All 20 big-firm strategists expect a gain for the S&P 500 in 2026, according to Bespoke. As any strategist would tell you, you have to take price targets with a grain of salt and use them more as a guide to what is expected in the year ahead. You cannot just name the price and a time and expect precision. Even talking about doing so reminds me of a joke: How do you know economists have a sense of humor? They use decimal points.
The average expected return for the S&P 500, according to Wall Street analysts, is 10.7 percent, which would place the index at approximately 7,600 points.
That expected return of 10.7 percent exceeds the average expected return at the beginning of previous calendar years. Since 2000, the average expected return has been 8.9 percent, and the actual return has been 7.7 percent. Strategists have nailed it—8.9 percent versus 7.7 percent is close enough to call it a win. If that history repeats itself, we should expect another strong year for stocks in 2026.
My 2026 economic and stock market outlook did not predict the S&P 500’s move. Instead, the report said, “If you are an investor, you do not need perfect forecasts. I could not give you one if you wanted one.” But if you do want one, the most likely outcome is a modest market decline in 2026. Why? Well, forgive my contrarian nature, but since 2000, this is only the eighth time analysts collectively expected a return greater than 10 percent. Investors are becoming more optimistic; the wall of worry that the stock market climbs is deteriorating.
However, that concern could go either way: Of those eight instances, the market ended at least 16 percent higher, but it was down double digits on the other three.
There is historical precedent that claims I am misguided to expect a small market decline in 2026. The index finished 2025 up double digits for the third consecutive year. That is only happened a handful of times in history. But keep in mind that 12-month stretches of double-digit returns do not have to occur only in calendar years. The S&P 500 only goes back to 1957, but using a common extended pre-1957 history dating back to 1927, there were 79 instances of the market being up double digits for three consecutive years. The average return 12 months after those occurrences was five percent (the median return was 2.9 percent).
That is a gain, not a loss. So, why do I not expect a market gain? Because the dot-com bubble in the 1990s skewed that average and median return. If you exclude those years, the average 12-month return after three years of double-digit gains was a negative 2.1 percent; the median loss was 2.7 percent.
So, why should I remain invested in stocks if I expect the market to drop a couple of percentage points? A two percent move in either direction—down or up—essentially rounds to zero. It would be long-term healthy for the S&P 500 to go sideways after the index shot up by about 80 percent over the previous three years. Meanwhile, corporate earnings should continue to increase, allowing the market to digest its high valuations.
Also, despite the constant conversation around it in 2025, I do not think the market is in an AI bubble. The odds are better than a lottery ticket that the average strategist will be right because, in part, the AI will fuel growth. Artificial intelligence will improve labor productivity and economic development, helping the U.S. avoid a recession in 2026. While I do not expect much for the market in 2026, the tail risk for a significant, permanent loss seems much smaller than the upside tail risk.
I have made comparisons to the November 2022 launch of OpenAI’s ChatGPT and to Netscape’s October 1994 launch because both were announcements of transformative technologies.
Per the above graph (admittedly, I created it using Anthropic’s Claude; I go back and forth between Claude, ChatGPT, and Google’s Gemini), the Nasdaq stock market index from the launch of each to 25 months later has a similar trajectory, with the ChatGPT Era returns ahead of the Netscape Era returns.
During the Netscape Era, the stock market experienced a blow-off top in 1999, ultimately topping out in March 2000, and then crashed hard. Regarding technology, today feels like we are in late 1996. In terms of stock market valuations and returns, given that we just experienced three consecutive years of double-digit returns, it feels more like 1997.
The most probable scenario for the stock market’s returns in 2026 is slightly negative. There is always a chance for deeper declines, but I believe a rally will follow any correction.
When it comes to the small tail risk of significant permanent declines in AI companies’ prices, we can draw a favorable comparison to the dot-com companies of the 1990s. In the words of Federal Reserve Chairman Jerome Powell, “This is different in the sense that these companies that are so highly valued actually have earnings. … If you go back to the 90s and the dot-com [era], these were ideas rather than companies. So, there was a clear bubble there.” That lack of a bubble may keep stock prices from doubling in a year, but it also means that negative tail risk is negligible compared to the dot-com era.
Additionally, speaking of the Fed, the monetary policy favors the stock market this cycle. (Thank you to DataTrek for the annotations on the Federal Reserve Economic Data chart below.) This is favorable for stock prices.
As DataTrek points out, the Fed increased rates in 1994, leaving the Federal Funds rate between five and six percent from 1995 through 1998; briefly lowered rates after the collapse of the Long-Term Capital Management hedge fund; and then resumed raising rates to 6.5 percent. In contrast, the Fed is easing rates this cycle and is likely to make one or two more cuts in 2026.
There is not enough evidence to call it the top of the stock market for this technological cycle, meaning it is prudent for many growth-oriented investors to remain invested in U.S. equities even if they may go nowhere, or even down, this year. It would be naïve to think the stock market will not correct by double digits sometime in 2026, but such a shock would likely be quickly resolved as the U.S. economic engine continues to chug along, benefiting from improved productivity and AI-related capital expenditure. The stock market will likely tread water in 2026, and that is healthy, but the primary risk is to the upside.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $1 billion of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representation that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
