Summary
The 2026 Outlook: Wartime Economy Investors remain optimistic that the war with Iran can be resolved or can at least transition into a period of wary co-existence on all sides. With the war in a truce phase (at least as of this writing), U.S. stocks as of mid-April had shaken off March weakness and even touched new all-time highs. As of the 4/17/26 close, the S&P 500 was up 4.5% on a year-to-date total-return basis. The Nasdaq Composite had moved in front with a 5.5% gain for 2026; and the Blue Chip DJIA was up 3.4%. Despite spiking bond yields as the war intensified, the Barclays Bloomberg U.S. Aggregate Bond Index was positive for 2026 at mid-April, holding a 0.8% gain. The war with Iran has exceeded the four- to six-week timeline forecast by the administration. As we discuss below, we believe the U.S. economy can continue to move forward given solid underlying fundamentals. But stocks will likely continue to be whipsawed by news flow and by the volatile level of energy prices. The Outlook for 2026 The S&P 500 advanced 16.4% for all of 2025, following capital appreciation of 24.2% in 2023 and 23.3% in 2024. The 2026 trading year is off to a challenging start, amid signs of tariff-related inflation in the pre-war period, weak GDP growth to end the 2025 year, disruption in the administration’s tariff schedule, and concerns that war-related energy inflation will ripple through shipping, agriculture, and other parts of the economy. The 2025 trading year was aided by optimism that the new administration in Washington would be more business-friendly. For 2026, investors and businesses remain optimistic that tax cuts under the Big Beautiful Bill will partly offset tariff impacts and higher consumer gasoline costs resulting from the war. President Trump, who in 2025 signaled a shift in focus from Europe and Asia to the western hemisphere, acted on that shift early in 2026 by seizing Venezuelan President Maduro and pledging to govern that country remotely. Success in the Venezuelan operation may have influenced the president’s assessment of the risks of attacking Iran. Geopolitics has become more of a factor in 2026 than in recent years. Conversely, the focus on Iran could potentially lessen pressure on NATO member Denmark to surrender Greenland. As the geopolitical focus shifts away from Europe and Asia to the Middle East and as the U.S. continues to focus on its own hemisphere, Russia and China may seek to expand their respective spheres of influence. In 2025, we issued key forecasts for 2026 related to economic growth, employment, interest rates, earnings growth, and the outlook for the ongoing bull market. We have adjusted some of these forecasts due to the war with Iran, while maintaining our overall outlook. We expect the U.S. economy to continue growing in 2026, fueled by an employed and resilient consumer and solid corporate investments led by AI adoption. Inflation and high financing rates continue to weigh on consumer spending, particularly for those on the bottom leg of the K-shaped economy who are disproportionately impacted by war-related energy cost inflation. More-prosperous consumers on the upper leg of the K continue to benefit from past and ongoing appreciation in financial assets and home values. The St. Louis Fed estimates breakeven employment growth, required to hold the unemployment rate steady, is in the sub-50,000 per month range given slowing population growth due to immigration policy and a declining native-born birth rate. Federal employment is expected to remain relatively stable, and the overall employment environment is less likely to see outsized impacts from policy changes such as the DOGE cuts of winter and spring 2025. Altogether, we look for nonfarm payrolls growth to average about 50,000 per month in 2026 and believe the unemployment rate could remain near 4.5% or lower for the year. Corporate spending was super-charged by AI investments in 2025, and we believe capex can grow at least at the 4.5% historical average in 2026. We also look for corporate investment to partially offset tariff impacts, a weak housing market, and subdued government spending. Measures of the commercial and industrial economy — including manufacturing PMIs, durable goods orders, and industrial production — have moderated but remain consistent with ongoing growth. Argus Chief Economist Chris Graja, CFA, reduced his GDP growth forecast for 2026 to 2.3% from a prior 2.5%. The decrease primarily reflects new pressures on consumer spending due to spiking energy prices, which could be offset partly by higher tax returns. Even before the war with Iran began, the Fed was in a tough spot trying to honor its dual mandate of keeping the work force fully employed and holding inflation near it 2% target range. The double-digit shock in energy prices has made the Fed’s job even harder. Energy inflation is fully revived, and shipping and food inflation are likely soon to follow, while the economy has shown signs of slowing. The Fed lowered the fed funds rate to the 3.5%-3.75% level in December 2025, and we continue to expect that to be the final rate cut before Chairman Powell’s term ends in May 2026. The White House, which has been vocal about wanting lower rates, has proposed inflation dove Kevin Warsh as the new chairman of the Federal Reserve. The two’s-10’s slope in the yield curve tightened to 51 basis points (bps) at the end of March 2026 from 69 bps at year-end 2025 – the steepest since 2021, before the Fed began its fight against inflation. The still positively sloped yield curve is a good indicator for economic growth. The majority of central bankers continue to support one rate cut each in 2026 and 2027, although the war has made the outlook fluid. That would lower the target rate to 3.0%-3.25%, for a half-point to one-point cushion over the pre-war rate of inflation. Amid geopolitical and economic cross-currents, we believe corporate earnings trends and increasingly favorable stock valuations can support a positive year for stocks. S&P 500 earnings from continuing operations posted low-double-digit growth in 2025 to approximately our $270 estimate. For 2026, we look for mid-teens growth in corporate profits to $315, raised in winter 2026 from our earlier $300 forecast. We are modeling S&P 500 earnings from continuing operations for 2027 of $363 per share, which assumes annual EPS growth of 15% from 2026. U.S. companies appear to have adapted to tariffs by shifting supply chains to local sources and replacing fixed costs with variable costs where possible. Given that large technology companies increasingly drive market EPS growth, we look for further margin expansion going forward. We take multiple approaches to equity valuation. Our Stock-Bond Barometer was signaling that stocks were reasonably valued entering 2Q26 as they pulled back from all-time highs on concerns over the Iran war. Our Stock-Bond Barometer is indicating that the two major asset classes are trading near parity on valuation. The output of this model is expressed in standard deviation to the mean, or sigma. Going back to 1960, the mean reading is a modest premium for stocks of 0.17 sigma, with a standard deviation of 1.07. The current valuation is a 0.43 premium for stocks – not a discount, but comfortably within the fair value range. The forward P/E ratio of 20-times for the S&P 500 is within the normal range of 15-24 and down from low- to mid-20s readings in 2024-25. On price/book, stocks are priced at the high-end of the 5.5-1.8 historical range, no surprise given that technology stocks with low capital bases predominate in the major indices. The ratio of the S&P 500 price to an ounce of gold is 1.4, within the normal range. And the gap between the S&P 500 earnings yield and the 10-year Treasury yield is 350 basis points, compared to the historical average of 400. These valuation measures suggest that the broad market (the S&P 500), which thus far remains in the bull market dating to October 2022, is not in danger of entering bubble territory. The current bull market is now more than three years old. Over this period the S&P 500 has risen over 95% as the rally withstood high inflation, economic uncertainty, implementation of tariffs, a government shutdown, major shifts in the direction of U.S. domestic and foreign policy, and now the war with Iran. The 13 prior bull markets since World War II averaged capital appreciation of 164% over an average span of 57 months, or just under five years. The five bull markets since 1980 have generated higher returns (about 240%) over longer periods (about six years). In addition to the risks noted above, the S&P 500 in 2026 faces the statistical difficulty of sustaining forwa
