AI spending, business profits, dovish Fed! US stocks "four consecutive gains" cannot be without three major supports

The US stock market ended 2025 with double-digit percentage gains for the third consecutive year. The current bull market in US stocks, which began in October 2022, has been driven by optimism towards AI, declining interest rates, and continued growth amid concerns of economic recession. The S&P 500 index rose by over 16% in 2025, following a 23% increase in 2024 and a 24% increase in 2023. However, achieving another impressive performance in 2026 for the fourth consecutive year may be a challenging task, requiring strong corporate earnings, a dovish stance from the Federal Reserve, and continued robust spending on artificial intelligence (AI). Many market strategists expect a strong performance from US stocks in 2026, with some projecting a target point for the S&P 500 index representing over a 10% increase, including Deutsche Bank's target of 8000 points indicating a roughly 17% increase. CFRA's Chief Investment Strategist Sam Stovall stated that to achieve another year of strong double-digit percentage returns, the market would need "all cylinders firing." Stovall's target price for the end of 2026 is 7400 points, suggesting an 8% increase from current levels. He said, "Multiple headwinds lead me to think that while we may ultimately end up with an unexpectedly good year, I don't believe it will be another stellar year." Can corporate earnings and AI continue to provide support? With US stock valuations already at historic highs and limited upside potential, earnings growth will be another key factor determining market performance. Bullish market participants point to optimistic prospects for US corporate earnings. Tajinder Dhillon, Head of Earnings Research at the London Stock Exchange Group (LSEG), stated that earnings for S&P 500 index constituent companies are expected to grow over 15% in 2026, following a 13% increase in 2025. Meanwhile, earnings growth driven by a broader range of companies beyond a few tech giants will be supported by fiscal stimulus policies and loose monetary policy. Dhillon noted that in 2024, the profit growth rate of the "FAAMG" stocks (Facebook, Apple, Amazon, Microsoft, Google) reached 37%, while the rest of the companies in the S&P 500 index only grew by 7%. By 2026, this gap is expected to significantly narrow with forecasted earnings growth of 23% for the top seven companies by market value, compared to 13% for the remaining companies in the index. Kristina Hooper, Chief Global Market Strategist at Invesco, also stated that if earnings growth for the other 493 stocks in the S&P 500 index can improve as has been observed in some instances it will certainly help the market achieve double-digit returns next year. Another major support for US stock valuations comes from enthusiasm for AI, including massive investments in infrastructure and potential strong demand for its applications. While previous concerns about returns on AI capital expenditures have impacted tech stocks and other AI-related stocks, this theme is likely to remain crucial in 2026. Jeff Buchbinder, Chief Equity Strategist at LPL Financial, stated, "If companies start cutting back on previously guided capital expenditures and confidence in the returns from AI investments wanes... the market may just tread water or even experience a slight decline." Dovish Federal Reserve, mixed historical signals, and uncertainties Investors believe that another key factor for a strong year in the stock market is the need for the economy to slow moderately to push inflation back down and pave the way for further rate cuts, without weakening to the point of recession. Federal funds rate futures indicate that investors expect the Federal Reserve to cut rates by at least two 25-basis-point cuts in 2026 after a cumulative 175-basis-point cut in 2024 and 2025. Yung-Yu Ma, Chief Investment Strategist at PNC Financial Services Group, stated, "I think the most critical driver might be whether the Fed can maintain a dovish stance." Investors are watching for the announcement of the Federal Reserve Chair by US President Trump in early 2026, hoping for a more dovish signal from the central bank, but also concerned about its independence possibly being tested. Historical data provides mixed signals for potential returns in 2026. On one hand, LPL Research data shows that of the seven bull markets since 1950 that successfully entered their fourth year, the average return in the fourth year was 12.8%, with six achieving positive annual returns. On the other hand, US midterm election years have historically performed poorly. Due to the political uncertainty brought by new congressional elections, the average increase in the S&P 500 index in midterm election years is only 3.8%. Additionally, there are many potential "black swans" to consider. For example, after extreme volatility in early 2025, the importance of tariff issues has diminished, but Yung-Yu Ma pointed out that US-China relations, as the world's two largest economies, could still influence the stock market in 2026. He said, "In fact, there is a possibility of breakthrough progress between the US and China that the market has not fully priced in, which could be a positive catalyst."