Market Commentary

February 9, 2026

Even after the S&P 500 Index posted double-digit gains for three consecutive calendar years, investors entered 2026 highly optimistic about equities.  Several investor sentiment indicators are near historical highs, and the Citi Panic-Euphoria model is deep in “euphoria” territory.  BofA’s recent Fund Manager Survey also indicates that average portfolio cash levels are currently 3.2 percent, the lowest reading in the survey’s 25-year-plus history.  While economic strength, investor optimism, and the fear of missing out can push the stock market higher, elevated overall valuations and upbeat earnings projections also leave it susceptible to increased volatility.

With about 75 percent of constituents reporting December/January quarter results so far, the S&P 500 Index’s bottom-up earnings are tracking to year-over-year growth of about 12 percent, better than the consensus forecast of 8 percent.  Year-over-year growth comparisons have been relatively easy over the past three years, but will become much more challenging beginning in the first quarter of 2026.  Encouragingly, company-provided guidance supports the optimistic consensus forecast for 14 percent earnings growth in 2026.  However, the market’s reaction to earnings beats has been relatively muted, suggesting that stocks had already discounted much of the good news.

We anticipate that reduced policy uncertainty, One Big Beautiful Bill Act incentives, easier financial conditions, and deregulation will provide a favorable environment for economic and corporate earnings growth in 2026.  Tax refunds, alone, could lift personal spending by 1.2 percentage points in the first quarter and 0.7 percentage points in the second quarter, with additional upside if individuals adjust their withholdings to reflect the tax changes.  U.S. manufacturing reshoring, higher foreign investment, and supportive policies should also contribute to strength in private fixed investment.

For our latest full Global Investment Outlook & Strategy Update, download the .pdf document.