This past year served as a reminder to investors to stay the course despite the inherent uncertainty in investing. Uncertainty came in many forms, including the reshuffling of the political landscape, the upending of global trade, the devaluation of the U.S. dollar, and persistent inflation. Last year, we reminded investors not to forget that the biggest changes in asset prices tend to be driven by surprises. As it turned out, the largest surprise of 2025 came in the form of a new world order for global trade, ushered in by President Donald Trump’s sweeping Liberation Day tariff announcement. The S&P 500 responded with a near-bear-market correction, falling just shy of 20%.

Remarkably, the market recovered, posting a 17% year-end gain. Thus, 2025 joined only two other years since 1980 with an intra-year decline of at least 19% followed by double-digit annual gains. Much like it did during the sell-offs accompanying the Long-Term Capital Management crisis (1997) and the Covid shutdowns (2020), last year it paid to ignore the noise and focus on the steady signal driving the market higher: earnings.

Through all the noise, earnings growth remained strong at an estimated 12% year-over-year rate. Inflation stayed largely contained and unemployment was low, despite concerns over the broader economy and geopolitics. By last September, the current cyclical bull market quietly marked its third anniversary, with the S&P 500 and Nasdaq delivering returns of roughly 90% and 125%, respectively.

Our current bull market ranks as the seventh-longest of the 24 since WWII. Its long duration, combined with additional telltale signs of its maturity, raises the prudent question: How much longer can this bull run? As the chart on page 2 illustrates, bull markets rarely reach their fourth anniversary. Combine those low odds with this market’s materially higher three-year returns, and this bull has a very high hurdle to clear in the year ahead.

Can the hurdle be cleared?

In evaluating this question, investors should expect more turbulence in the year ahead. The political landscape, both at home and abroad, is expected to remain tense, and the U.S. government’s debt burden is projected to deepen, with little indication of fiscal responsibility. Both issues appear to be priced into markets, and so a more significant catalyst would be required to end the bull market in 2026.

Which specific risks are more likely to end this bull market? The prime candidates are persistent AI stock bubble concerns, the potential end of the Federal Reserve’s independence, a debt crisis triggered by bond vigilantes, and exceptionally high equity market valuations. As we will explore further, each of these factors is unlikely to end the current bull run in the year ahead.

Bear Market Candidates in the Year Ahead

AI Bubble Concerns

Although AI enthusiasm could eventually lead to excessive valuations, this appears unlikely at present. Investors’ ongoing questions about a potential AI bubble and recent sell-offs in AI stocks have reduced the likelihood of a meltdown by effectively capping valuations. Furthermore, unlike the excesses of the late 1990s, the majority of the AI build-out has been funded by cash flow rather than debt, and in the past three years, forward price-to-earnings (P/E) multiples for publicly traded AI stocks have declined while earnings per share (EPS) estimates have more than doubled.

The End of Fed Independence?

Over the next several months, President Trump will appoint two new members to the Federal Reserve Board of Governors, including a replacement for current Fed Chair Jerome Powell. However, the question of the Fed’s independence is unlikely to hinge on just two appointments. Investors should instead watch for policy shifts, such as an increased bias toward quantitative easing despite continued elevated inflation and the apparent abandonment of its long-standing 2% inflation mandate.

Sovereign Debt Crisis

Warnings of an imminent U.S. sovereign debt crisis have surfaced repeatedly over the past decade, yet current market signals suggest 2026 is unlikely to be the long-anticipated breaking point. The 10-year U.S. Treasury yield has risen by roughly half a percentage point since the Fed began easing rates, but most market forecasts do not foresee additional increases in the near term. One reason is the Treasury’s tendency, first evident in 2023 refunding decisions, to tilt borrowing toward short-term Treasury bills rather than meaningfully expanding long-dated issuance. This pragmatic approach has helped mitigate upward pressure on longer-term rates.

