Good morning. Andrew here. Happy New Year. We hope you had a great week. We’re looking forward to a year filled with lots of news — and we’ll also be marking DealBook’s 25th anniversary this fall. This morning, we’re taking a look at the markets and what to expect in the year ahead. Bernhard Warner has gone deep on issues that could tip the market one way or the other — there are some fun contrarian takes — and what they might say about the economy. (Was this newsletter forwarded to you? Sign up here.)
How long can the rally continue?To many investors, it feels as if the S&P 500 is on autopilot, with nothing but rising returns on the horizon. Last year, the benchmark index racked up 39 record highs — after 57 the year prior — on the way to an annual gain of 16.4 percent. Wall Street expects more of the same this year. Analysts polled by FactSet have forecast, in aggregate, that the benchmark index’s price target will finish 2026 a whisker below 8,000 — at 7,968.78. That would imply, yes, another 16 percent gain from Wednesday’s year-end close of 6,845.50, and would put the S&P 500 on its best four-year pace since the 1990s, according to Bloomberg. “We think it’s going to be a good year,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, told DealBook. Sure, there are doubts. Sky-high valuations, especially for the so-called Magnificent Seven — the giant technology companies in the thick of the artificial intelligence race — are making some investors antsy. A.I. exuberance has drawn in investors from around the world. Now, they’re asking tougher questions. “It’s not that they suddenly hate the A.I. trade or don’t believe in it,” Calvasina said. “But I think there’s some sticker shock on the valuations.” Even still, Calvasina and her team’s “base-case model” predicts the S&P 500 will end 2026 at 7,750. She said that while the model had not ruled out “some additional volatility,” it expected the prediction to hold even if the overall market were to drop 5 to 10 percent. Such a sell-off slammed stocks in April after President Trump announced bruising tariffs against countries around the world. The administration then reversed many of them in fits and starts, and markets rebounded. Even with that swoon, the S&P 500’s bull-market rally is now trucking through its fourth year, helping Wall Street giants reap bumper profits.
The glass-half-full outlook for 2026 It’s easy to see why the bulls are in such a good mood. The economy is growing. Corporate profits are booming. And despite that, the futures market expects the Fed to cut interest rates at least twice this year. Another paradox: Consumer spending has held up — to the delight of retailers this holiday season — even with inflation well above the central bank’s 2 percent target. And then there’s the corporate bonus coming thanks to last year’s domestic policy bill. If 2025 was the year of tariff uncertainty, this one could be the year when Trump’s tax cuts bolster corporate profits. “The amount of policy impacting price action across asset classes has been a big factor” in fueling the 2025 rally, Adam Turnquist, the chief technical strategist for LPL Financial, told DealBook. “We think it’s going to be another one where policy probably takes center stage.” Several analysts also told DealBook they’d be watching the Supreme Court docket closely. Early this year, justices are expected to rule on the legality of some of the administration’s biggest tariffs, which it has justified under the International Emergency Economic Powers Act of 1977. A decision against the administration could scramble Trump’s tariff strategy — although some trade experts disagree — and benefit consumers and businesses hit hard by levies. An overall improved business outlook and fairly low odds that the U.S. is headed for recession help explain why Wall Street’s models point to solid gains again this year. LPL Financial has set a year-end target for the S&P 500 that is a bit more modest than its peers’. The firm’s base case is a price target of roughly 7,300 to 7,400. Its bull case is 7,800, to which it assigns a 25 percent probability. Betting against this bull market has become an exercise in futility. In a sign of the times, Nate Anderson, one of the market’s most notable short sellers, quit last year and disbanded his firm, Hindenburg Research.
The bear case for 2026 Make no mistake, however: While market pessimists are harder to find, there are concerns that bulls and bears alike share. A.I. bubble fears are top of mind. Will Big Tech’s huge investments usher in broad productivity gains for society? (The early results haven’t caught up to the hype.) Or will the debt-fueled binge burn investors? “The wild card is probably going to be A.I.,” Turnquist said. “We think A.I. in 2026 is transitioning to more of a show-me story” he added, in which investors will want to see that these enormous bets are beginning to pay off for companies. There are more prosaic economic concerns, too. The labor market has been slowing. And stubbornly high inflation remains a worry. Both factors could sap households’ confidence to spend, and dent corporate profits. Questions about consumer spending were vigorously discussed on corporate earnings calls last year. The issue also created tension within the Fed as policymakers grappled with the conundrum of whether to cut interest rates to bolster hiring, or stand pat so as not to risk accelerating inflation. Trump is expected to name a new Fed chair soon, and he has made it clear he wants a policy chief who shares his view on lower interest rates. But the committee remains vastly divided on the prudent course of action. The stakes of that debate will only rise if inflation continues to run hot, potentially adding volatility to markets. That the Fed will cut rates multiple times this year has become gospel for the bulls. The bears aren’t sure the data will merit such aggressive moves by the central bank. That will make the Jan. 9 jobs report a crucial one, analysts say, as it could set an early tone for the year about which way the Fed will lean on rate cuts. Here’s what else investors are watching:
The Trump administration retreats from new-year tariff threats. The Commerce Department announced it would cut planned levies on Italian pasta to under 14 percent from 92 percent, saying that the pasta companies had “addressed many of Commerce’s concerns” about allegations of dumping. The White House also said it would delay planned tariff increases on upholstered furniture, kitchen cabinets and vanities until 2027. The moves come as affordability is expected to be a prominent issue in this year’s elections. The founder of the Chinese A.I. start-up DeepSeek proposes a cheaper way to develop artificial intelligence. The company, which shocked Big Tech in early 2025 with its streamlined chatbot, published a paper proposing a more economical approach to training foundational models. It involves something called Manifold-Constrained Hyper-Connections, or mHC, according to Liang Wenfeng, DeepSeek’s founder and an author of the paper. The large investments required to train models have been a barrier for companies trying to compete with well-funded U.S. rivals. Zohran Mamdani is sworn in as New York City’s mayor. A democratic socialist, he used his inauguration speech to lay out an “an agenda of safety, affordability and abundance” for New Yorkers, but he acknowledged that his policy goals wouldn’t be easy to pull off. Mamdani, 34, sought to strike a unifying tone — he refrained yesterday from singling out billionaires, as he has in the past — but questions remain over whether his brand of progressive politics will work in the mecca of U.S. capitalism. We hope you’ve enjoyed this newsletter, which is made possible through subscriber support. Subscribe to The New York Times.
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