Key points
- There are enough potential catalysts for investors to give the U.S. equity market the benefit of the doubt as 2026 begins, though the hurdles are real.
- Fixed income yields remain historically attractive, but bond prices could face modest downward pressure in 2026 as the Fed ends its rate-cutting cycle, muting total returns.
- The 2026 S&P 500 consensus profit forecast of 12.8 percent year-over-year growth looks somewhat lofty, and elevated forward P/E multiples of 21.3x deserve continued scrutiny.
- We begin 2026 with a market weight allocation to U.S. equities, favouring dividend growth stocks and the Health Care sector — and advising investors to remain nimble and vigilant about concentration risk.
United States equities
For the bull market to persist through 2026, we think several catalysts need to converge and at least one significant obstacle must be overcome. The U.S. economy and corporate profits have to keep growing at healthy clips. The focus of the AI development cycle probably needs to start shifting from AI 1.0—which has been mostly a capital spending story to build infrastructure and train and run AI models—to AI 2.0, where signs of productivity and financial benefits begin accruing to companies inside and outside the technology industry. And the market must buck the trend where the S&P 500 has experienced an average 22 percent correction surrounding midterm election years since 1934.
A tall order? Perhaps. But we are mindful that the market has jumped over high hurdles before. Our team's GDP growth forecast for 2026 stands at 2.2 percent— right at the 2.2 percent average since 2000 and above the 1.9 percent consensus forecast—which, if realised, would place the economy in a historical regime associated with meaningfully better equity outcomes.
"While the gap between tech and non-tech earnings growth rates should shrink further, overall S&P 500 profit growth will likely still be heavily impacted by AI capital spending and cloud computing—given these stocks represent a large share of the market's capitalisation."— Elizabeth Prasad, Portfolio Manager, Wealthy Asset Management
The 2026 S&P 500 consensus profit forecast looks somewhat lofty to us at 12.8 percent year-over-year growth, based on $310 earnings per share. We remain wary of the market's elevated forward price-to-earnings valuation of 21.3x compared to the 18.6x ten-year average. However, we do not think high P/Es will create problems until economic and/or earnings growth begin to buckle.
Questions about whether AI is in a bubble should linger into 2026. We are uncomfortable with certain aspects of the boom—including the recent surge in circular financing arrangements, where a large AI company invests in a smaller startup that in turn uses part of that financing to buy hardware and services from the original investor. The possibility that unprecedented capital expenditure spending could soon run into power generation and regulatory constraints is also of concern. At this stage, however, we see certain yellow warning signs rather than a full-fledged bubble.
Market weight allocation to U.S. equities
We begin 2026 at market weight for U.S. equities. The conditions for above- average returns exist in plausible scenarios, but the base case points to more moderate gains—and elevated valuations argue against adding incremental risk at current levels without a clearer catalyst.
Favour dividend growth and Health Care
We favour dividend growth stocks for their defensive characteristics in an environment where returns may be more compressed than recent years. The Health Care sector also looks attractive given its potential for improved earnings growth relative to consensus expectations entering the year.
Remain nimble and manage concentration risk
We advise investors to stay nimble overall and to be vigilant about single-stock and sector exposures—bringing them back in balance when they drift out of bounds. In an index where a handful of names exert outsized influence, concentration drift can meaningfully alter a portfolio's true risk profile.
United States fixed income
We see the Federal Reserve holding interest rates steady for the bulk of 2026. The near-term bias remains toward further cuts to around 3.75 percent or 3.50 percent. But with core inflation likely to hold north of three percent next year even as the unemployment rate is projected to rise modestly to 4.6 percent, we see little scope for interest rates to fall materially further.
"Should recent monetary policy easing—paired with fiscal stimulus via tax cuts—stoke stronger economic activity next year, markets could pivot the focus to the potential for rate hikes in late 2026 and into 2027. That scenario would add meaningful headwinds for bond total returns."— Gabriel Abbas, Chief Financial Officer, Wealthy Asset Management
2025 was a historically strong year for bond market performance. The Bloomberg U.S. Aggregate Bond Index began 2025 with an average yield of 4.9 percent, and as yields declined—pushing bond prices higher—the total return realised by investors reached 7.1 percent, one of the best years since 2000. We expect more muted total return prospects for bonds in 2026.
Given our expectations of minimal Fed rate cuts, near-average economic growth, and elevated inflation above the Fed's target, we see scope for modestly higher yields, putting downward pressure on prices and therefore total returns. We project the 10-year Treasury yield to end 2026 at 4.55 percent, up from 4.06 percent at the time of writing.
Investment grade credit: exercise caution
Credit markets remain historically rich and exposed to potential headwinds. The Bloomberg U.S. Investment Grade Corporate Bond Index offers investors just 0.85 percent of incremental yield over comparable Treasuries—a spread that leaves little cushion against a deteriorating economic backdrop. We anticipate greater bond supply, largely from technology firms looking to finance AI-related capital expenditures, to weigh on the corporate bond sector and overall performance.
Municipal bonds: selective value remains
Municipal bonds were one of the more attractive fixed income sectors in 2025, but a rally to close out the year has diminished much of their broad appeal. That said, we see lingering value in bonds beyond ten years on the curve, where yields remain above recent averages—particularly for investors in higher tax brackets for whom the after-tax yield advantage remains meaningful.
Yields remain historically attractive overall
Despite expectations of modest upward pressure on yields, fixed income starting yields remain well above the 3.4 percent twenty-year average on the Bloomberg U.S. Aggregate Bond Index. For investors with a longer horizon, the income component of fixed income returns is more supportive today than it has been for much of the past decade—even if price appreciation is constrained.
"We think investors should position for a year that is good rather than great—maintaining equity exposure at or near strategic targets, staying selective in fixed income, and preserving the flexibility to become more defensive if economic or earnings conditions deteriorate."— Cameron Moshfegh, Chief Executive Officer, Wealthy Asset Management
Neither Wealthy Asset Management GmbH nor its affiliates or employees provide legal, accounting, or tax advice. All legal, accounting, or tax decisions regarding your accounts and any transactions or investments entered into in relation to such accounts should be made in consultation with your independent advisors. No information provided by Wealthy Asset Management or its affiliates or employees should be construed as legal, accounting, or tax advice.
Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Fixed income investments are subject to interest rate, credit, and inflation risk. Index performance is not illustrative of fund performance; it is not possible to invest directly in an index. Yield and return forecasts are illustrative and do not constitute a guarantee of future performance. All market data sourced from Bloomberg and FactSet as of November 2025.
This article was updated in December 2025.