Elevated Stock Valuations

Among the cited risks for the year ahead, equity valuations stand out as the most concerning. The S&P 500 currently trades at a forward price-to-earnings multiple of 22.5, well above its long-term average of 19, placing valuations toward the upper end of their historical range. Importantly, though, that valuation premium is not evenly distributed across the market. The 10 largest companies command meaningfully higher multiples (29) than the rest of the index (19), reflecting investors’ willingness to pay up for scale, balance-sheet strength, and superior earnings visibility.

Elevated valuations rarely trigger declines on their own. Instead, they reflect confidence in future earnings growth. That confidence is most evident among the seven largest S&P 500 companies, which are expected to grow earnings by 29%, compared with 10% for the median company. As long as those expectations remain intact, valuations can stay higher for longer. Still richer multiples reduce the market’s margin for error. If an external shock or earnings disappointment were to emerge, high valuations could amplify a pullback, but, in isolation, valuations are better viewed as a source of vulnerability than a catalyst for a correction.

A Winning Hand

Despite the risks discussed above, we expect the bull market to extend into a fourth year. Entering the year ahead, the S&P 500 has been dealt a good hand to beat the odds, benefitting from a constructive mix of monetary and fiscal policy, capital investment and earnings momentum.

Easing monetary policy and supportive fiscal policy remain important tailwinds. The Fed has already shifted toward accommodation, and expected further rate cuts would help sustain economic expansion into 2026. Historically, equity markets have continued to advance after the resumption of Fed easing, as lower borrowing costs support both growth and valuations. Markets have historically gained 14% in the months following the resumption of rate cuts (see chart on this page). At the same time, the One Big Beautiful Bill Act (OBBBA) should provide further support for economic growth, adding an estimated 0.4% to GDP growth through targeted corporate tax credits and consumer tax incentives.

Capital spending on AI infrastructure and increased domestic manufacturing are other powerful drivers for the year ahead. Combined AI-related spending by AI hyperscalers (such as Alphabet, Amazon, Meta, Microsoft, and Oracle) is expected to rise by 34% to $500 billion in 2026. While the pace of spending has been striking, AI investment represents a relatively small share of the overall economy and remains below levels seen at the peak of prior technological advancements.

To illustrate, AI spending accounts for around 1% of GDP, yet in prior general-purpose technology investment cycles (e.g., electricity, railroads, communications), investment

peaked at 2%–5% of GDP. This suggests room for further expansion (possibly doubling), rather than imminent saturation. At the same time, the Trump administration’s efforts to reshore and diversify supply chains should contribute to additional investment in U.S. manufacturing capacity, extending capital spending beyond AI alone.

The wealth effect from Baby Boomers adds an additional layer of support to this bull market. Boomers represent the largest and wealthiest retiring cohort in history, with a significant share of their net worth tied to equities. The ongoing bull market has strengthened their balance sheets and provided them with a powerful incentive to consume.

Finally, the earnings outlook remains solid. Consensus expectations call for 14% per year growth over the next two years. Even after adjusting for historical optimism in earnings forecasts, earnings growth appears sufficient to support current valuations. Assuming the current forward S&P 500 price-to-earnings multiple of 22 holds, and applying it to a forecast 2027 earnings growth of $352/share, the price target is approximately $7,700 for 2026. This implies a gain of around 11% from this year’s closing level of $6,845, in line with our forecast and in keeping with the average annual increase over the past decade of roughly 12%. In other words, if multiples hold steady, earnings growth alone would be consistent with returns broadly in line with long-term averages, rather than signaling an overheated market.

Taken together, we expect both economic and earnings growth to remain resilient in the coming year. With monetary easing and historical patterns of late-stage bull market performance, these factors support our view that the bull market will likely extend into 2026.

SUMMARY OF OUR 2026 OUTLOOK

» Continued market volatility

» Accelerating U.S. economic growth

» Easing financial conditions from both fiscal and monetary policies

» Positive returns for both stocks and bonds