Quick Bites | Year End Approaches and We Start to Look at 2026…
It has been quite a year, and it isn’t done yet. We started 2025 talking about the approaching recession in the US (it never arrived), went through the tariff “Independence Day” sell-off, hoped for declining inflation and central bank rate cuts, and witnessed the incredible run by Artificial Intelligence stocks and the Magnificent 7.
As we write this note on 8 December, the year to date returns on the S&P 500 are +16%, Nasdaq +22%, the EU50 Index +17%, Japan +26% and the ASX 200 +5%. More surprisingly, perhaps, year to date gold is +60%, silver is +102%, iron ore is +3%, and crude oil has fallen -16%. The AUD is +7% against the USD.
Source: Charlie Aitken, Regal Partners
Tomorrow, we are likely to hear from the RBA that it is content to keep rates at 3.6% until there is clearer evidence that inflation, as measured by the trimmed mean, is likely to fall within the 2-3% target band. That could result in no further cuts until well into next year. On Thursday morning (AEST), we are probably going to see the US Federal Reserve cut rates by 25 basis points, from 4.0% to 3.75%.
There are lots of confusing developments for equity investors to consider. The economic indicators are mixed. President Trump said he will announce his pick for the next Fed chair in January. It is unclear how the market will react if there is a perception that the Fed’s independence has been infringed upon. The US Supreme Court is likely to rule in January that Trump’s tariffs might be unconstitutional; Treasury Secretary Scott Bessent has said that the administration would reimpose them.
Meanwhile, investors are struggling to evaluate the AI story, including whether the earnings of hyperscalers are inflated and whether they will ever achieve a return on the vast sums of capital expended in building up their AI capacity.
Yet despite all the confusion, global markets and some commodity prices are spiking higher. The chart below shows the S&P 500 Index both in market-cap version and equal-weighted (i.e. reducing the influence of the mega-cap tech stocks). Both are surging.
Source: Yardeni Research
Notably in the US, consumer spending has been resilient, and while industrial production generally hasn’t been growing for a while, production is skyrocketing in the technology and defense industries, offsetting weakness in other areas of the economy.
Source: Yardeni Research
In Australia, the recently released September quarter national accounts confirmed that growth in private sector demand is finally picking up. Rising household incomes have eased cost-of-living pressures somewhat and supported spending, despite the rising cost of electricity. Business investment also picked up in the latest quarter, which is positive for future capacity. Labour market conditions have been soft, but not as weak as feared.
Estimates of Australia’s economic growth next year are expected to be around the 2.25% level, but such assumptions are vulnerable to surprises in population growth, labour participation and productivity, the strength of commodity prices and the currency, and much else besides … making forecasts very difficult.
Where to in 2026?
As always, there are an infinite mix of positives and negatives to consider. Here are a few:
- While economic growth isn’t expected to be spectacular, it should be bolstered by fiscal stimulus from earlier cuts by central banks, easier monetary policy as the Federal Reserve continues to cut rates, trade policy that is less of a surprise than in 2025, and more spending in AI capex.
- There will be economic challenges: Inflation is expected to remain above the target rates that most central banks try adhering to. And labour markets are expected to remain soft as companies focus on keeping costs down by turning increasingly to AI.
- Profit margins are expected to remain high. Since the pandemic, companies have adjusted their cost structures aggressively, and this has involved layoffs, consolidating office space, and investment in new equipment, including efficiency-enhancing tools powered by AI.
- Earnings growth should be strong: in the US, consensus calls for an impressive 14% earnings growth in 2026. In Australia, much will depend on the performance of commodity markets and currency impacts.
- The bond market could be “the canary in the coal mine”. Australian 10 year government bonds have risen quite dramatically since October (yield of 4.0975% on 17 October 2025) to be at 4.725% at time of writing.
