The Year Ahead: 2026

From Valuation to Validation.

If 2025 was the year of anticipation—pricing in the soft landing, the AI revolution, and the policy pivot—2026 is the year of validation. The S&P 500 enters the year up 1.4% year-to-date, hovering near the psychological 7,000 level, having ridden a wave of multiple expansion that pushed the index up 16% last year. Now, the market’s homework is due.

The consensus view is undeniably sunny: Global growth is forecast at a sturdy 2.8%, US GDP is expected to expand 2.5%, and earnings are projected to surge 15%. Strategists see the index hitting 7,600 by year-end. But beneath this optimism lies a delicate tension. The 10-year Treasury yield has crept back to 4.23%, its highest level in four months, challenging equity valuations just as the Federal Reserve prepares for a historic leadership transition in May.

The central question for 2026 is simple but unforgiving: Can corporate America deliver the earnings growth required to justify these prices, or will the ‘Battle of the Kevins’ for the Fed Chairmanship introduce volatility that a priced-for-perfection market isn't ready to handle?

What 2025 Taught Us

Stocks ended 2025 up an impressive 16%, a year that defied the recessionary doomsayers and survived the ‘Liberation Day’ tariff shock in April. The resilience of the US consumer, coupled with the continued dominance of mega-cap tech, proved that betting against American exceptionalism remained a losing trade.

Lessons

  • Momentum is sticky: The trend remained your friend until it explicitly wasn't. Fighting the tape during the tariff scare proved costly as markets absorbed the shock and rallied.
  • Yields matter, until they don't: Equities digested rates above 4% better than most models predicted, provided earnings growth remained robust.
  • The AI trade is real but lumpy: Capex commitments drove returns more than immediate revenue monetization for many downstream players.

Macro Framework

Cycle Position: Mid-Cycle Expansion

We are firmly in a mid-cycle expansion phase, characterized by moderating but positive growth and normalizing inflation. The ‘hard landing’ risk has largely faded from consensus, replaced by a debate over the pace of acceleration.

Growth

Goldman Sachs forecasts global growth of 2.8% for 2026, outpacing the 2.5% consensus. The US is projected to grow at 2.5%, driven by productivity gains from AI adoption and a resilient labor market. This is not a boom, but it is certainly not a bust.

Inflation

The inflation battle is entering its final mile. Core PCE is estimated to fall to 2.1% by December. While the heavy lifting is done, the ‘last mile’ to the 2% target remains fraught with service-sector stickiness.

Fed Policy

Markets are pricing in two cuts of 25 basis points, likely in June and September. However, the path is complicated by the expiration of Chair Powell’s term on May 15. The succession battle adds a layer of political risk to monetary policy that was absent in 2025.

Market Setup

Valuations

With the S&P 500 near 6,950, valuations are elevated relative to historical averages. The market is trading on forward earnings that have not yet materialized. This leaves little buffer for disappointment; any miss in execution could lead to rapid multiple compression.

Earnings

FactSet data shows an expected 2026 earnings growth rate of roughly 15%. This is a high bar. It requires not just sustained revenue growth but also margin preservation in an environment where input costs remain sticky. The ‘Mag 7’ must continue to do the heavy lifting, but breadth is expected to improve.

Positioning

Sentiment is broadly bullish, with the VIX at 15.86, reflecting a degree of complacency. Institutional positioning has chased the year-end rally, meaning ‘pain’ is now to the downside if the narrative cracks.

Themes for 2026

Theme 1: The AI Capex Tsunami

AI capital expenditures are expected to approach $520 billion in 2026. This massive outlay is the engine of the current bull market. The trade is shifting from the ‘pick and shovel’ hardware providers to the software and services companies that can monetize this infrastructure. NVIDIA ($NVDA) and its peers remain central, but the circle of winners must widen.

Theme 2: The Battle of the Kevins

Jerome Powell’s term ends May 15. The frontrunners to replace him—Kevin Hassett and Kevin Warsh—represent different policy inclinations. This transition creates a window of uncertainty in Q2. Markets hate uncertainty, especially regarding the cost of capital.

Theme 3: Fiscal Tailwinds

The ‘One Big Beautiful Act’ promises a reduction of $129 billion in corporate tax bills through 2026 and 2027. This fiscal injection provides a floor for corporate earnings, potentially offsetting headwinds from higher-for-longer rates.

Theme 4: The Yield Ceiling

With the 10-year yield at 4.23%, we are approaching the danger zone for equity valuations. If yields break decisively above 4.5%, the equity risk premium erodes significantly, challenging the bull case for risk assets.

Scenario Framework

Bull Case (25%): AI Productivity Boom

AI adoption drives a productivity miracle, boosting margins and GDP simultaneously. Inflation falls faster than expected, allowing the Fed to cut 3-4 times. In this scenario, the S&P 500 could break 8,000.

Base Case (55%): The Soft Landing Validated

Growth holds at 2.5%, inflation glides to 2.1%, and the Fed cuts twice. Earnings grow 10-12% (slightly missing the 15% target), but multiples hold steady. A solid, if unspectacular, year for returns.

Consensus Target: 7,600

Bear Case (20%): The Reflation Tantrum

Growth re-accelerates too fast, reigniting inflation. The Fed is forced to hold or even hike. Yields spike to 5%, crushing multiples. The ‘Battle of the Kevins’ leads to a policy error.

Key Catalysts for 2026

Q1

  • Earnings Season: First test of the 15% growth forecast.
  • March FOMC: Updated Summary of Economic Projections (SEP).

Q2

  • May 15: Jerome Powell’s term expires. New Chair nomination/confirmation.
  • June FOMC: First expected rate cut (25 bps).

Q3

  • September FOMC: Second expected rate cut.
  • Jackson Hole: New Chair’s policy framework debut.

Q4

  • US Midterm Election Primaries: Political noise begins to ramp.
  • Holiday Spending: Reality check for the consumer.

Risk Framework

Primary Risk: Sticky Inflation / Yield Spike

The most immediate threat is a resurgence of inflation that pushes the 10-year yield above 4.5%. At 4.23%, we are uncomfortably close. A breakout here would force a repricing of all risk assets.

Secondary Risks

  • Fed Transition Error: A clumsy handoff or politicized appointment could shake confidence in Fed independence.
  • Geopolitical Shock: Oil is currently bearish ($64.60), but supply chains remain vulnerable.
  • Earnings Disappointment: If AI capex doesn't translate to revenue, the 15% growth target collapses.

Tail Risks

A sovereign debt crisis in a major economy or a systemic liquidity event in private credit markets remain the low-probability, high-impact ‘black swans’ to monitor.