LPL Financial expects the S&P 500 to see modest gains in 2026, predicting it will close between 7,300 and 7,400, reflecting a rise of 7% to 8%. Growth will be driven by excitement around AI and the Federal Reserve easing monetary policy. One major factor boosting the bull market is increased investment in AI, which is projected to reach $520 billion in 2026. This growth in AI spending is likely to greatly enhance both the economy and corporate profits.

Wall Street’s Expectations

Wall Street predicts double-digit earnings growth for S&P 500 companies, especially from major tech firms. However, as earnings growth levels out, there may be a shift towards value stocks this year. Interest rate cuts from the Fed could also support stock market gains. Historically, the S&P 500 has risen an average of 13% after such rate-cut cycles. Risks to watch include potential AI challenges, pressures from interest rates, trade tensions, and geopolitical situations. LPL recommends sticking to current investment strategies while taking advantage of market pullbacks. The S&P 500 could reach 7,800 with strong gains from AI productivity, although it might drop to 6,200-6,300 if recession fears arise. The 2026 outlook suggests the bull market will persist, but growth will be more limited. Our target for the S&P 500 remains between 7,300 and 7,400, a modest increase from the current level of about 6,850. This points to strategies that benefit from a gradual rise, rather than a rapid increase. The excitement around artificial intelligence is still the strongest driver, with major tech companies anticipated to increase their capital spending by 30% to over $500 billion next year. Recent investor presentations have confirmed these plans, setting the stage for upcoming months. Therefore, keeping a long position in tech, possibly through NASDAQ 100 futures or call options on key AI companies, makes sense.

Federal Reserve’s Role

The Federal Reserve is expected to support growth through more monetary easing. Following the December 2025 meeting, indications suggest a rate-cutting cycle may start in the first half of 2026. We view this as a proactive step, not a reaction to a crisis. In the non-recessionary rate cuts of 2019, the S&P 500 saw significant gains the following year, reinforcing a positive outlook. However, with high valuations and the unpredictability of a midterm election year, caution is warranted. The VIX is currently low at around 14, making options premiums relatively cheap. This is an ideal time to consider buying protective puts or using collars to guard against potential market dips. In 2026, gains are likely to stem from earnings growth instead of a rise in earnings multiples. We are also anticipating shifts as we move through the year, with earnings growth disparities between the Magnificent Seven and the broader market expected to shrink. This could create chances for relative value trades, favoring sectors like communication services or undervalued healthcare over underweight real estate. Recent Q3 2025 earnings reports already hint at this shift, a trend we believe will pick up speed. In the coming weeks, the key strategy should be to buy on any market dips. There’s a 15% chance the market could fall to the 6,200-6,300 range due to recession concerns, which would create a strong buying opportunity. Traders might consider selling cash-secured puts at these lower levels to earn income while waiting for the market to pull back. Create your live VT Markets account and start trading now.

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