After a relatively easy 2024 that saw equity gains without any significant pullbacks, 2025 was a relatively trying year although ultimately successful. Tariff fears sparked by President Trump’s infamous “Liberation Day” drove extreme volatility in early 2025, but negotiations restored confidence and fueled a powerful, broad-based bull market rally. Mega-cap stocks along with the AI narrative led the market and were supported by strong corporate earnings and interest rate cuts. By the end of the year, the S&P 500 had gained 16.4%, recording its third straight year with a double-digit percentage gain.
Looking forward to 2026, would it be too much to ask for a fourth year of double-digit gains? The initial reaction from most investors would reflect much doubt on whether the market could make it 4 years in a row. However, when considering the major drivers of the market, another strong year seems more than possible.
The most salient point for this bull market to continue is also the most basic one as well and that is corporate earnings growth. According to FactSet, S&P 500 earnings are expected to increase 15% in 2026. The simple math here suggests that no multiple expansion is needed for double digit gains, in fact there is some margin for either a disappointment in earnings growth vs consensus or slight multiple contraction.
The next most important catalyst in 2026 is a more dovish Federal Reserve. The Fed began to cautiously cut rates in 2025 and the consensus is for another two rate cuts in 2026. However, the Fed is due for a leadership change in May as Chair Jerome Powell’s term comes to an end. President Trump has made it clear that he believes that rates are too high, and he is going to nominate a Fed Chair who reflects these views. Although the change in chairmanship will happen in May, President Trump is likely to name Powell’s successor in early 2026 and the new Chair’s commentary will likely start having an immediate impact on the market.
The last quarter of 2025 saw a pullback in many of the AI related stocks. Concerns on whether a bubble was forming in these stocks and more importantly, a fear that the pace of data center buildouts would have to slow due to a lack of funding were to blame. While some AI stocks do seem to have attracted speculative money, the largest ones trade at reasonable valuations, especially in light of their expected growth rates. The fear for not being able to fund further expansion is centered on privately held OpenAI. The company has committed to projects that total $1.4 trillion in cost over the next decade and some investors believe that number will have to come down as funding dries up. However, appetite for AI spending from both private credit and private equity has not diminished. Currently, OpenAI is talks to raise $100 billion from a combination of private equity companies, sovereign wealth funds and Microsoft.
The continuation of the AI narrative and a more dovish Federal Reserve are both powerful catalysts but keep your eye on corporate earnings. They more than anything else will ultimately determine if it is more of the same good returns for the stock market at the end of 2026 or if things have changed.
Date of report: January 7th 2026