase matches the historical norm for fourth-year performance after three consecutive years of double-digit gains. Recent trends haven’t been overly encouraging. For instance, both 2020 and 2015 experienced declines after previous two-year increases exceeding 10%. Should the S&P 500 climb by 10% this year, it would mark its strongest four-year performance since 1999.

The bullish sentiment is grounded in the belief that the U.S. economy will regain its momentum in the year’s first half, boosted by tax cuts, deregulation, and advances in artificial intelligence. However, some expectations have lowered as valuations remain high, and there are persistent worries that planned capital expenditures might restrict profits.

BofA Securities strategists Victoria Roloff and Savita Subramanian expressed concerns in a research note on Friday, noting that “increasing capital intensity among the large tech companies constituting a significant portion of the index, combined with higher multiples and signs of strain in the labor market,” contributes to a call for a more cautious approach. They predict a more modest 4% rise for the S&P 500 this year.

Historically, midterm election years pose challenges to market performance, with average gains of just 3.8% and only a 55% chance of growth. “It’s not much better than a coin toss,” remarked Stovall.

Tom Essay, founder of Sevens Report, raised additional caution flags, pointing out that three-year stock market cycles like the recent one often signal the onset of cyclical bear markets. He highlighted unsettling patterns, particularly given the S&P 500’s five-year period of negative returns following a three-year rally and early signs of a bear market, such as inflation concerns surrounding AI stocks and recent tests of support levels.

Despite the qualms about lofty valuations and unsustainable price hikes, the market has held up fairly well, thanks in part to ongoing corporate profit growth. Earnings growth is projected to ramp up to nearly 14% by 2026, contrasting with 12% in 2025, potentially giving market performance a boost.

Keith Lerner, chief investment officer and market strategist at Trust Advisory Services, offered his take over the phone. “This is an earnings-driven bull market,” he stated. “Values may have climbed a bit, but the majority of the increase has been driven by revenues.” He emphasized that while he anticipates earnings will continue to influence the market, the historically high trading multiples indicate a slowdown in the pace of growth might be reasonable to expect.