Bank of America (BofA) has warned that the U.S. stock market's potential for excess returns in 2026 is limited after three consecutive years of double-digit gains and elevated valuations. The bank forecasts the S&P 500 to reach around 7,100 by December next year, a modest 4% increase from Wednesday's close. The index has already surged about 16% in 2025, following gains exceeding 23% in each of the prior two years.
Savita Subramanian, BofA’s head of U.S. equity and quantitative strategy, noted that while corporate earnings are expected to grow at a double-digit pace next year, stock returns will likely be "muted." She drew parallels between today’s concentrated market leadership and high valuations with the dot-com bubble era but emphasized that the outcome will differ. However, she cautioned that the AI-driven rally could face a "growth lull" as Big Tech’s massive AI investments have yet to translate into profits.
The S&P 500 has recently entered a volatile phase, with traders weighing AI-related uncertainties and the Federal Reserve’s unclear rate-cut trajectory. Despite a 5% pullback after hitting record highs in late October, the index rebounded in November’s final week. Currently, the S&P 500 trades at a forward P/E of 22x—19% above its long-term average.
Other Wall Street banks remain bullish: Deutsche Bank’s Binky Chadha predicts 8,000, Morgan Stanley’s Mike Wilson sees 7,800, while JPMorgan and Goldman Sachs target 7,500 and 7,600, respectively—all implying a fourth straight year of 10%+ returns.
Subramanian highlighted potential headwinds: shrinking liquidity, reduced buybacks, rising capex, and less aggressive central bank easing. She outlined an optimistic scenario where earnings significantly outperform, pushing the S&P 500 to 8,500 (up 24%), and a bear case where fading AI hype and macro disappointments could drag it down 24% to 5,500.
While acknowledging bubble risks, Subramanian ruled out a crash, citing lower equity allocations, earnings-backed returns, and tempered speculation compared to 2000. "The differences between today and 2000 far outweigh the similarities," she concluded.
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