The S&P 500 Is Expected to Rally 12% This Year

Goldman Sachs Research forecasts US stocks to post their fourth-straight year of gains in 2026. Earnings growth is likely to drive the rally amid a solid economy and continued easing by the Federal Reserve.

Our strategists project the S&P 500 to produce a 12% total return in 2026 (as of January 6), compared with 18% last year and 25% in 2024. They expect earnings per share (EPS) to increase 12% in 2026 and 10% the following year.

“Nonetheless, as concentration has risen, so has the idiosyncratic risk embedded in the S&P 500 and investor dependence on the continued strength of the largest US companies,” Snider adds.

Are US stocks in a bubble?

“The US equity market’s current combination of elevated valuations, extreme concentration, and strong recent returns rhymes with a handful of overextended equity markets during the last century,” according to Goldman Sachs Research. But even though some of the most notable financial market booms over the past 100 years were followed by steep declines in equities, some features of those episodes are missing today.

For example, speculative trading activity rose sharply in 2025 but remains well below the highs of 2000 or 2021. Broad-based equity flows have recently been subdued.

In contrast with the booms of 2000 and 2021, IPO activity in 2025 was modest, although Goldman Sachs Research expects volumes to increase in 2026. Leverage on corporate balance sheets is rising but remains low relative to history.

What are the biggest risks to the US stock market in 2026?

The biggest risks to an equity market rally are weaker than expected economic growth or a hawkish shift by the Fed. “Neither appears likely in the near future,” Snider notes.

Goldman Sachs Research forecasts US GDP to grow 2.7% this year, and our economists expect the Fed to make two rate cuts of 25 basis points each (as of January 6).

Historically, the S&P 500 P/E multiple has risen by an average of 5%-10% during 12-month periods of stable or accelerating US economic growth; has risen by a similar 5%-10% magnitude during periods of non-recessionary rate cuts; and has increased by roughly 10%-15% when both conditions occurred simultaneously, according to Goldman Sachs Research.

What does AI spending mean for US stocks?

Also among the key risks to stock market returns are the trajectory of AI capex, returns on that investment spending, and the impact of AI adoption. The largest public hyperscale tech companies had roughly $400 billion of capital expenditures in 2025, nearly 70% more than 2024.

Goldman Sachs Research expects AI investment to continue to increase this year. But as capex is on track to reach 75% of cash flows—similar to tech company expenditures in the late 1990s—spending growth going forward will increasingly rely on debt funding.

“History shows a mixed track record regarding the eventual success of first movers in periods of major technological innovation,” Snider writes. “While odds are good that some of today's largest companies achieve that success, the magnitudes of current spending and market caps alongside increasing competition within the group suggest a diminishing probability that all of today’s market leaders generate enough long-term profits to sufficiently reward today’s investors.”

“In our view, the AI trade in 2026 is likely to be defined by a deceleration in investment spending growth, a rise in AI adoption, and consequent rotations within the AI trade rather than widespread AI exuberance or gloom,” he notes.

Five investment themes for 2025

While AI will remain a dominant theme, investors have a host of opportunities for stock picking to generate benchmark-beating returns, Snider writes. Goldman Sachs Research highlights five investment themes for the year ahead:

Mid-cycle acceleration: In early 2026, accelerating US economic growth alongside Fed easing should boost cyclical sectors of the equity market. Those sectors are likely to include stocks exposed to middle-income consumers and firms tied to non-residential construction.

The great re-leveraging: Corporate leverage is low but will continue to rise this year. In addition to creating tailwinds for companies in the lending ecosystem, another consequence should be a premium for stocks that maintain strong free cash flows and a focus on returning cash to shareholders.

The AI future is now: Increasing corporate AI adoption and decelerating growth in AI investment should expand the focus of the AI trade from the direct beneficiaries of the AI infrastructure build-out. The next phases are predicted to involve companies boosting efficiency through the use of AI and companies with revenues benefiting from that adoption. Goldman Sachs Research also expects increased focus on the interaction of AI with the physical world via robotics and automation.

The dealmaking comeback: Rebounding IPO volumes, surging M&A activity, and continued equity market appreciation are expected to facilitate a recovery in private equity activity in 2026. This should, in turn, contribute to a rebound in stock valuations for alternative asset managers.

The search for value: Wide valuation spreads and a favorable macroeconomic outlook bode well for value as a factor (stocks trading at lower prices relative to profitability and earnings) in early 2026, following a surprisingly strong 2025.

This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.