It's almost an understatement to say that it has been a fantastic three-year stretch for U.S. stocks.
As measured by the S&P 500 index (which represents about 80% of total U.S. market capitalization), the market rose 24% in 2023, an equally impressive 23% in 2024, and another 17% year to date in 2025. Keep in mind that the average annual return for the S&P 500 is approximately 10.5%, so those three years have been exceptional for investors.
However, as 2025 comes to a close, the question on many investors' minds is whether the three-year market rally can continue into 2026. Nobody can know for sure, of course. And guessing market tops and bottoms is no way to invest.
Wall Street models predict another year in the black
That said, it can be useful to examine the fundamentals of the market and the economy to gain a sense of what the stocks are most likely to do, at least directionally.
And in fact, Wall Street does just that. Most large investment banks and brokerages create models to predict market behavior and then plug multiple data points from the economy, stock and bond markets, and corporate profits into them. Those models crunch all that data and come up with year-end targets for the S&P 500.
Those predictions are often inconsistent, with some analysts being bearish and others bullish on stocks.
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Currently, however, Wall Street is uniformly bullish for 2026. Bloomberg surveyed 21 sell-side analysts at major investment firms, all of whom predict a market gain for 2026. The average gain among these analysts is 9%.
The most bullish of the surveyed firms were Oppenheimer and Deutsche Bank, both of which see the S&P 500 breaking through 8,000 by the end of 2026. That would represent an approximate 16% gain in that index. The least bullish estimate came from Stifel Nicolaus, which predicts the market will rise over the next 12 months, but only by 1.3%, to 7,000.
As much as I like to act the contrarian, I agree with these Wall Street prognosticators. I, too, see the current bull market continuing through 2026.
The economy has momentum going into 2026
The U.S. economy continues to grow at a pace near its historic trend. The Federal Reserve Bank of Atlanta's GDP Now tool estimates that the current growth rate of real GDP is 3%. And while the unemployment rate has ticked up a bit in recent months, it remains low by historical measures, at just 4.4%. A growing economy, where most people who want a job can find one, supports rising stock prices.
Additionally, tax analysts anticipate a surge in large tax refunds and business incentives in 2026, following the passage of the One Big Beautiful Bill Act in July 2025, which retroactively applies its tax cuts to the start of 2025. That will be highly stimulative for the economy.
Finally, the Federal Reserve is in easing mode. The central bank has cut its target interest rate three times since August, and the futures market is pricing in at least two more quarter-point cuts in 2026. That could easily be an underestimate, as current Fed Chair Jerome Powell's term will come to an end in May, and President Donald Trump seems determined to replace him with a chair who is more likely to cut rates at a much faster pace.
Rising profits should lead the market higher in 2026
But the most important factor for stock prices is corporate earnings. Ultimately, prices follow earnings growth. The outlook for earnings appears very positive right now.
Yardeni Research expects the collective earnings per share of S&P 500 companies to increase from an estimated $268 in 2025 (fourth-quarter earnings are not yet available) to $310 in 2026. That's a 16% gain.
Yardeni's prediction is right about average for Wall Street. FactSet, which tracks analyst predictions, says the average estimate for year-over-year earnings growth for the S&P 500 in 2026 is 15%. Much of that growth is expected to be driven by the "Magnificent Seven" companies, which are collectively expected to grow earnings of 22.7% next year. But growth for the other 493 firms in the S&P 500 is also expected to be solid next year, at 9.4%.
Sure, much could also go wrong for the market in 2026. War could break out in several hotspots around the globe, potentially throwing the global economy off track. Investors might start to believe the artificial intelligence (AI) buildout is a speculative bubble and panic. And consumers, worried about rising prices, could slow their spending. All of these would undoubtedly hurt stock prices.
But at the moment, those concerns are mere possibilities, while corporate profits and economic data point to a rising market for 2026.
