2026 Market Outlook: 6 Growth Drivers, S&P 500 +14%
Seekingalpha.com, Dec. 19, 2025 8:00 AM ET
The market outlook for 2026 is positive, considering the large tax refunds about to drop, deregulation, and lower inflation.
Despite AI bubble fears, and previous concerns about recession, the S&P 500 has hit record highs.
Risks include more geopolitical turmoil, rising unemployment and the choice of Fed Chairman.
In this article, I outline 6 key growth drivers that will fuel the S&P 500 to new highs.
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Investment Thesis for 2026
As we are heading into 2026, the stock market is healthy and I recommend a Buy rating on the S&P 500 Index (SP500, SPY, VOO), projecting it hit a record high of 7,750 based on current trends and positive growth drivers. This represents an increase of 14% over the current index of 6,797 as of December 18, 2025.
The most important factors that influence my price target are:
Higher than usual tax refunds will drive consumer spending.
Deregulation will improve corporate revenue growth and profitability.
Tariff volatility will subside. President Trump is meeting with China in the Spring.
Lower inflation and a push to make things more affordable.
AI will improve productivity, creating breakthrough technology.
Housing market will thaw, unlocking consumer spending.
The U.S. economy remains in expansion mode, with the S&P 500 up 15.6% year to date. Concerns about a recession have come and gone, now the fear is overspending on Artificial Intelligence (AI). Massive spending behind AI has prompted many analysts to raise red flags about an AI bubble, which is feared to pop, leaving many high valuation stocks to plumet in a winner take most event.
The consumer has proven to be resilient. Despite continued inflation and the ebbs and flows of tariff impact, consumer spending continues. This is not surprising as unemployment is still low at 4.6%.
We are currently in a low hiring, low firing environment where many companies are hedging against the future, concerned that if they reduce headcount, they won’t be able to handle the flow of work in the future. The current administration has reduced the workforce with deportations and stricter immigration controls. For some consumers at the upper end of the wealth spectrum, the wealth effect from a record high stock market supports higher spending.
Not everything is great. Inflation has been hurting lower income families, as is the weak housing market, which has made it both difficult to sell a house or have the confidence to lock in a 30-year mortgage. The Fed has cut twice, and it looks like a third cut is possible in January, when the President will announce his new Fed Chair pick.
While it is true that tech valuations are high, in my opinion, there is no AI bubble that threatens to pop and take down the stock market. Consider first the companies involved in the AI race, which include Microsoft (MSFT) and OpenAI (OPENAI), Alphabet/Google (GOOG), Amazon (AMZN), Meta (META) and even IBM (IBM). They are all well-established solid companies that continue to grow earnings and will survive no matter what happens. This is very different from the Dot-com bubble where companies that weren’t profitable met their doom as investors realized their business model was flawed.
As a young marketing executive back in the 2000’s I remember watching commercials on TV for companies I had no idea what they did, nor did I remember their name at the end of the commercial, which puzzled me. Why spend millions on the Super Bowl with ineffective marketing? Our current times are very different. AI is changing our life. Just consider what one can do with ChatGPT. What in the past could take hours of research, now just takes one well worded sentence.
Tech sector price earnings ratios today are below the 2000 Dot-com bubble (Microsoft is trading at a P/E of 29). Keep in mind some of those Dot-com’s didn’t have earnings. Earnings growth is positive today vs. the cash burn of the 2000s.
The world is historically at war. This year is no different. The Ukraine/Russia war continues but has shifted to into a period where negotiation may produce changes. European countries are ramping up weapons and preparing for conflict with Russia. In Israel, the war met a turning point where the Israeli hostages were returned, and the fighting officially stopped. However, retaliation from Iran and supporters of Palestine has begun. In the Middle East, Saudi Arabia is focused on investing in clean energy and technology, away from fossil fuels. It is also considered a peace maker by being a middle man with the Arabian countries and the U.S. In my view, this approach will pay off handsomely for Saudi Arabia over the long run.
Going into the new year, the U.S. has very strong drivers that will continue to grow the U.S. economy which will be reflected in a more valuable stock market:
Higher Income Tax Refunds – the new tax cuts (approved 7/4/2025) are expected to return $191 billion in tax refunds in early 2026. Based on history, consumers will spend, not save the refunds. This will have a positive impact on economic growth.
Deregulation – the current administration has made a point to reduce regulation, which is a pro-business strategy, which tends to increase company revenues and expand the GDP. Oil companies for example have experienced relief over so many restrictions in 2025.
Relief from Tariffs – Much of the tariff volatility has subsided and will be reduced further. The top concern is China. President Trump is planning a trip to meet with President Xi in the Spring. The fact that they are meeting is reducing anxiety, in my view.
Lower Inflation – the December CPI read 2.7% which was a surprise to all. As the effects of Covid spending and tariff policies are reduced, inflation will become less of a concern in my view.
Artificial Intelligence Spending Improves Productivity – similar to how tractors transformed farming over the use of horses, AI has the potential to improve the productivity of the nation. Whether its more innovative medicines found by pharmaceutical companies, or personal coaching that makes people healthier and more productive, the impact of AI will drive economic growth.
Housing Market Will Become Unfrozen – as rates go lower, the housing market will experience a boost as stuck homeowners with low-rate mortgages are convinced to move, and young buyers find mortgages that are more affordable. The current administration is promising to do more in helping homebuyers, potentially with incentives to Fannie Mae (FNMA) and Freddie Mac (FMCC).
Going into 2026, the main risks I see are any of the growth drivers not panning out. For example, when Presidents Trump and Xi meet in the Spring, the outcome could change the prospects for the year. While we expect inflation to continue falling, a reversal in the tariff policy could change this.
Geopolitical risks are a concern at the macro level. While I expect the war with Ukraine to slow down, it is possible that Russian President Putin escalates the situation, which may impact the Euro community, potentially drawing the U.S. into additional spending. Risks with Iran and Palestine supporters retaliating against Israel and the U.S. could pose additional shocks, whether its terrorism at home or additional fighting in the Middle East.
Finally, I see a risk in the change of the Chair of the Federal Reserve. Depending on the choice, the markets could experience volatility. The best scenario is that a person with a reasonable background for the job is selected, and they talk about the independence of the Fed.
I project 2026 will be another year of solid growth with the S&P 500 rising to a high of 7,750, a +14% increase year on year. I rate the index a Buy based on 6 main growth drivers.
First, tax refunds are expected to put an additional $191 billion in consumer’s hands, which they typically spend. Deregulation among certain industries will provide growth potential and lower costs. Tariff policy will subside, ending in lower tariffs as a results. This reduction will help lower costs and increase consumer spending.
AI will improve productivity in certain job sectors, which will improve efficiency and productivity of business, which will translate into higher growth. Finally, the housing market will thaw from its freeze, with lower mortgage rates and potentially government assistance with Freddie Mac and Fannie Mae.
Risks include the main 6 growth drivers not materializing and geopolitical risks, such as continued or new wars.
Overall, I expect the stock market to continue its bull run, achieving new record highs.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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