Key points

  • We can see a plausible path to another year of positive gains for most major stock markets—but likely at a more sober pace than the past three years.
  • Even moderate equity market gains will require recession among the largest economies to be avoided, earnings to grow, and the AI story to stay on the rails.
  • GDP growth everywhere needs to shift into a higher gear than current consensus forecasts to lift prospects beyond "merely positive" toward "above average."
  • We expect equity markets in developed economies will post more new highs in 2026 and deliver all-in positive returns—and portfolios should be positioned accordingly.

After three successive years of above-average market appreciation, delivering a fourth will be a tall order—but not entirely out of the question. Whether equity market returns are merely positive or above average, either outcome will depend on the major economies—especially the U.S.—avoiding recession, and on current consensus forecasts for GDP, earnings growth, inflation, and interest rates proving to be in the right ballpark.

Looking at the price history of the S&P 500 from 1945, there were five instances of at least three years of back-to-back above-average gains not counting this cycle—including one streak of four years and one of five. History does not rule it out. But the conditions required are both specific and demanding.

"Our confidence that the S&P 500 can deliver average to above-average returns in 2026 rests on two inter-related premises: the U.S. economy avoids recession, and the AI story—particularly the forecast for associated capital spending—is not dealt any serious blow."— Cameron Moshfegh, Chief Executive Officer, Wealthy Asset Management

The GDP growth threshold that matters

The consensus estimate for U.S. GDP growth in 2026 sits at 1.9 percent. Which side of two percent the actual reported growth rate lands on would put our stock market return expectations into one of two quite different historical regimes.

In years where U.S. GDP growth has come in somewhere in the 1.1 percent to two percent range, the S&P 500 has typically struggled—delivering positive returns only 40 percent of the time, with an average return of minus 3.4 percent. But when GDP growth has landed in the 2.1 percent to three percent range, the picture brightens considerably: the S&P 500's batting average jumps to 71 percent with an average return of 11.3 percent.

Our team at Wealthy Asset Management identifies several factors that might push growth into the potentially more rewarding zone above two percent:

Rebound from the government shutdown

A rebound from the government shutdown could provide a strong handoff into Q1. Furloughed workers will receive back pay retroactively, as will most benefit recipients—and spending in the early months of the year should receive a further boost from the expected $50 billion increase in tax refunds flowing from the recently passed budget. Consumer resilience, which temporarily faded, is expected to re-emerge.

Fed easing and increased bank lending

Changes in monetary policy act on the economy with a lag of six to twelve months. The 100 basis points of rate cuts in Q4 2024 likely helped the U.S. economy to an above-average Q3 result, and the lagged positive effects should continue to be felt in H1 2026. As of the September Senior Loan Officer Survey, a majority of banks have become more interested in making loans to consumers, and the number of banks lowering lending standards continues to rise.

Capital spending boost from tax policy

New provisions in the budget bill allow for faster write-offs of expenditures on qualified properties—warehouses, data centres, factories—and extend indefinitely the full immediate expensing of both research and development and equipment costs. In our view, this should result in a faster rate of capital expenditure growth than would otherwise have been the case.

How does AI fit into the picture?

AI is a rapidly changing and very large component of both U.S. index earnings and GDP growth. The 10 largest capitalisation stocks in the S&P 500—eight of which are AI giants—account for 43.5 percent of the index's value but contribute only 35.3 percent of its earnings. This disconnect shows up as markedly higher price-to-earnings ratios: the average P/E for the top 10 weights sits near 27x earnings against a long-term average of 18.6x, while the rest of the index trades at 17.7x against a long-term average of 15x.

"Investors are willing to pay a premium multiple for AI leaders because of their superior earnings growth today and their perceived capability to deliver more in the future. But the rest of the market—while significantly less expensive than the megacap AI leaders—is also expensive relative to its own historical average."— Elizabeth Prasad, Portfolio Manager, Wealthy Asset Management

AI is also critically important to GDP growth expectations in 2026 and beyond, because of the dramatic growth in capital spending by the large developers and the expectation that more successful commercial applications will emerge— prompting heavy future investment by users. While announced 2026 capital expenditure budgets for the biggest players add up to over $400 billion, that likely represents a growth rate slowdown from 2025's blistering pace.

