As traders donned '2026' glasses on the floor of the New York Stock Exchange at the close of 2025, the celebratory mood might be short-lived. Financial analysts are painting a cautious picture for the stock market in the coming year, predicting that the fireworks of the past three years, largely orchestrated by Big Tech, could give way to a period of muted returns and heightened volatility.
The Miraculous 2025 Gain and the Looming 2026 Reality
Looking back, the S&P 500's 16% gain in 2025 seems remarkable given the turbulent backdrop. The year was marked by significant policy swings under President Donald Trump, including tariff announcements that triggered a near bear-market in April. However, the relentless artificial intelligence (AI) narrative, albeit uneven, propelled technology stocks and the broader market to yet another year of substantial profits. This outcome surpassed Wall Street's initial prediction of a 7% rise.
For 2026, however, the consensus among strategists for a 9.6% gain appears optimistic. Historical data since 2015 shows the S&P 500 has only hit that narrow band once, in 2016 with a 9.5% rise. Dean Lyulkin, CEO of Cardiff, a specialty finance firm, suggests moderate outcomes are rare, expecting either disappointing returns or another great year. The prevailing analysis, however, leans towards the former.
The Midterm Election Curse and Economic Overheating Risks
A primary reason for caution is the 2026 midterm election calendar. Historically, midterm years are the weakest in the four-year presidential cycle. The S&P 500 finishes higher only 53% of the time in such years, with an average gain of just 4.6%. This contrasts sharply with the other three years, which see gains 78% of the time, averaging 11%. Much of a president's impactful policies are often enacted and priced into the market in the first year of a term, a pattern seen during Trump's first administration.
Furthermore, the fiscal stimulus and tax cuts passed in 2025 are expected to manifest more strongly in the 2026 economy. The risk, as highlighted by analysts like TS Lombard's Dario Perkins, is not a recession but growth exceeding the modest 1.8% economists predict. Stronger-than-expected growth could rekindle inflation fears, forcing investors to question whether the Federal Reserve will need to embark on a dreaded interest rate tightening cycle or risk its perceived independence by ignoring price pressures.
The AI Trade Gets Complicated: No More Easy Gains
For three years, the sheer momentum of Big Tech and the AI investment theme has masked underlying market weaknesses. This facade began to crack in 2025. While giants like Nvidia and Alphabet outperformed, and others like Broadcom provided support, worrying signs emerged. Investors started scrutinising the massive capital expenditures on AI, punishing heavy borrowers like Oracle and CoreWeave in the final quarter of the year.
This does not signal the end of AI as an investment theme, but it marks a shift to a more complex and selective phase. The easy, broad-based gains are likely over. Stock selection will become paramount as physical bottlenecks emerge and capital flows unevenly. For instance, research from 22V's Dennis DeBusschere noted that in late 2025, companies benefiting from Google's spending outperformed those linked to OpenAI.
While a catastrophic year like the 23% decline pessimistically forecast by BCA Research's Peter Berezin is not the base case, a repeat of the high-teens gains of 2023-2025 also seems improbable. Without a major market drop to act as a springboard for recovery, the path to significant appreciation is narrow. The more likely scenario is a relatively flat year for the S&P 500, potentially ending down around 2%. The silver lining, as analysts note, is that this outlook does not necessarily point to a bear market, but rather a pause and recalibration after a spectacular run.
