AI, earnings and the Fed: What could drive US markets in 2026

Synopsis

The US stock market is nearing a third straight year of double-digit gains, driven by AI optimism, easing rate expectations and steady growth, with the S&P 500 up over 17% in 2025 after strong rallies in 2023 and 2024. However, sustaining the rally into 2026 will be tougher and hinges on robust corporate earnings, a supportive Federal Reserve and continued AI-led investment.

TIMESOFINDIA.COMThe US stock market is nearing a third straight year of double-digit gains.

The US stock market is closing in on a remarkable third consecutive year of double-digit gain…

Synopsis

TIMESOFINDIA.COMThe US stock market is nearing a third straight year of double-digit gains.

The US stock market is closing in on a remarkable third consecutive year of double-digit gains, a streak driven by optimism around artificial intelligence, interest rate cuts, and steady economic growth despite recession fears. The S&P 500 has surged more than 17% in 2025, adding to rises of 23% in 2024 and 24% in 2023. Yet, extending this momentum into a fourth stellar year in 2026 could prove challenging, requiring strong corporate earnings, a dovish Federal Reserve, and sustained AI investment.

The bull market that began in October 2022 has weathered volatility, including sharp declines in early 2025 following unexpected tariff announcements. Despite these headwinds, the market has demonstrated resilience, fueled by both tech sector strength and broader economic support. Analysts suggest that for another year of double-digit returns, multiple factors will need to align, including continued growth across a wide range of companies.

Corporate earnings are expected to play a central role in shaping market performance. S&P 500 profits are projected to rise over 15% in 2026, building on a 13% increase in 2025, according to a Reuters report.

Unlike previous years, when the bulk of gains came from megacap tech firms such as Nvidia, Apple, and Amazon—the “Magnificent Seven”—earnings growth in 2026 is expected to broaden across a larger portion of the index. While the Mag Seven are forecasted to see 23% profit growth, the remaining S&P 500 companies could achieve around 13%, narrowing the disparity that has historically concentrated returns in a handful of tech giants.

Excitement over AI remains a key driver of valuations, with massive capital expenditures and strong demand for AI applications supporting investor sentiment. However, caution lingers, as questions about the returns on AI spending could temper market enthusiasm. Companies scaling back planned investments or failing to deliver expected returns may pressure stock prices, potentially limiting upside.

Monetary policy will also be critical in shaping 2026’s market trajectory. Investors are eyeing the Federal Reserve’s stance, hoping for a dovish approach with further rate cuts, while avoiding economic weakness that could tip the U.S. into recession. Fed funds futures point to at least two additional quarter-point reductions in 2026, following a cumulative 175 basis points of cuts in the previous two years. Leadership changes at the Fed could further influence market expectations, adding another layer of uncertainty.

Historical trends offer mixed signals. In previous bull markets that reached a fourth year, gains have averaged nearly 13%, with six of seven cycles posting positive returns. Conversely, midterm election years have historically been weaker, averaging just 3.8% for the S&P 500, reflecting the uncertainty that new Congressional elections can bring.

Geopolitical factors and global trade relationships could also act as wildcards. While tariffs were a major source of volatility in early 2025, developments in U.S.-China relations in 2026 could provide unexpected catalysts, either positive or negative, for equity markets.

While the US stock market enters 2026 with strong fundamentals and broad optimism, sustaining the streak of double-digit gains will require a convergence of favorable earnings, supportive monetary policy, continued AI investment, and positive geopolitical developments. Investors may be cautiously hopeful, but the challenges ahead suggest that any further upside is likely to be measured rather than explosive.

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