Outlook 2026: Could the market power into higher gear this year?

With the current bull market entering its fourth year, the Chief Investment Office believes the long-term growth story is far from over. Here's what could continue to drive momentum.

After an extraordinary and surprising year that saw the S&P 500 record double-digit gains and corporate profits outpace expectations, what comes next? Do equity markets have more room for growth? Are stock valuations too high? What, if anything, could derail economic growth and the market's resilience?

Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, believes the U.S. economy and financial markets are powering up for a new level of potential growth. "From energy grids and data centers to defense systems and digital platforms, power is driving the global economy — and shaping the outlook for 2026," he says.

“From energy grids and data centers to defense systems and digital platforms, power is driving the global economy — and shaping the outlook for 2026.”

— Chris Hyzy, Chief Investment Officer,
Merrill and Bank of America Private Bank

Below, find answers from the Chief Investment Office (CIO) and BofA Global Research to four top-of-mind questions about the potential risks and opportunities ahead. Plus, test your knowledge of current market dynamics. For additional useful insights and lively conversation, watch the Outlook 2026 webcast "Powering up: What could drive the next era of growth?"

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What's next for year four of this bull market?

"The U.S. economy is firing on all cylinders," says Joe Quinlan, head of Market Strategy for the CIO, who cites six reasons equity prices could potentially keep advancing:

Resilient consumer spending. Lower-income households are beginning to struggle with rising costs, but wealthier individuals and families, who account for more than half of consumer outlays, have been buoyed by investment gains and rising home values, a report by the Bank of America Institute notes.Footnote ¹ What's more, strong spending by retiring baby boomers is providing a boost for the economy, helped in part by Social Security cost-of-living adjustments that have surpassed wage growth recently.Footnote ² "Boomer spending continues to be one of the largest tailwinds in the economy overall," adds Hyzy.
Corporate capital expenditures. The extraordinary investments in infrastructure around artificial intelligence are powering high levels of spending by U.S. companies. "The data center buildout is so strong that we're spending almost as much there as we're putting into the construction of office buildings," says Quinlan.
The One Big Beautiful Bill Act. Last summer's passage of this sweeping legislation provides capital depreciation allowances for companies and other tax advantages that should help fuel still more capital expenditures in 2026.
The decline of the U.S. dollar. For U.S. exporters and multinational companies with overseas operations, a dollar that is losing value against other currencies helps drive earnings growth by boosting the competitiveness of U.S. goods and services.
Rebounding global economic growth. Many countries have responded to U.S. tariffs and trade frictions by redoubling their own efforts to expand their economies, cutting interest rates to spur growth. As a result, the global economy is accelerating as 2026 begins.
Expected further cuts by the Federal Reserve. "We're in the mid-innings of a Fed easing cycle, which is typically very bullish for equities," Quinlan says.

Against that backdrop, investor sentiment could provide yet another tailwind. Hyzy calls this an "owl market," with cautious investors watching and waiting. As their enthusiasm increases, they could deploy the considerable amounts of cash sitting on the sidelines, helping propel the market to further gains.

Risks to watch for: Amid trade tensions, corporations are likely to pass more tariff-related costs along to consumers, and that could affect spending by individuals and corporations. Sustaining the boom in spending on AI and finding ways to profit from those investments add uncertainty, while the impact of the longest U.S. government shutdown in history could linger.

Can strong corporate earnings and stock prices continue their upward push, or are valuations already too high?

Through most of 2025, companies reported profits that exceeded expectations, providing a tailwind for much of the market. Despite investor concerns about high valuations — and the potential for prices to retreat to levels more in line with historical averages — the forces driving those healthy earnings are still in place, says Hyzy. That includes the health of the U.S. consumer, the key to profits at many companies.

While the price-to-earnings (P/E) ratio of the S&P 500 — which measures an index's value by comparing its current market price to its earnings per share — has risen from around 22 to almost 28 over the past three years, it is now about where it was one year ago. "We're still in the early phase of profit reacceleration," says Hyzy. "Looking ahead, we expect a solid upward drift in profits."

Hyzy believes the private sector will lead the way in the year ahead. "Company balance sheets are healthy," he says. "Corporations have lower debt than they have traditionally had, and that means much of the current boom in capital expenditures has been able to fuel itself with cash."

