As we close out 2025 with the much-anticipated last post of the year, today will be the first of two parts of Cornerstone’s 2026 Market Outlook. In these posts, we’ll analyze a significant amount of fundamental data, underlying market data, and historical data to craft an expectation of what’s possible over the next 12 months.
Unexpectedly to some, the S&P 500* overcame massive spring tariff fears, where the market nearly entered bear territory, only to find itself now on the verge of another all-time high after another big up year. Plus, the Santa Claus Rally is currently further padding some of 2025’s statistical gains.
In the 2026 Market Outlook, we’ll do our best to concisely lay out and explain what we see staying the same. More importantly, we’ll cover how the market’s character may change.
At its most macro level, we think investors will be able to look back on 2026 feeling satisfied after experiencing a fourth straight double-digit return year, although daily conditions could be unusually volatile compared to the previous three years. Interestingly, technical forward-looking indicators also support choppiness, with it concentrated in the first three quarters of next year:
Here are five high level things we expect in 2026:
- A change in sector leadership as markets rotate and broaden.
- Strength in small-cap stocks relative to the S&P 500 due to falling interest rates.
- Value stocks outperforming growth stocks in the first half of the year.
- Increased mid-year volatility from midterm election uncertainty.
- A transition from market value growth being led by price-earnings expansion to instead being led by earnings growth strength.
Before jumping into future expectations, let’s reflect on the three-year anniversary of this bull market that began in October 2022. It’s now up well over 91%.
As our readers know, whiles fears dominated the headline news, we continually pounded the table that the data didn’t support those narratives. Thus, we didn’t buy into the doom loops.
There’s plenty of data to suggest 2026 will be another good year. However, it will probably have different leadership. Now let’s review seven of the most important data points.
1. The Bull Market Turns Three
History tells us when bull markets run for three years, things get even more bullish. At that point, it goes on to last more than six years, posting a cumulative gain of 225%, on average.
With the current bull market up 91%, history says it still has a long way to go:
Not all bull markets last this long. But when the three-year mark is reached, they tend to keep running.
2. Trade Policy Tailwinds
Stocks should keep benefiting from government policy tailwinds in 2026. Specifically, we would point to a continuation of our 2025 fade-tariff-fears thesis. While unpopular at the time, it worked well.
We’ll be staying the course, but for reasons that require me to wear my attorney hat. That is, the first quarter will probably see the Supreme Court rule that President Trump lacked the authority to impose tariffs under 1977’s International Emergency Economic Powers Act. Many justices signaled skepticism because the law requires an emergency and trade deficits don’t appear to meet that legal standard.
If the tariffs are declared illegal, we still expect the administration to combine alternative approaches under different laws. However, any replacement tariffs would likely raise significantly less revenue:
This scenario would boost economic and earnings growth in 2026 for affected U.S. companies, further lowering inflation.
3. Monetary Policy Tailwinds
A boosted economy, higher earnings, and lower inflation would be significant stock market tailwinds. And they’re supported in 2026 by the likelihood of even more potential dovish Fed rate cuts beyond the current priced in expectation of 2.6 cuts:
4. Fiscal Policy Tailwinds
The administration's signature policy bill is starting to provide fiscal tailwinds for the market that are accelerating into 2026.
Individuals will see substantially increasing state and local tax deductions. That fattens consumer wallets. And for businesses, a new provision provides for full expensing of equipment along with research and development costs.
The data is showing these changes have begun to boost demand in phases.
A significant portion of the economic stimulus has come largely from the bill's corporate investment incentives. As a result, corporate spending has surged. And contrary to the popular narrative, it’s not just big tech firms spending:
The spending breadth is bullish because history shows rising capex is usually accompanied by multiple expansions. So, for those concerned about P/E ratios being stretched and priced to perfection, this data should cause some reconsideration.
Remember, markets are forward-looking. Expensive doesn't mean capped. It typically means confidence in the future.
We should prepare for even higher valuations ahead because rising capex means higher productivity margins and earnings earnings earnings down the road. Since 1985 in this type of environment, there's an 81% chance that multiples will expand:
Combining this corporate spending with the upcoming 2026 tax refund season providing consumer relief creates a situation of expected elevated consumer spending power and subsequent economic growth. With the consumer representing roughly 70% of economic activity in the U.S., this extra cash flow is a significant counterpoint to keep “recession-istas” at bay for at least another year.
5. Earnings Earnings Earnings
As we touched on last week, U.S. earnings are on pace to grow 12% year-over-year in 2025. This is quite impressive relative to the 7% long-term average.
