Three major challenges for the US stock market in 2026: profit growth, AI returns, and Fed policy.

The US stock market is about to end its three-year streak of double-digit percentage gains. In order to continue the upward trend in 2026 (achieving growth for a fourth consecutive year), it will face a challenging situation, requiring strong profit growth from companies, the Federal Reserve to maintain a moderate policy direction, and a continued increase in investment in the field of artificial intelligence. Since the start of the bull market in October 2022, the US stock market has benefited from optimistic prospects for artificial intelligence, interest rate cuts, and continuous economic growth, despite market fluctuations due to recession concerns. In that year, the stock market experienced roller-coaster-like fluctuations, with prices falling sharply after the Trump administration announced higher-than-expected tariffs in April. The S&P 500 Index had risen by over 17% as of the last few trading days in 2025, increased by 23% in 2024, and rose by 24% in 2023. Sam Stovall, Chief Investment Strategist at CFRA, stated that in order to achieve strong double-digit returns next year, the market needs to be "all set." Stovall pointed out: "There are many negative factors that lead me to believe that, while we might have an unexpectedly good year ahead, I don't think it will be another great year." He predicted a target of 7,400 points for the S&P 500 Index by the end of 2026, an increase of about 7% from the current level. Many market strategists expect a strong market performance in 2026, with some predicting targets for the S&P 500 Index to increase by over 10%, including Deutsche Bank Aktiengesellschaft's target of 8,000 points, which is about 16% higher than the current index level. Will profit and artificial intelligence boost the market? Bulls in the stock market are optimistic about the earnings prospects of US companies. Tanguy Dillon, Head of Income Research at the London Stock Exchange Group (LSEG), stated that earnings for companies in the S&P 500 Index are expected to grow by over 15% in 2026, on the basis of a 13% increase in 2025. Analysts expect that earnings growth will no longer be limited to a few tech and related giants, but will be driven by a broader range of companies. This is because fiscal stimulus policies and loose monetary policies provide strong support for the economy and consumer spending. Dillon of the LSEG pointed out that seven highly valued companies in the market, including NVIDIA Corporation (NVDA.US), Apple Inc. (AAPL.US), and Amazon.com, Inc. (AMZN.US), are referred to as the "Fabulous Seven Giants." In 2024, these seven companies saw a profit growth rate of 37%, while the rest of the companies in the S&P 500 Index only saw a profit growth rate of 7%. By 2026, this gap is expected to narrow significantly: the earnings of the top seven companies by market capitalization are expected to grow by 23%, while the earnings of the rest of the companies in the index are expected to grow by 13%. "If the earnings growth of the other 493 stocks in the S&P 500 Index can improve - we have already seen some signs of that - it will certainly help the market achieve double-digit returns next year," said Christina Hooper, Chief Market Strategist at Invesco. Investors point out that in the current context where stock valuations have reached historical highs and further upside potential is limited, earnings growth will be the core factor determining market performance. One of the important drivers supporting valuations is the strong optimism in the market for artificial intelligence technology - this is reflected not only in the huge capital investment in AI infrastructure, but also in the strong expectations for its commercial applications. However, recently, doubts about the return on AI-related capital expenditures have increased, leading to pressure on the performance of tech stocks and the AI concept sector, which may continue to dominate industry valuation logic in 2026. Jeff Buchbinder, Chief Equity Strategist at LPL Financial, stated: "If companies start cutting back on previously anticipated capital expenditures, and the market loses confidence in the returns from investing in artificial intelligence... then this year's performance could remain flat or even slightly decrease." Dovish Federal Reserve and mixed historical signals Investors indicate that another key factor driving the strong performance of the stock market is a moderate economic slowdown, paving the way for subdued inflation and further interest rate cuts, but not plunging into a recession. Federal funds futures show that investors expect at least two more interest rate cuts in 2026, each by 25 basis points, after a cumulative 175 basis point cut in 2024 and 2025. Yang Yu Ma, Chief Investment Strategist at PNC Financial Services Group, Inc., stated: "One of the factors I most look forward to may be the Federal Reserve maintaining a dovish stance." Investors are watching the expected decision on the appointment of the Federal Reserve Chairperson by US President Donald Trump in early 2026, seeing it as a signal that the Federal Reserve will lean more dovish, but also worrying about its independence being tested. Historical data provides a mixed conclusion on the potential returns for 2026. On the positive side, according to LPL Research, of the seven bull markets that have lasted for four years since 1950, the average increase in the fourth year was 12.8%, with six of them achieving positive returns for the whole year. However, in US midterm election years, the stock market performance tends to be poor due to the uncertainty brought by the election of a new Congress. According to Stovall of CFRA, the average increase in the S&P 500 Index in midterm election years is only 3.8%, compared to an average increase of 11% in the other three years of a president's term.