As long as companies keep workers employed, demand for products and services should remain strong, and that can help support a continued rise in corporate earnings. While news of AI-driven layoffs is something to keep an eye on, for now, says Hyzy, "the job market is still in balance, with the number of job openings matching the supply of workers to fill them."

Risks to watch for: As strong as earnings have been, stock prices have risen even more quickly, pushing the P/E ratio of the market to what some consider perilously high levels. This is something to track closely, notes Matthew Diczok, head of Fixed Income Strategy for the CIO. "Yet keep in mind that the stock market is a leading economic indicator," he says. "When equity prices go up faster than earnings, profits may catch up. The market could be signaling the further increase in earnings we expect to see in 2026."

“When equity prices go up faster than earnings, profits may catch up. The market could be signaling the further increase in earnings we expect to see in 2026.”

— Matthew Diczok, head of Fixed Income Strategy,
Chief Investment Office, Merrill and Bank of America Private Bank

What are some of the potential big new opportunities that could drive growth in 2026?

Modernizing electrical grids and developing new energy sources to power artificial intelligence (AI) and other emerging technologies are central to what BofA Global Research describes as the largest economic growth story of our time. "It's about mobilizing capital to meet the $30 trillion opportunities and risks of a rapidly changing world," says Haim Israel, head of Global Thematic Investing, BofA Global Research. For investors, this means looking at themes that support an era of energy transition.

Demand for electricity to power data centers and other infrastructure needed to support the explosive growth of AI is expanding rapidly, with global growth in demand for electricity rising a record 4.3% in 2024, a big jump from the 2023 increase of 2.5%.Footnote ³ Renewable sources are likely to fill much of the gap. In 2024, global investment in clean energy totaled $2.2 trillion, while fossil fuel investments dipped for the first time since 2020.Footnote ⁴ Yet U.S. policy changes favoring traditional energy sources are likely to lead to sharp reductions in U.S. investments in wind power, solar and energy storage through at least 2030.Footnote ⁵

With that context in mind, the CIO points to several potentially attractive areas for investment during the next two years. Energy efficiency, including electrification, leads the way, followed by renewable and low-carbon energy, energy transport and related infrastructure, and critical minerals and materials.

With the U.S. and nations around the world responding to heightened geopolitical tensions, defense is another potential area to focus on. Lauren Sanfilippo, senior investment strategist for the CIO, cites a new "security supercycle" that spans everything from "traditional aerospace and defense systems to cybersecurity, drones, AI-driven defense shields, hypersonics and satellite networks." Military buildups in other countries have added to the global demand for arms and munitions, while investments in emerging technologies are also surging. "The U.S. allocated about $55 billion in 2025 to develop emerging technologies in space, command and control communications, computers and intelligence systems, while Japan invested $3.6 billion on missile defense against hypersonic and ballistic missile threats," Sanfilippo says.Footnote ⁶

“The U.S. allocated about $55 billion in 2025 to develop emerging technologies in space, command and control communications, computers and intelligence systems.”

— Lauren Sanfilippo, senior investment strategist,
Chief Investment Office, Merrill and Bank of America Private Bank

Risks to watch for: Sanfilippo urges caution about the valuations of U.S. and European defense stocks, many of which are now trading at a premium. Given the recent downturn in U.S. investment in renewables, the CIO believes that adding sufficient capacity in electricity generation to meet demand is likely to require a mix of solar, wind, natural gas and nuclear.

How far could the Federal Reserve cut rates?

After reducing interest rates three times in late 2024, the Federal Reserve chose to keep rates steady through most of 2025 amid concerns that tariffs and other factors could rekindle inflation. But in September, after the economy added only 22,000 jobs in August,Footnote ⁷ the Fed cut rates by a quarter of a percentage point, followed by another quarter-point rate cut in October. "The Fed has two goals — stable prices and maximum employment," Diczok says. "For now, at least, inflation is taking a back seat to the cooling labor market." While another cut in December is no sure thing, the CIO expects perhaps three further reductions in the second half of 2026.

