Market Commentary - January 2026

The S&P 500 Index’s monthly win streak extended into December, capping off a remarkable three-year run. It’s prediction season and Wall Street is bullish. However, Wall Street’s track record is suspect and an examination of key drivers for 2026 uncover an equal number of risk factors. 

Although the S&P 500 Index closed the year with a four-day losing streak, the index posted a total return gain in December, marking its eighth consecutive monthly advance and registering the longest winning stretch since 2017. Value stocks outperformed Growth stocks for the second consecutive month, while international equity markets rebounded after a pause in November. Sector performance in December was mixed, with six of eleven sectors positing gains, led by Financial Services, Communication Services, and Materials. Utilities lagged significantly, ending the month down 6%, making it the weakest performer. The Fixed Income markets experienced a modest pullback in December but still delivered their strongest annual performance since 2020.

“The function of economic forecasting is to make astrology look respectable.”
- John Kenneth Galbraith

Forecasting or Fortune-Telling?

Economic predictions often rest on fragile assumptions and can be derailed by unforeseen shocks, making them feel more like educated guesses than hard science. While critics argue that modern models have improved short-term accuracy, Galbraith’s skepticism still resonates decades later.

Galbraith’s supporters may find their convictions challenged by the rise of AI-driven forecasting. Artificial intelligence has transformed forecasting from static, backward-looking models into dynamic, adaptive systems. Unlike traditional econometric models that assume linear relationships, AI-driven tools leverage machine learning, neural networks, and natural language processing to process massive, diverse datasets in real time. This means forecasts can now incorporate:

• Unstructured data like social media sentiment, news feeds, and satellite imagery.
• Nonlinear patterns that traditional models often miss.
• Continuous updates as new data streams in, improving agility during volatile periods.

Specific Examples:

• Financial Planning Platforms: AI-powered tools are increasingly used to automate scenario modeling, detect anomalies, and deliver real-time updates for corporate financial planning and analysis teams. 
• Market Trend Prediction: Machine learning models help forecast equity and commodity trends, enabling firms to adjust portfolios proactively based on evolving market signals. 
• Macroeconomic Analysis: Advanced AI systems now integrate global indicators, consumer sentiment, and even environmental data to predict GDP growth and inflation trajectories with greater precision.

While AI is redefining the boundaries of economic forecasting, it remains a guide and not a crystal ball, underscoring the need for judgment, adaptability, and humility in navigating uncertainty.

Wall Street Weighs In

Bloomberg.com has a prominent section and podcast called “The Big Take”, which features deep dives, long-form journalism, and daily podcasts covering major business, economic and political stories with in-depth analysis from their global reporters, focusing on context for market-moving events. The latest entry, “Here’s (Almost) Everything Wall Street Expects in 2026”, is a terrific compilation of outlooks for the year ahead from more than 60 institutions. Rather than providing a full summary, the following are some of the most significant points and themes to highlight.