The spending is also running up against real-world constraints. The most important is the availability of electric power to run fast-proliferating data centres. The idea that U.S. generating capacity needs to grow by 20 percent over the next five years is widely mooted—but such rapid expansion seems unlikely to fully materialise in that timeframe, creating a meaningful headwind for the buildout.

Can everything be good enough at the same time?

Looking across the U.S. economic and market landscape, a delicate tension emerges between consensus earnings estimates and the various economic conditions needed to deliver them.

Will GDP growth be strong enough to deliver the nearly 13 percent earnings growth embodied in current consensus estimates? At the same time, will it be weak enough that inflation falls to two percent and the Fed feels compelled to reduce rates by another 150 basis points—as the model would require for the most bullish S&P 500 scenario to prevail? These apparent tensions do not rule out a positive outcome, but they do counsel humility about the most optimistic forecasts.

Base case — mid-single-digit returns plus dividends

Using consensus estimates for year-end 2026—CPI at 2.60 percent, fed funds rate at 3.25 percent, 10-year Treasury yield at 4.07 percent—along with S&P 500 earnings of $308 per share, points to an S&P 500 price level of approximately 7,100 by year end, representing appreciation of roughly 7.5 percent from late-November levels. This is the outcome we think is most likely and most worth positioning for.

Bullish case — above-average appreciation

A more bullish variant—CPI at 2.0 percent, fed funds rate at 2.50 percent, 10-year yield at 3.50 percent—pushes the price scenario up to approximately 7,500, a gain of roughly 13.6 percent. This outcome requires an unusually positive confluence of market-friendly economic, inflation, and interest rate conditions occurring simultaneously.

Bear case — valuation pressure

If inflation and interest rates move up rather than down—perhaps not enough to produce a recession but sufficient to pressure price-to-earnings multiples— valuation scenarios in the low 6,000s open up. A U.S. recession, which is not our forecast, could produce levels that are lower still.

Much the same setup in other developed markets

Most developed economies are running stimulative monetary and fiscal policies in the same direction as the United States—featuring rate cuts by central banks, commitments to higher defence spending, initiatives to boost power-generation capacity and strengthen grids, and efforts to develop domestic AI capability. They also face many of the same challenges: anaemic GDP growth, trade uncertainties, mounting fiscal debt burdens, and fraught domestic politics.

The S&P 500 excluding its top 10 weights, together with the large-cap indexes in Canada, Europe, and Japan, are all trading at price-to-earnings multiples well above their long-term averages. It is as though investors— leery of the very high multiples in the megacap AI growth space—have opted for the more palatable multiples found elsewhere, pushing up those stocks and groups to historically high valuations in the process.

"Delivering above-average equity market gains from here will require an unusually positive confluence of market-friendly conditions—for the U.S. and for developed markets broadly. Position for less, and be happy with more."— Gabriel Abbas, Chief Financial Officer, Wealthy Asset Management

How to position portfolios

In our view, the conditions necessary for the S&P 500 and other global large-cap indexes to deliver mid-single-digit returns plus dividends in 2026— rather than the 13 percent-plus aimed for in the bullish scenario—are much less demanding and more likely to occur. They would include some slight further moderation in inflation allowing another cut or two from the Fed, leaving S&P 500 earnings able to approach the consensus $310 per share estimated for the year.

As 2026 gets underway, our team believes portfolios should be invested up to— but not beyond—a predetermined long-term equity exposure. In other words, a market weight positioning with a plan for becoming more defensive when and if needed. The asymmetry between the base case and the bear case argues for discipline over aggression at current valuations.

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 in equities involves risk, including the possible loss of principal. Past performance is not indicative of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index. GDP growth scenarios and S&P 500 price scenarios are illustrative and do not constitute a guarantee of future performance. All market data sourced from FactSet and Bloomberg as of November 2025.

This article was updated in December 2025.