What could that mean for investors? Interest rate cuts normally happen during economic doldrums, when slowing growth is leading to job losses and lower rates are needed to encourage corporate borrowing, spending and hiring. That's not the case this time. "The Fed is cutting rates while the economy is accelerating," Sanfilippo says. Having the cost of capital come down at such a time could provide additional fuel for a wide range of companies, further broadening participation in market gains.

What's more, Marci McGregor, head of Portfolio Strategy for the CIO, notes that falling interest rates may be particularly helpful for small companies. "Since 1990, following Fed easing, small caps have outperformed large caps on average in both the near and longer term," she says.

Risks to watch for: For fixed-income investors, the likelihood of additional interest rate cuts in 2026 brings the risk of lower bond yields and reduced income. That could motivate additional bond purchases now, to lock in better rates, although the CIO is currently neutral across all fixed-income sectors. Notes Hyzy: "Putting money into longer-term bonds before rates drop further could help you diversify equity risk with higher, more stable income."

What investors should consider now

Diversifying your portfolio is more important than ever as you look ahead to the coming year, Hyzy says — being broadly exposed to many kinds of investments can help tamp down volatility and prepare for unforeseen events. That may mean adding value-oriented assets, including in defensive sectors such as consumer staples and healthcare, as well as small caps. "Take advantage of a wide range of industries, capitalizations and geographic locations," says Hyzy, who suggests considering thematic portfolio additions in defense, power generation and other areas of rising global demand that have the potential for outsized long-term growth.

“Take advantage of a wide range of industries, capitalizations and geographic locations.”

— Chris Hyzy, Chief Investment Officer,
Merrill and Bank of America Private Bank

"Diversification works when we need it most," Hyzy adds, "and it could be needed more than ever as you look to integrate thematic, long-term investments with your core portfolio to power your investments into a new era of growth."

Pop quiz: Test your market know-how

Select answer to learn more

True or false: The fourth year of a bull market is historically one of its weakest, as economic growth flags, corporate profits decline and investors lose confidence.

True

False

True or false: AI's hunger for power is reshaping energy markets — data centers alone could drive as much as 5% of new electricity capacity by 2030.

True

False

True or false: Decisions to increase, reduce or maintain interest rates are voted on by the 12 members of the Federal Reserve's Federal Open Market Committee (FOMC). The Fed chair, like the other 11, has only one vote.

True

Correct. The voting members of the FOMC include the seven members of the Board of Governors, including the Fed chair, as well as the president of the New York Federal Reserve Bank and four other regional Reserve Bank presidents who serve on a rotating basis. Split decisions, such as occurred in July, September and October 2025, can reflect differences in outlook about economic growth, inflation and the speed of rate hikes or cuts.

False

Incorrect. The voting members of the FOMC include the seven members of the Board of Governors, including the Fed chair, as well as the president of the New York Federal Reserve Bank and four other regional Reserve Bank presidents who serve on a rotating basis. Split decisions, such as occurred in July, September and October 2025, can reflect differences in outlook about economic growth, inflation and the speed of rate hikes or cuts.

More for you

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Footnote ¹ Bank of America Institute, "Consumer Checkpoint: The tale of two wallets," October 10, 2025.

Footnote ² Bank of America Institute, "Paychecks to pensions: The evolution of retiree spending," November 4, 2025.

Footnote ³ IEA, "Global Energy Review, 2025."

Footnote ⁴ IEA, "World Energy Investment 2025," IEA, June 2025.

Footnote ⁵ BloombergNEF, "Trump Slams the Brakes on US Wind and Solar Growth," July 22, 2025.

Footnote ⁶ United Nations, "The Security We Need: Rebalancing Military Spending for a Sustainable and Peaceful Future," August 2025.

Footnote ⁷ U.S. Bureau of Labor Statistics, "The Employment Situation — August 2025," September 5, 2025.

Footnote ⁸ Bloomberg, Yardeni Research, CFRA Research. Data as of October 10, 2025.

Footnote ⁹ IEA, "Energy and AI," April 2025.

Important Disclosures

The opinions expressed are as of 11/17/2025 and are subject to change.

Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.

Diversification does not ensure a profit or protect against loss in declining markets.

Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Stocks of small-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies. Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice-versa. Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.

This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").

BofA Global Research is research produced by BofA Securities, Inc. ("BofAS") and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC popup, and wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").

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