- Valuations could stay high. Without doubt, markets are expensive, but they might remain so until earnings catch up. Alternatively, valuations could be a headwind, and extended PE ratios could revert to longer term average levels. To a larger extent than usual, returns in 2026 are likely to be primarily driven by earnings growth (or its absence).
We have repeated often that it is almost impossible to predict with any accuracy where the stock market will be in a year. In addition to an infinite number of variables to consider, there are also the “unknown unknowns” (RIP Donald Rumsfeld) i.e. the unpredictable developments that occur along the way.
Here below, we quote a sample of global investment houses to note where they think 2026 might go (plus their targets for the S&P 500, which currently sits at 6,874) … for what it’s worth.
• Capital Economics: 8,000 (as of 19 Nov): “We suspect that the near-term risks are more about perceived demand for AI, or whether capex is excessive. Our forecast for the S&P 500 to rise to 8,000 by end-2026 implicitly assumes that valuations will rise a lot further before the bubble, if there is one, bursts.”
• Deutsche Bank: 8,000 (as of 26 Nov): “In 2026, we see robust earnings growth and equity valuations remaining elevated. We expect a pickup in earnings growth in 2026 to 14% (from 10% in 2025), taking S&P 500 EPS to $320. Corporate cost-cutting and the labour market remain risks, but for administration policies we expect checks and balances in the run-up to the mid-term elections. At 25x, the S&P 500 trailing multiple is well above the historical average (15.3x) but easily explained by favourable drivers: higher payout ratios, higher perceived trend earnings growth, fewer large drawdowns in earnings, and inflation below its long-run average.”
• Bank of America: 7,100 (as of 26 Nov): “Multiple expansion and earnings growth both pushed the S&P 500 up 15% this year. In 2026, earnings will do the liſt (we forecast 14% growth, or $310) with about 10pt PE contraction. 7,100 implies ~5% price return. In 2025, policy uncertainty stymied broadening, and guidance remained muted. But from here, bonus depreciation should pull forward capex, corporate guidance is 2 to 1 bullish, and sentiment is far from euphoric. Liquidity is full blast today, but the direction of travel is likely less, not more – less buybacks, more capex, less central bank cuts than last year, and a Fed cutting only if growth is weak.”
• Barclays: 7,400 (as of 19 Nov): “1) The AI story keeps rolling, despite recent volatility sparked by capex and financing concerns, as compute demand continues to scale and monetization grows to encapsulate paid users, ads, and enterprise/agents; 2) Fed cuts are constructive for valuations, especially for cyclical/growth equities; 3) easier financial conditions support healthy deal activity; 4) worst is likely past on the tariff front, while US fiscal profile has improved YTD + modest boost from OBBBA (One Big Beautiful Bill Act); 5) US ‘26 GDP likely sluggish vs. LT trend but better than most DMs, while US equities continue to lead RoW in EPS growth, margin expansion and revisions.”
• Wells Fargo: 7,800 (as of 21 Nov): “Our target is driven by our PRSM framework (Profits, Rates, Sentiment, Macro). Profits: +14% YoY for 2026E EPS and +13% for 2027E; Rates: negative due to tight liquidity, but we expect a Fed boost; Sentiment: contrarian Buy signal triggered (SPX +7.5% N3M on avg. & 90% hit rate); Macro: turned positive for the first time since Jan 2025. The overall PRSM score of 0.2 implies +12% return over N12M.”
• Morgan Stanley: 7,800 (as of 17 Nov): “The capitulation around Liberation Day marked the end of a three-year rolling recession and the start of a rolling recovery. We believe that we’re in the midst of a new bull market and earnings cycle, especially for many of the lagging areas of the index. We think that most of the elements of a classic early-cycle environment are with us today — compressed cost structures that set the stage for positive operating leverage, a historic rebound in earnings revisions breadth, and pent-up demand across wide swaths of the market/economy that were mired in the preceding rolling recession.”
A relatively disappointing one year chart for the ASX 200.
Source: Trading Economics