Market aims for fourth straight year of gains

Ben Graham · January 5

The US market is healthy but not as exceptional as in recent years. Over the past three years, the S&P 500 delivered double?digit gains each year. In 2025, it gained 16%, hitting 39 record highs. If the rally continues into a fourth year, it would be the longest winning streak since 2007. On the other hand, since the start of 2023, the broad index has jumped about 80%, which makes investors cautious and reluctant to rush into buying every dip.

S&P 500 Dynamics

Optimists are banking on a strong US economy, robust corporate earnings, Fed rate cuts, and continued AI-driven growth. Yet it is plainly visible that each of those bullish drivers is not as powerful as it once was.

A cooling labor market and elevated Fed policy rates will sooner or later slow GDP growth. This process could begin to show up around the turn of 2025-2026, exacerbated by the risk of another US government shutdown. The pause in the Fed's easing cycle may last at least until spring, and doubts about the return on AI investments already prompted rotation at the end of last year.

Dynamics of S&P 500 and Stock Index Forecasts

Unsurprisingly, some banks set rather modest year?end 2026 targets for the S&P 500. Being bullish remains fashionable—bears have been proven wrong too often in recent years—but prudence is warranted. Bank of America sees the index at 7,100 by year?end, less than 4% above current levels.

JP Morgan and Goldman Sachs are far more bullish, projecting 7,500 and 7,600, respectively — forecasts that may be more reflective of sentiment than fundamentals. If a meaningful correction takes hold, these forecasters could quickly turn bearish.

Rotation of investment portfolios in 2026 won't be limited to the United States. After several years in which global equity indices outperformed US markets, parallels are being drawn to the dot?com era, when the global market led the US for several years. Does it make sense to bet that history will repeat and allocate to European and Asian equities?

Those markets still look cheap on fundamental valuation, a factor that matters when investors worry about an AI valuation bubble.

Technically, the S&P 500 is testing dynamic supports represented by moving averages and a fair?value area near 6,840. A break below that level would raise the risk of a deeper pullback and justify establishing short?term short positions. Conversely, a rebound from there would demonstrate bulls' strength and support adding to long positions.

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