NEW YORK, Dec 24 (Reuters) – The U.S. stock market has closed with double-digit gains for the third year in a row. A fourth great year in 2026 may be a tall order, requiring high earnings, a dovish Federal Reserve, and strong artificial intelligence spending.
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Sam Stovall, chief investment strategist at CFRA, said the market needs to be “firing on all cylinders” to achieve another year of double-digit returns.
“A lot of the headwinds mean this year could end in a surprisingly good year, but I don't think it's going to be an even better year,” Stovall said, setting a price target of $7,400 for the stock at the end of 2026, about 7% above current levels.
Will revenue and AI bring improvement?
Stock bulls point to a positive outlook for U.S. corporate profits. Profits for S&P 500 companies are expected to grow more than 15% in 2026, on the back of solid 13% growth in 2025, according to Tajinder Dhillon, head of earnings research at LSEG.
By 2026, the gap is expected to narrow significantly. Mag 7's earnings growth is expected to be 23%, compared to 13% for the other indexes.
“Many of the other 493 stocks in the S&P 500 have improved earnings growth, some of which we are already seeing, and that will undoubtedly help the stock market achieve double-digit returns next year,” said Christina Hooper, chief market strategist at Man Group.
Investors said earnings growth will be critical because stock valuations are difficult to expand beyond high levels.
Rising appreciation for AI, including massive spending on infrastructure and expected voracious demand for its applications, is driving valuations. Questions about returns on capital spending have weighed on tech and other AI stocks recently, and will continue to be a key theme in 2026.
“If companies start to scale back the capital spending they've already directed and the market starts to lose confidence in the returns AI investments are generating, we'll probably see a flat or slightly down year,” said Jeff Bachbinder, chief equity strategist at LPL Financial.
Dovish feeds, mixed historical signals and wildcards
Investors said another key factor in a strong year for the stock market is that the economy has softened enough to calm inflation and pave the way for further interest rate cuts, but not enough to tip it into recession. Investors expect rate cuts of at least two additional quarter points in 2026, following 175 basis point cuts in 2024 and 2025, according to Federal Funds Futures.
“Probably the biggest driver I would expect is for the Fed to remain dovish,” said Yunyu Ma, chief investment strategist at PNC Financial Services Group.
Looking at historical data, the potential returns for 2026 are mixed. On the plus side, of the seven bull markets that entered their fourth year since 1950, the fourth year saw an average gain of 12.8%, with six out of seven posting positive annual performance, according to LPL Research.
However, in US midterm election years, results tend to be below average as elections for new Congresses increase uncertainty about the composition of the federal government. According to CFRA's Stovall, the S&P 500 index averaged only a 3.8% gain during the interim period, compared with an average gain of 11% over the other three years of a president's term.
There are also many wildcards available. For example, after causing extreme volatility in early 2025, tariffs have receded as a key market issue, but relations between the world's two largest economies, the United States and China, could shake up stocks in 2026, PNC's Ma said.
“In fact, there is potential for progress between the United States and China that could be a positive catalyst that is not built into expectations,” he said.
Report by Lewis Krauskopf. Editing: Megan Davis and Anna Driver
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