Many factors point to a strong year for the stock market in 2026. First, equities generally perform well. There is a significantly higher probability—around 75%—that markets rise in any given year rather than fall. In fact, and based on historical evidence since 1970, expecting a ten per cent return would not be particularly optimistic. Moreover, accommodative monetary and fiscal policy, together with a continuation of the AI hype, could provide additional support for the stock market. So, is it a done deal? No, because dark clouds gather on the horizon. I explore these risks in my next analysis.
As we head into a new year, what better way to start than by focusing on some of the positive developments that could give your stock portfolio a boost in the year ahead. That’s what this post is all about.
In my next post, I’ll balance things out with some more sobering thoughts on what could go wrong for the stock market in 2026.
Global stock markets
Let’s begin by looking at the historical evidence. Over the long term, stock markets tend to go up — and by quite a lot. Since 1970, the average annual return from global shares has been 11.5%. That’s an impressive performance.
Another way to look at this is to imagine investing $100 in the stock market on 1 January 1970 and then doing nothing at all. By 29 December 2025, that investment would have grown to $21,244. The stock market really can make you rich.
Of course, returns are not 11.5% every single year. Some years are much better, others much worse. Figure 1 shows the annual return from global stocks for each year since 1970.
Figure 1. Annual returns from the global (developed markets) equity portfolio; MSCI World, in USD, 1970-2025. Source: Datastream via Refinitiv and J.Rangvid.
As the figure illustrates, the stock market can also make you poor. For example, if you had invested $100 on 1 January 2008, you would have lost around 40% over the course of that year.
Returns swing around the long-term average — sometimes by a wide margin. The standard deviation of annual returns is about 17%. If we (roughly) assume that returns are normally distributed, this implies that annual returns have exceeded 28.5% (11.5% + 17%) in about one out of every six years. At the same time, returns have been below –5.5% (11.5% – 17%) in roughly one out of six years as well.
How often has the stock market been negative? Over the 56 years from 1970 to 2025, returns were negative in just 13 years, or about 23% of the time. In other words, stocks have provided you with positive returns in roughly three out of every four years.
This blog post is about expected returns in 2026. What the historical numbers tell us is that it has usually been a sensible starting point to expect stocks to rise. Put bluntly, you are much more likely to look smart by predicting that returns will be positive – there is roughly a 75% chance you will be right – than by predicting that stock markets will fall.
That is an important baseline when thinking about next year’s returns. Saying that stock market returns will approach 10% in 2026 would be in line with what stocks have delivered historically.
Predictions for the S&P 500
Whether we like it or not, US equities play a dominant role in the performance of global portfolios; US stocks make up more than 70% of developed equity markets, as measured by the MSCI World index. That is why newspapers and investment houses devote so much attention to developments in the S&P 500.
Today, the S&P 500 stands at around 6,900. A recent Financial Times survey found that Wall Street banks expect the index to end 2026 somewhere between 7,100 and 8,000, with an average forecast of 7,530 (link). That implies a gain of roughly 9%.
Such forecasts are often described as bullish. But are they really? Not when judged against historical experience.
When discussing where the S&P 500 will end up at the end of the year, we are talking about changes in the index level, not the total return including dividends. Since 1970, the S&P 500 has risen by about 9.5% per year on average. So, predicting an increase of around 9% over a year simply reflects the historical norm.
Figure 2 shows the annual change in the S&P 500. It looks remarkably like the pattern of returns for the global stock market shown in Figure 1. In particular, for the S&P 500, like for the MSCI World, the market was negative in 13 out of 56 years, implying a greater than 75% probability that the market rises in any given year.
Figure 2. Percentage annual change in the S&P 500. Source: Datastream via Refinitiv and J.Rangvid.
Once again, it is important to remember what is being shown in the figures. Figure 1 shows the total return on the global stock market. Figure 2, by contrast, shows only the annual price change — or capital gain — of the S&P 500. To arrive at the total return on the S&P 500, we also need to include dividends.
Since 1970, the dividend yield on the S&P 500 has averaged around 3% per year. Adding this to the average annual price increase means that the S&P 500 has delivered more than 12% per year on average since 1970.
The last twenty years
You might argue that going all the way back to 1970 is not representative when thinking about what will happen in 2026. After all, many things are very different today. That may be true.
What happens if we focus only on more recent history? If we start in 2005 and look at the past twenty years, the picture does not change much. The MSCI World has still delivered roughly 11% per year on average.
The same is true for the S&P 500, which has risen by about 10% per year over the past two decades (before dividends).
So, predicting that the stock market will rise by, say, 8–10% in 2026 — roughly what many Wall Street banks are forecasting — is simply a statement that markets will behave much as they have done on average for many decades.
What could generate a bull market?
A true bull market would be one that delivers returns well above those of a normal year. And, encouragingly, there are several factors that could point in that direction for 2026.
Easy monetary policy
The Federal Reserve cut interest rates three times in the autumn of 2025. A simple rule of thumb I often use is that a one percentage point cut in the policy rate tends to raise GDP by roughly one percentage point after about a year. If that rule holds, we should begin to see the positive effects of lower rates during 2026.
Stronger economic activity supports corporate earnings, and higher earnings ultimately show up in higher share prices.
