The S&P 500 (^GSPC +0.23%) has advanced 92% since the current bull market began in October 2022, and the benchmark index has posted double-digit returns in each of the past three years. However, the stock market will need to overcome three major headwinds to extend that streak in 2026.
Here's what investors should know.
Image source: Getty Images.
The stock market will battle three major headwinds in 2026
First, midterm election years are usually difficult for investors. The political party that holds the presidency tends to lose seats in Congress, creating policy uncertainty. In turn, the S&P 500 has suffered an average peak-to-trough decline of 18% during midterm election years. In other words, history says the index will fall 18% from its high at some point in 2026.
Second, the economy is struggling to adapt to President Trump's tariffs. The labor market has weakened substantially; unemployment recently hit a four-year high and jobs growth has dropped to its slowest pace in more than a decade, excluding the pandemic. Also, the University of Michigan Consumer Sentiment Index recorded its lowest annual average in history last year (data goes back to 1952).
Third, the S&P 500 currently trades at 22.2 times forward earnings, an expensive valuation that (excluding the current situation) has been seen during just two other periods in history. The index topped 22 times forward earnings during the dot-com bubble and the Covid-19 pandemic, and both situations ultimately ended in a sharp decline.
Wall Street thinks the S&P 500 will have a strong year in 2026
Despite the headwinds mentioned, most Wall Street analysts are optimistic about the stock market's potential returns in 2026. The chart below shows year-end targets for the S&P 500 set by different investment banks and research organizations. It also shows the implied upside (or downside) versus the index's current level of 6,858.
|
Wall Street Firm |
S&P 500 Target Price (2026) |
Upside (Downside) |
|---|---|---|
|
Oppenheimer |
8,100 |
18% |
|
Deutsche Bank |
8,000 |
17% |
|
Morgan Stanley |
7,800 |
14% |
|
Seaport Research |
7,800 |
14% |
|
Evercore |
7,750 |
13% |
|
RBC Capital |
7,750 |
13% |
|
Citigroup |
7,700 |
12% |
|
Fundstrat |
7,700 |
12% |
|
Yardeni Research |
7,700 |
12% |
|
Goldman Sachs |
7,600 |
11% |
|
HSBC |
7,500 |
9% |
|
Jefferies Financial Group |
7,500 |
9% |
|
JPMorgan Chase |
7,500 |
9% |
|
UBS |
7,500 |
9% |
|
Wells Fargo |
7,500 |
9% |
|
Barclays |
7,400 |
8% |
|
BMO Capital |
7,400 |
8% |
|
CFRA |
7,400 |
8% |
|
Bank of America |
7,100 |
4% |
|
Median |
7,600 |
11% |
Data sources: BMO Capital Markets, Reuters, Yahoo! Finance.
As shown, among 19 Wall Street firms, the median year-end target puts the S&P 500 at 7,600 in 2026, implying 11% upside from its current level of 6,858. That is slightly better than the average return of 9% annually (excluding dividends) during the past 40 years.
In general, Wall Street analysts are optimistic because they expect S&P 500 earnings growth to accelerate as companies continue to spend heavily on artificial intelligence (AI). Also, while Federal Reserve officials only signaled one interest rate cut in 2026 at the FOMC meeting in December, the market (and many analysts) think two interest rate cuts is more likely because of the weakening jobs market.
Consider these comments:
- Darrell Cronk at Wells Fargo writes, "In 2026, we expect to see artificial intelligence develop further from a concentrated technology phenomenon into a broad-based economic growth catalyst."
- Lisa Shalett at Morgan Stanley writes, "A resilient economy and strong corporate earnings are likely to drive continued equity gains in 2026."
- Dubravko Lakos-Bujas at JPMorgan writes, "2026 should be another strong year for AI stocks, with capex likely to surpass expectations." He also believes the S&P 500 could top 8,000 if the Fed cuts rates more than twice.
- Marc Nachmann at Goldman Sachs writes, "Analysts have underestimated AI capex every quarter for the past two years, suggesting a continued upside risk to the broader AI trade's durability."
As a caveat, Wall Street has a poor track record when it comes to predicting the future movements of the S&P 500. In fact, the return implied by the median year-end forecast missed the mark by 18 percentage points between 2020 and 2024, according to data from Goldman Sachs.
Here's the big picture: Wall Street is optimistic about 2026, particularly where AI stocks are concerned, but investors should not take gains for granted. The S&P 500 typically struggles during midterm election years, and the market is arguably predisposed to volatility this year because of elevated valuations and the uncertainty created by President Trump's tariffs.
