Wall Street Expects a Solid 2026 for Stocks. But the ‘Risks Are Growing’

It was a rollercoaster of a year on Wall Street. Most experts think the ride isn’t over.

The S&P 500 is on track to post its third consecutive year of double-digit gains, putting the benchmark index up more than 90% since the current bull market started in October 2022. Strategists expect 2026 to be another good—if more modestly so—year for the stock market.

As of mid-December, the average 2026 year-end S&P 500 price target was 7,269, according to an LPL Financial analysis. That implies about 5% upside from Tuesday’s record-high close.

“We expect a continuation of the recent past, where returns are solid, driven by rising earnings growth,” wrote Vanguard analysts in the firm’s 2026 outlook. “But let us be clear: Risks are growing,” especially in the tech sector, they wrote. 

Investors “need to remain prepared for periodic episodes of market volatility,” says LPL Financial CIO Mark Zabicki. Sudden shifts in government policy and high levels of stock market concentration made this year an especially volatile one, and Zabicki expects that trend to continue. 

Here are the major debates that are likely to dominate Wall Street in 2026.

Can the AI Rally Last?

A debate is humming on Wall Street about whether the artificial intelligence business is in a bubble characterized by unreasonably high stock valuations and seemingly unbridled infrastructure investments that may not pay off. 

According to Bank of America, this year’s tech IPOs posted their best first-week performances since the Dotcom Bubble of the 1990s, to which today’s market is frequently compared. Investors, they wrote, are also “exhibiting a historically strong buy-the-dip response,” a possible sign that FOMO is winning out over prudence.

On the flip side, the companies making the largest AI investments have more robust earnings and cash flows than their equivalents in the 1990s, which bulls say makes the AI boom more resilient to economic shocks.

AI may be a revolutionary technology, but “the rules of economics and finance still apply,” wrote analysts at Lazard Asset Management. Lenders—who became a more important part of the AI story this year—need to be repaid, and investors want returns on their investments. “In many cases, the AI trade increasingly appears unlikely to deliver on these demands,” according to Lazard. 

The hyperscalers—Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), Meta (META), and Oracle (ORCL)—are expected to log combined capital expenditures of more than $500 billion next year, with AI infrastructure accounting for the majority of spending.

“The amount of revenue you’re gonna have to generate incrementally to justify this capex is gonna be huge,” said Peter Berezin, Chief Global Strategist at BCA Research. He expects either Wall Street or the hyperscalers to realize next year that “these numbers are not sustainable. They’re gonna come down.”

Others see more room for the rally to run. “I think we are closer to 1998 than 2000,” said Chris Buchbinder, equity portfolio manager at Capital Group, who notes big tech’s earnings are keeping pace with their stock prices, unlike in the late ’90s. 

Profit Growth To Remain Strong and Broaden

Analysts expect corporate profit growth to accelerate next year, driven by a resilient U.S. economy, supportive policy, and AI spending. 

The S&P 500 is expected to grow earnings 15% next year, up from a little over 12% this year and well above the 10-year average of 8.6%, according to FactSet Research. The tech sector is likely to grow the fastest thanks to booming demand for AI chips, but the gap between big tech and the rest of the market is expected to narrow. 

LPL Financial forecasts the Magnificent Seven’s year-over-year earnings growth will hold steady between the mid-teens and low-twenties throughout the year, while the rest of the S&P 500’s growth accelerates into the mid-teens by the fourth quarter.

Strong profits outside of the tech sector could take some wind out of the AI rally’s sails. “More compelling investment opportunities are emerging elsewhere even for those investors most bullish on AI’s prospects,” wrote Vanguard. 

Higher expectations can be a double-edged sword, as AI beneficiaries like Nvidia and Broadcom (AVGO) learned in the past month. U.S. stocks are expensive by historical standards, with the S&P 500 trading near its highest forward price-to-earnings ratio of the last 10 years. 

“The optimism priced into markets doesn’t leave a lot of room for disappointment,” said Capital Group economist Darrell Spence.

Can Tax Bill and Rate Cuts Offset Rising Unemployment and Trade Concerns?

The U.S. economy is expected to get a boost next year from the combination of this summer’s One Big, Beautiful Bill Act, or OBBBA, and easing monetary policy.

OBBBA, the tax and spending bill signed into law by President Donald Trump in July, is expected to boost economic growth next year, especially in the first half when taxpayers receive an extra $100 billion in refunds, according to a Goldman Sachs estimate. Changes to corporate taxes and infrastructure depreciation should also boost some business spending. 

Simultaneously, the Federal Reserve is expected to continue lowering interest rates to support a labor market that appears increasingly imperiled. The unemployment rate, which has been inching higher for months, rose to its highest level since 2021 in November. The argument for more cuts was bolstered this month by a surprisingly tame inflation report.

“We are seeing what is an undeniable uptrend in the unemployment rate in the United States,” said BCA Research analysts, who identified the weakening jobs market as “the core issue” investors face heading into the new year. “There is not a very robust history of a benign rise in the unemployment rate,” they added. Consumer spending accounts for about 70% of U.S. gross domestic product.

Tariffs, the economic wildcard of 2025, could cede center stage this year. The Trump administration has agreed to trade frameworks with most of America’s largest trading partners, and Trump may back off threatening more tariffs, which polls show a majority of Americans dislike, heading into November’s midterm elections.

If the Fed cuts rates next year and the U.S. avoids a recession, that should encourage investors. Over the seven most recent Fed easing cycles, stocks posted an average annualized return of nearly 28% outside of recessions, compared with a 3% pullback during recessions.