In addition, markets expect the Fed to continue cutting rates in 2026. Figure 3 shows the implied target rate probabilities for the 9 December 2026 FOMC meeting — the final meeting of the year.
Figure 3. Target rate probabilities for 9 December 2026 meeting, downloaded on 29 December 2025. Current Fed Funds Rate target is 3.50 – 3.75%. Source: CME Fedwatch and J.Rangvid.
The current Federal Funds target range is 3.50–3.75%. Market pricing suggests that there is only about a 5% probability that rates will still be at this level at the end of 2026. Put differently, investors see a 95% chance of at least one rate cut over the course of 2026.
More likely, the market expects two 25-basis-point cuts during the year, Figure 3 reveals. If that happens, monetary policy would become even more supportive, providing additional stimulus to both the economy and the stock market.
Easy fiscal policy
Fiscal policy is also likely to be supportive in 2026. The Reconciliation Act (formerly known as the “One Big Beautiful Bill Act”) is set to boost household incomes.
While higher-income households are expected to benefit more in absolute and relative terms, the policy raises incomes across the board. In other words, everyone gains — as illustrated in Figure 4.
Figure 4. Annual change in household resources in 2026 as a percentage of income. Ten income groups (deciles). Source: CBO (link) and J.Rangvid.
The increase in household income should support consumer spending, helping to lift economic activity and, in turn, stock prices.
It is worth noting that the macroeconomic impact will be more muted than if income gains were more evenly distributed. Because higher-income households receive the largest boost, the effect on consumption is smaller than it would be if lower-income households benefited more. This is because high-income households tend to spend a smaller share of any additional dollar they earn — their marginal propensity to consume is lower.
That said, Figure 4 shows that households across the entire income distribution benefit from the Act. This broad-based increase in incomes should still be positive for the economy — and therefore for stocks.
Corporate profits also stand to gain. Corporate tax rates are falling, and estimates from Morgan Stanley suggest that companies will save around $129 billion in corporate taxes over 2026 and 2027 (link). Higher after-tax profits, all else equal, translate into higher share prices.
But how large will the impact of fiscal policy ultimately be? The Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution produces a Fiscal Impact Measure (FIM), which captures the effect of fiscal policy—including taxes, spending and tariffs—on US economic growth. Figure 5 presents this measure, decomposing the overall fiscal impact into its underlying components.
Figure 5. Impact of fiscal policy on US GDP growth, decomposed into contributing factors. Source: Hutchin Center and J.Rangvid.
As shown in Figure 5, fiscal policy is set to deliver a substantial boost to GDP in the first quarter of 2026. Specifically, fiscal measures are in total projected to raise GDP growth by 2.3 percentage points in Q1 2026, representing a very significant impulse to the US economy.
A large share of this effect reflects the end of the government shutdown, which is estimated to have reduced US GDP growth by around 1.5 percentage points in the final quarter of 2025, but will add 2.2 percentage points to GDP growth in Q1 2026. In addition, the One Big Beautiful Bill Act (OBBBA) is expected to lift GDP growth by almost one percentage point in Q1 2026 and to continue providing meaningful stimulus thereafter.
Offsetting this support, tariffs and heightened uncertainty are likely to weigh on GDP growth, consistent with my previous analysis of tariffs’ negative effect on the US economy in my last post (link). I will return to this downside risk in my next post, which focuses on the bear case for equities.
Overall, however, fiscal policy is poised to deliver a significant boost to economic activity—particularly in the first quarter of 2026—creating a broadly supportive backdrop for equity markets.
AI investments
AI-related investment was a major driver of US economic growth in 2025. In fact, without the surge in AI spending, the US economy would have slipped into recession in the first half of the year, OECD calculates (link). Instead, strong investment helped keep growth positive.
Large-scale AI investment is expected to continue in 2026. Goldman Sachs estimates that AI-related capital spending could exceed $500 billion next year — and potentially more (link). With total non-residential investment running at around $4.3 trillion, this represents a substantial boost to economic activity, corporate earnings, and, ultimately, share prices.
Strong investment flows, combined with widespread optimism about AI, could continue to push up the valuations of AI-related companies. As we have seen over the past couple of years, gains in these stocks can spill over into the broader market.
Beyond the hype, there is also the possibility that some of the promised productivity gains from AI begin to materialise in 2026. Even modest efficiency improvements would raise the long-term value of many companies, not just those directly involved in AI.
Conclusion
Many factors point towards a strong stock market year in 2026.
First and foremost is the simple stylised fact that stocks usually go up. Since 1970, markets have risen in roughly three out of every four years. If you want to avoid looking foolish, it is generally safer to predict that markets will rise rather than fall.
Predicting a return of around 10% next year is not especially bullish, it may be argued, as it merely would reflect the historical average over the past fifty years or so.
Beyond that baseline, several forces could push returns above average. These include easy monetary policy, supportive fiscal policy, and the continued momentum — and possible realisation — of AI-driven growth. If these factors align, 2026 could be an excellent year for stocks.
Of course, things are rarely that simple. There are numerous risks, and many things could go wrong in 2026. I will explore those possibilities in my next analysis. Stay tuned.