• Economic Cycle Extends: Fourth quarter estimates point to a full-year U.S. economic growth forecast in the range of 1.9% to 2.5% for real GDP growth in 2025. Wall Street enters 2026 with cautious optimism, projecting a modest uptick in economic growth. Anticipated drivers include interest rate cuts, increased investment in AI, and lower corporate tax rates, while easing global trade tensions are expected to provide additional support for worldwide expansion.
• Inflation: Lingering Price Pressures in the U.S. But Eurozone Expected to Steady Resilient economic growth, coupled with lingering effects of trade and immigration policies, suggests than any slowdown in price increases will likely be gradual and potentially limited in the U.S. With lower relative economic growth anticipated in Europe, risks of higher inflation are limited.
• Monetary Policy: Global Easing with Outliers Increased political pressure may force the Fed’s hand despite sticky inflation. The European Central Bank may ease slightly, while the Bank of England and Bank of Japan may implement firmer policy rates.
• Gains Ahead for U.S. Stocks: Current projections suggest the bull market will persist into 2026, underpinned by structures such as AI adoption, moderate economic expansion, and sustained policy support from both fiscal (One Big Beautiful Bill) and monetary measures. For years, warnings of peak profit margins have circulated, yet the data tells a different story — corporate margins have climbed steadily for two decades, making this concern largely unfounded.
• Non-U.S. Equity Markets Momentum to Continue: Low valuations, improved earnings trends, supportive policy dynamics, and a weaker U.S. dollar bode well for the group. Germany is rolling out a substantial fiscal stimulus program, while Japanese firms are implementing reforms aimed at enhancing shareholder value.
• The U.S. Yield Curve is Expected to Steepen: Rate cuts will lower near-term yields, while fiscal strength will prop up the long end of the yield curve. Some firms are calling for fewer rate cuts while other firms see good income generation opportunities.
• Risk in the Shadows of Optimism: The very factors strategists cite as drivers of economic and market gains are simultaneously flagged as potential risks. Policy missteps remain a key risk as rates cuts could reignite inflation, especially with trade barriers acting as potential catalysts. Meanwhile, heavy AI-related spending, its uncertain payoff, and possible disruptions to labor markets and business models, add layers of volatility to the outlook.

Checking the Scoreboard

If that is what analysts expect for the year ahead, it must be said that Wall Street’s crystal ball was a little cloudy in 2025. Strategists kicked off the year bullish, calling for double-digit gains on the back of earnings strength and the AI boom. By the summer, strategists pivoted bearish, fearful of an extended trade war that would spike inflation and curb economic activity. As markets shrugged off the drama, forecasts staged a comeback. In the end, the Street’s much vaunted crystal ball was just a snow globe.

The evidence shows Wall Street’s predictive accuracy is negligible. According to Paul Hickey, founder of Bespoke Investment Group, Wall Street consensus has only ever predicted annual gains every single year this century. But the market didn’t climb every year. In 2022, for instance, the S&P 500 Index dropped 19% despite a consensus forecast for a 4% gain. In fact, the Index finished lower in seven of the past 25 years despite Wall Street’s annual rosy predictions.

Our Take

As we noted in prior monthly commentaries, earnings-per-share (EPS) growth is a foundational driver of equity returns over the longer term, but it’s not a reliable short-term indicator. Investor sentiment, interest rates, and macro shocks often overshadow earnings trends in the short run.

That said, we remain optimistic about the current earnings growth projections for 2026. FactSet Research projects the S&P 500 Index’s EPS growth rate for 2026 to be around 15%, marking a third consecutive year of double-digit growth. While the so-called “Magnificent 7” stocks have enjoyed exceptional EPS growth in recent years, that advantage is expected to narrow in 2026. This creates attractive opportunities in sectors beyond Technology — including Materials, Industrials, Communication Services and Consumer Discretionary — where analysts anticipate strong double-digit growth.

However, we remain cautious given several factors, including the risks highlighted above in “The Big Take”. We also recognize that the market has just completed an extraordinary three-year run, appreciating 80%.  The last comparable stretch was 2019-2021, followed by a 19% decline in 2022. Similarly, after the prior major rally ended in 1999, the market posted double-digit losses for three consecutive years. This isn’t a call for a market correction, but it does echo the old Wall Street adage: “The stock market takes the escalator up and the elevator down.” Sharp, sudden declines can occur — often fueled by powerful human emotions like fear and panic selling — even when consensus forecasts remain bullish. Ultimately, projected earnings strength supports a constructive outlook, but risk factors warrant maintaining a cautious posture. 

Looking Ahead

The first month of 2026 will be pivotal for gauging whether the U.S. economy can sustain its late 2025 momentum amid lingering inflation and labor market uncertainty. Markets will focus on a series of policy signals and high-impact reports like:

Starting in mid-January, fourth-quarter earnings reports will begin to roll out. Historically, these releases include full-year guidance, making this the first real test of whether analyst expectations are overly optimistic or aligned with management’s outlook.

Thank you for your continued confidence in our team, and please reach out with any questions you may have. It is our pleasure to share life’s journey with you.