AI Spending and Earnings Growth Poised to Drive Stocks Through 2026
New York, Friday, 26 December 2025.
Strategists target an S&P 500 rise to 8,100, fueled by over $500 billion in projected AI capital expenditures, extending the three-year rally despite historic valuation levels.
A Resilient Bull Market Faces the Valuation Test
As investors close the books on 2025, the financial landscape is defined by a bull market that has demonstrated remarkable stamina since its inception in late 2022 [1][6]. Despite a volatile start to the year, the rally stabilized, delivering a third consecutive year of double-digit gains for the S&P 500 [6]. As of December 24, 2025, the benchmark index has risen approximately 18% year-to-date to reach roughly 6,932, building upon returns of 24% in 2023 and 23% in 2024 [1]. The technology-heavy Nasdaq 100 has led the charge with a 22.3 percent gain in 2025, while the Dow Jones Industrial Average followed with a 14.5% increase to close at 48,731 [1]. However, as the market pivots toward 2026, analysts are scrutinizing whether this momentum can withstand historically high valuations; the 12-month trailing P/E ratio for the S&P 500 sits at 31, its highest level since 2020 [1].
The $500 Billion AI Gamble
The primary engine for this extended rally remains the unprecedented investment in artificial intelligence. Market leadership is shifting from a consumption-driven model to one fueled by capital expenditures, a transition highlighted by Savita Subramanian, head of US Equity Strategy [1]. For 2026, hyperscalers—large-scale cloud service providers—are projected to log combined capital expenditures exceeding $500 billion, with the vast majority allocated to AI infrastructure [6]. This massive spending is expected to support earnings growth across the sector, with the S&P 500 projected to grow earnings by 15% in 2026, an acceleration from the roughly 12% growth seen in 2025 [6]. While this spending underpins optimistic forecasts, skeptics like Peter Berezin of BCA Research warn that the incremental revenue required to justify such massive outlays must be enormous, suggesting these levels may not be sustainable [6].
Divergent Forecasts for 2026
Wall Street’s outlook for the coming year reflects a divide between optimism based on corporate resilience and caution regarding asset pricing. Oppenheimer strategists have set an aggressive target for the S&P 500, predicting it will reach 8,100 by the end of 2026, representing a potential gain of approximately 16.849 percent from late December 2025 levels [1]. Their thesis relies on persistent economic resilience and corporate results that have consistently beaten expectations throughout 2025 [1]. Conversely, Bank of America maintains a more conservative stance, projecting a year-end target of 7,100, which implies a modest gain of just 2.6%, despite anticipating robust earnings per share (EPS) growth of 14% [1]. This divergence suggests that while earnings may rise, valuation compression could limit stock price appreciation.
Macroeconomic Headwinds and Policy Impact
Beyond corporate balance sheets, the broader economic environment in 2026 will be shaped by legislative and monetary policy. Economic growth in the coming year is expected to be bolstered by the “One Big, Beautiful Bill Act” (OBBBA), signed into law by President Donald Trump in July 2025 [6]. However, the labor market is showing signs of cooling; in November 2025, the unemployment rate rose to its highest level since 2021, a trend BCA Research identifies as a core issue for investors [6]. On the inflation front, economists project a rate of around 3% for 2026, with income growth expected to slightly outpace it at 3.6% [5]. In the housing sector, price pressures are anticipated to ease slightly, with nominal home prices forecast to rise between 1% and 2%, while real prices may actually fall as inventory levels in some markets surpass 2019 levels [5].
Navigating the Late-Cycle Landscape
As the bull market matures, the distinction between growth and value sectors is becoming more pronounced. Large-cap growth stocks, including heavyweights like NVIDIA—which surged 40% in 2025—are currently trading at 150% of their typical valuation norms [1][4]. In contrast, small-cap and mid-cap value stocks remain closer to historical averages, trading between 105% and 108% of norms [4]. While the consensus among experts points to a solid 2026, the growing risks associated with high valuations and a softening labor market suggest that volatility will remain a constant companion [6]. Investors are advised to watch for Federal Reserve actions in response to these economic signals, as rate cuts in 2026 could be the catalyst needed to sustain the rally if a recession is avoided [6].