Sustaining momentum, strengthening resilience

Bull market momentum continues into 2026, fueled by strong earnings, policy support, and consumer optimism. Yet stretched valuations and structural shifts underscore the need for strategies that balance growth with resilience.

The bull market continues its charge into 2026, fueled by solid multiyear gains. The S&P 500® has advanced by more than 90% since its October 2022 low. History shows rallies at this stage can last for another two years and add roughly 85% more in gains,¹ suggesting potential for further upside.

The backdrop remains broadly supportive with stabilizing trade policy, fiscal stimulus, monetary easing, strong earnings, and consumer tailwinds. Notably, periods of policy support and robust earnings growth rarely result in recession.

But markets aren’t one-sided. Today’s valuations are stretched, and the global order is shifting in ways that could introduce new risks. That’s why the year ahead calls for strategies that embrace continuity and growth—while building portfolio resilience.

What’s driving investor optimism?

Deep structural drivers are reshaping the investment landscape and returns likely will be sustained by:

• Trade stabilization: Reducing uncertainty, 16 frameworks have been negotiated, the US and China remain in a tentative trade truce, and there are plenty of exemptions to ease the pain from tariffs. The worst-case scenario feared in early April never materialized.
• Fiscal stimulus: The One Big Beautiful Bill Act will stimulate corporate and consumer spending in 2026. Businesses have retroactively expensed over $100 billion in R&D, and the $150 billion in incremental tax refunds expected between February and May should boost consumption. 
• Monetary easing: From a peak of 5.25%, the Fed has cut rates by 1.5%, a 29% retracement. Other global central banks—the European Central Bank, Bank of Canada, Bank of Switzerland, and Bank of New Zealand—have retraced more than half their rate hikes, leaving the Fed plenty of room to reduce rates further next year. The Fed announced plans to end quantitative tightening in December, effectively another quarter-point cut.
• Corporate strength: Q3 marked the fourth straight quarter of double-digit earnings growth, with 82% of companies beating earnings estimates and 76% beating revenue expectations. Both those figures are above five- and 10-year averages.² Also, all 11 sectors outperformed forecasts, and profit margins remain near record highs despite tariff concerns.³
  
  With the S&P 500’s year-over-year earnings growth increasing by double digits (13.1%) for the fourth consecutive quarter,⁴ the good times are expected to continue. Analysts are projecting 13.9% earnings growth and 6.9% revenue growth for S&P 500 companies next year.⁵ Strong earnings growth and profit margins signal economic stability.

Add deregulatory tailwinds, accelerating AI investment, and consumer optimism—bolstered by events like the US hosting the World Cup and the 250^th anniversary of the Declaration of Independence—and the case for continued momentum becomes even more compelling.

Risks ahead: Speedbumps, not roadblocks

Yet even with such strong support, investors must navigate emerging headwinds. Valuations remain the most obvious risk.

Stretched valuations

After more than 35 new all-time highs in 2025,⁶ the S&P 500 looks stretched. And while valuation alone is a poor predictor of short-term performance, it’s a concern for investors seeking better entry points.

Today’s stretched valuations and muted volatility mean the margin for error is slim—making any setback more costly.

Trade and labor dynamics

Beyond price levels, the macro landscape is shifting in ways that reshape investing norms. Global trade is being redefined. The Trump administration has pushed allies to share more equally in the global security burden, fueling a “go-it-alone” mindset and driving defense stocks higher. At the same time, the labor market is in an unusual equilibrium. Both supply and demand are slowing, influenced by tougher immigration policies, demographic trends, and the accelerating impact of AI.

Structural shifts, state capitalism, and midterm elections

Technology adds another layer of uncertainty. Hyperscalers are pouring billions into AI infrastructure and power grid modernization. Yet return-on-investment remains elusive, raising the risk of volatility as markets adjust to these massive capital expenditures. Meanwhile, state capitalism is gaining traction, with governments investing heavily in strategic industries to bolster national security, jobs, and domestic champions.

All these structural shifts inject unpredictability into economic growth, inflation, and interest-rate dynamics.

Finally, 2026 is a midterm election year and market volatility tends to increase. Since World War II, the average drawdown in midterm years is 19%.

But markets have never been down 12 months following a midterm election,⁷ suggesting that any turbulence in 2026 could set the stage for renewed gains.

AI: Growth engine or bubble?

The biggest question for many investors is whether the AI boom could turn into a bubble. Certainly, the ingredients for a bubble are present: the introduction of a general purpose technology followed by massive capital expenditures, surging private market flows, easier monetary policy, and deregulation.

What’s more, AI has become the poster child for circular capital, where tech giants fund each other’s ambitions through overlapping investments and joint ventures. This creates a dynamic where one small misstep could trigger outsized consequences.

And with improving M&A and IPO activity reflecting growing animal spirits, it’s easy to understand all the headlines comparing AI to past bubbles.

But here’s why AI won’t repeat the dot-com era:

1. Earnings are expanding, not contracting: Unlike the late 1990s, Tech earnings are accelerating—and expected to keep growing in 2026.
2. It’s still early days for the CapEx cycle: Smaller in scale and duration than the 1990s buildout, the AI investment wave is just beginning, with plenty of runway ahead.
3. Focus on monetization: Today’s investors demand ROI, not just hype. Companies failing to show a path to profits are punished, as recent earnings reactions prove.
4. Policy is loosening, not tightening: Every major bubble has burst under rising rates. Today, the Fed is easing, not hiking, removing the classic pinprick.

Most importantly, not all bubbles are equal. Bubbles in unproductive assets like tulips and land can be destructive. Think about the real estate bubbles bursting in the late 1980s in Japan, and in 2007-2008 in the US.

But bubbles in productive assets often seed future growth. Think about broadband emerging from the dot-com bust. Similarly, today’s hyperscaler investments in AI infrastructure may lay the foundation for the next generation of transformative companies.

How to invest in 2026

The bull market is alive and well but expect greater volatility. To position portfolios for a year where continuity and growth will likely remain dominant themes, investors should think beyond traditional asset allocation approaches to:

• Boost resilience with multi-asset and alternative strategies: With the range of possible outcomes widening, it’s time to rethink traditional portfolio allocations.
• Target AI and policy-led growth from US to emerging markets: As AI powers large-cap growth companies and lifts emerging market sentiment, monetary easing and deregulation are creating opportunities in cyclical sectors like small caps and banks.
• Pursue bond upside with active short duration and credit: Rising deficits, persistent inflation, and steepening yield curves demand active management across securitized assets, investment-grade corporates, and high yield.

Navigating the bull market in 2026 demands a disciplined yet dynamic strategy anchored in resilience, fueled by innovation, and sharpened by tactical precision.