By Martin Baccardax
Wall Street is starting to revamp its outlook for stock performance over the second half of 2026, following a distinctly separate set of market returns that dominated the opening six months.
Two of the biggest U.S. investment banks see increasing risks tied to Federal Reserve rate forecasts, an uneasy peace agreement between the U.S. and Iran, and questions over the fate of the artificial intelligence investment wave -- but remain bullish.
Stocks have had a staggering second-quarter comeback this year, with the S&P 500 up more than 13% coming into Tuesday's sharp selloff and the Nasdaq Composite gaining more than 18.8%.
Those gains, which more than reversed the two indexes' respective 4.6% and 7.1% declines over the first three months of the year, were largely the result of a tech and AI investment wave that powered a staggering first-quarter earnings growth rate of around 29%. Those wins offset the impact of soaring oil prices and geopolitical tensions that continue to linger in the Persian Gulf.
Earnings are likely to drive markets higher in the back half of the year. However, tensions between the U.S. and Iran -- and the higher crude and energy prices they've created -- alongside a surprisingly hawkish Fed and a fading domestic consumer will keep gains in check.
"While neither the software, private credit nor geopolitical and energy shocks have yet been large or persistent enough to overturn our core equity thesis, new concerns are emerging into the back half of the year, " said a team of analysts led by Venu Krishna, U.S. equity strategist at Barclays, in a research note.
Markets will tangle with resurgent inflation, AI capital expenditure concerns and a hawkish Fed over the next six months, the team said, but its broader earnings thesis is still likely to take the S&P 500 to around 7800 points by the end of the year.
For Barclays, that's a mere 2% bump from its prior forecast, and suggests a small 5% gain from current levels. But the bank sees more upside by the end of 2027, when it expects the benchmark index to be at 8800 points.
"Upside to 8500 in our bull case would require a stronger translation of AI investment into productivity and margins, alongside a more benign macro path," Krishna and his team wrote. "Conversely, our 6300 bear case embeds a slowdown in AI capex and tighter financial conditions."
LSEG data suggests second-quarter earnings growth of around 22.9%, with an overall tally of $692.4 billion. Further advances of 25% and 23.7% are penciled in for the final six months of the year.
That leaves full-year growth pegged at 25.2%, more than 10 percentage points ahead of the 2025 total, with an early 17% gain forecast for 2027.
Stifel analysts led by Thomas Carroll said in a note that they are similarly "cautious bulls," taking their year-end S&P 500 price target to 7800 points as a "running hot' economy and strong operating leverage drive explosive profit growth."
"However, stock concentration sits at 40-year highs and peaking dispersion signals a rotation out of megacaps into equal-weight indices, " the team said. "Stocks are reflecting our bifurcating 'Tale of Two Economies' view, where booming AI fixed investment is outperforming squeezed consumers."
Both Stifel and Barclays lifted their 2026 S&P 500 earnings estimates to $337 a share, suggesting 20%-plus gains from last year's levels, but both also note disquiet with the level of tech-led concentration in the benchmark.
Around half of the S&P 500's overall market value of $67.1 trillion is captured in just 41 stocks tied to the artificial intelligence boom, according to Jim Bianco of Bianco Research, citing data from JPMorgan.
Krishna at Barclays says that historically low correlations within the S&P 500 sectors suggest idiosyncratic earnings, while noting concentration changes stoked volatility.
"Together, we believe these dynamics have reduced the effectiveness of sectors as an expression of views, reinforcing the shift toward stock selection and narrow thematic exposure," he said.
That leaves investors back to square one, in some respects, in terms of assessing the market's path into the second half of the year. Stock prices reflect earnings growth, paired with the broader economy's strength and measured with a discount rate tied to the Fed.
One of those three pillars -- the first -- seems assured. The others, much less so.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 23, 2026 15:12 ET (19:12 GMT)
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