Amazingly, this earnings pace is projected to accelerate and broaden in 2026. Much of the expected growth can be attributed to the constructive policy mix mentioned above along with AI-driven efficiency gains.
Analysts expect the S&P 500 to report a 2026 earnings growth rate of 15%:
Let that sink in.
Some may say this is a false flag due to the AI hyperscalers. However, only two of the top five projected contributors to earnings growth for 2026 are expected to come from the Magnificent 7 companies – NVIDIA and Meta*.
This reflects a broadening sector growth environment.
For perspective, the 493 non-Mag-7 companies in the S&P 500 are projected to report earnings growth of 12.5% on their own next year. This is above their estimated 2025 calendar year earnings growth rate of 9.4%:
Accelerated earnings expansion can be supported by a combination of improved efficiency and an expansion of estimated revenue growth. Revenue growth in 2026 is expected to be 7.2%, which is above the trailing 10-year average of 5.3%:
Lastly, 2026’s estimated net profit margin for the S&P 500 is projected to be 13.9%. That’s above the 10-year average of 11%:
If 13.9% is the actual net profit margin, it will mark the highest net profit margin reported since FactSet began tracking the metric, beating the previous record set in 2025.
As long as earnings keep working, stocks will keep pace.
6. Valuations
The bubble narrative is everywhere, but we think it’s misguided (see 5. Earnings Earnings Earnings above). Valuations cannot be looked at alone; they must be analyzed relative to their earnings growth. In other words, strong profit momentum justifies higher valuations.
This is especially true when considering the expectation that per-share earnings growth is finally starting to broaden beyond hyperscalers. As we’ll cover later, this is the beginning of an expected rotation in leadership going into 2026, at least for the first half of the year.
Many point to the P/E expansion of the S&P 500 as being tech- and AI-driven. But reasonable valuations still exist.
The equal-weight S&P 500’s forward P/E is 17.1. Even better, mid-cap stocks are trading at 16.1 times forward earnings and small-cap stocks are at 15.2:
These valuation spreads present new market opportunities we look forward to in 2026.
7. Investor Positioning Contrarianism
We’ve used this popular quote before, but it bears repeating:
“Bull markets are born in despair, mature on skepticism, bloom on optimism, and finally die on euphoria.”
Despite three years of extraordinarily strong equity gains, the latest investor sentiment survey proves we’re nowhere close to widespread euphoria.
The American Association of Individual Investors (AAII) regularly surveys its 2 million members about stocks. Removing weekly volatility and looking at the four-week average of bullish versus bearish investor sentiment since 1987, the median is 7%. That means there are more bulls than bears, on average.
That is not the case today. The latest reading has bulls trailing bears by 6.9%. That's a bottom-quartile historical reading and nearly 14% below the long-term median:
So next time someone tells you froth is everywhere, show them the chart above.
This is a strong historical contrarian indicator because the more bearish sentiment gets, the better odds are for future gains. Why? Because markets tend to peak on optimism, not pessimism.
Obviously, none of this guarantees anything because there are always exceptions. Still, the historical data provides strong reliability. As we all know, history likes to repeat itself.
Specifically, the S&P 500 averages six-month returns of 6.7% after the lowest quartile sentiment readings, like we’re currently seeing:
Setting the Stage
Before we close out part one of our 2026 outlook, let's take a step back to review and set the stage for part two.
Over the last three years, the S&P 500 has enjoyed annualized total returns of more than 21.5%. That’s double the long-term average.
It doesn’t take a genius to know that after a run like that, some higher volatility inevitably will arise. As a little teaser for next week’s continued 2026 outlook, there are headwinds that investors should be prepared to face. But we think equities will rise double digits again next year, though the ride will probably be choppy.
Remember, multiple annual drawdowns of 3%-10% are the norm, not the exception:
Thankfully, we’ve mostly been able to avoid such drops over the last three years.
What is most likely to drive any increase in chop?
We think that’s already unfolding now via the uncertainty over who the AI winners and losers will be. Tech performance dispersion has risen sharply recently. We expect uneven tech performance to mean a more volatile S&P 500 in 2026.
That increases the importance of identifying the sectors, subsectors, and stocks that will lead the winners of the rotation. It’s already begun and should continue into the first half of 2026.
[Answer for next week’s trivia question: Ross]
* Links to third-party websites are being provided for informational purposes only. CoreCap is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. CoreCap is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
*Past performance does not guarantee future results.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
*Cornerstone owns NVDIA and Meta in client accounts. Daniel Milan owns NVIDIA and Meta personally.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial and CoreCap are separate and unaffiliated entities.