Summary
Four Fundamental Forecasts for 2026 Argus Research Company follows a top-down investment framework, starting with the domestic economy and moving to the global economy, interest rates, equity markets, segments, sectors, and finally stocks. Here are our four fundamental forecasts for 2026. FORECAST ONE: The U.S. economy will expand at approximately a 2.0% rate in 2026, avoiding a recession. We expect the U.S. economy to continue growing in 2026, remaining on an upward path that will be supported by three factors: an employed consumer, solid corporate investment, and an attentive Federal Reserve. This past year has been bumpy for the economy, which started the year by contracting in the first quarter due to tariffs and trade. The second half of the year featured the shutdown of the U.S. government, which resulted in a lack of official data to guide investors. Through it all, we kept our focus on the U.S. consumer, who drives the overall economy and was capable of spending given an unemployment rate near cycle lows. The consumer sector of the economy also benefited from rising stock prices and high home prices. Those trends remain intact, even if nonfarm payrolls growth averages 50,000 per month for the next year. (With a low labor force growth rate due to changes in immigration policy, that’s about all the jobs that are needed to keep unemployment in the 4.0%-4.5% range.) Turning to corporate investment, spending on capex and on IT has increased at a double-digit pace during 2025. While it is a bit reckless to forecast double-digit growth in these categories in 2026, the dawn of the AI era suggests to us that spending can grow at least as fast as the historical average of 4.5%. These two factors can offset challenges in import/export (tariffs), residential investment (high mortgage rates), and government spending. By our reckoning, the U.S. economy will have grown at a 1.9% pace in 2025, down from a 2.8% rate in 2024 but in line with the estimated long-term domestic growth rate of 2.0%. We will be watching unemployment claims closely in 2026. The recent trend is a benign 230,000 per week. If that rises above 300k, the unemployment rate could be pushing toward 5.0%. That’s when our third factor, the Federal Reserve, comes in, with capacity to lower rates further or even boost its balance sheet. Currently, our estimate for GDP growth in 2026 is 1.9%, unchanged from 2025. FORECAST TWO: We expect modestly lower interest rates in 2026, and for the yield curve to maintain an upward slope. Inflation trends were more important than GDP trends for the stock market in 2022 and 2023, but their impact has faded a bit, as expected, in the past two years. In fact, our assumption is that prices are under control, amid the cross currents of lower fed funds and short-term interest rates and still-unfolding tariff and macro-economic impacts. At Argus, we look at over 20 different price indicators on a monthly to understand what’s going on with inflation. On average, these indicators show a lower rise in goods prices partly offset by stubbornly high services prices. The increase in shelter costs, which comprises up to one-third of total consumer spending, finally has started to moderate. The stable inflation trend allows the Federal Reserve to focus more on the employment element of its dual mandate. The central bank recently wrapped up its Open Market Committee meeting and, as expected, lowered its fed funds target rate 25 basis points to the 3.50 to 3.75% level. This was the third cut in 2025, and may well be the final reduction before Jerome Powell’s term as Fed chair is up in May. The Open Market Committee also announced that the Fed’s reserve balances have declined to a satisfactory level and the central bank will now go back into the market to purchase shorter-term Treasuries. In the financial markets, interest rates declined after the modest asset-buying program was announced. The decisions reinforce the notion that the Fed is now less concerned about the impact of tariffs on inflation and is more concerned about the employment sector of the economy. The decisions also leave the incoming chairman of the Fed — to be appointed by President Donald Trump — with a solid and flexible balance sheet, and with room to maneuver on rates should the need arise. The Trump administration has been extraordinarily vocal in its opinions on interest rates, blurring a clear line of independence that has long existed between the White House and the Fed. The White House wants lower rates, and the central bank has headed in that direction. That said, in the Summary of Economic Projections published along with the latest Fed meeting, the central bankers are on record favoring only one cut in 2026 and then one in 2027. That would lower the target rate to the 3.0 to 3.25% range, likely representing a 100-basis-point cushion above the prevailing rate of inflation. At the long end of the yield curve, inflation and Fed policy are not the only factors influencing market rates of interest. Total U.S. sovereign debt is now at 120% of GDP, meaning Treasury issuance can ‘crowd’ the bond market and drive up yields. On the other hand, the Fed has wrapped up its quantitative tightening program and is now allowing assets to roll off its balance sheet upon maturity. That should provide some support for longer-term bonds. In the fall of 2024, the U.S. Treasury curve finally turned positive after being inverted for two years. Lower inflation, ongoing economic growth, and Fed rate cuts to date have returned the yield curve to its normal upward slope. We look for the slope to steepen further in 2026 as shorter-term rates head lower and longer-term rates drift down or remain near current levels. An increasingly upward slope in the curve has positive implications for economic growth. FORECAST THREE: Corporate earnings trends and stock valuation factors can support a positive year for the U.S. equity market. Corporate profits grew at a low double-digit pace in 2025, having continued to recover from an earnings recession in 2022-2023. For 2026, we look for another year of growth, with S&P 500 earnings from continuing operations of $300, compared to $270 in 2025. Final 3Q25 EPS growth was in fact closer to the mid-teens. Over four-fifths of companies topped expectations. We were encouraged by very strong 8% revenue growth, although some of that is driven by inflation and tariffs. Further, operating margins in 3Q EPS widened and were above the midpoint of the historical 9% to 14% range. That shows that companies have adapted to tariffs by shifting supply chains to local resources and by flexing variable costs when possible. Given that large technology companies increasingly drive market EPS growth, we look for higher margins going forward. The main driver of 2025 earnings strength has come from the biggest sectors in market: Information Technology and Financial. In addition, we look for good growth in Industrial earnings, and are beginning to see a turnaround in Healthcare earnings. We expect less of a drag from sectors that were negative in 2024, mainly Energy and Materials. As AI drives earnings, the smaller sectors become less relevant; as such, we would focus on the market leaders. Turning to equity valuations, we take several approaches to making our assessment. Our Stock/Bond Barometer asset-allocation model is indicating that the two major portfolio asset classes are near parity on valuation. The model, our most comprehensive, goes back to 1960 and takes into account real-time price levels, historical growth rates, and forward-looking forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The output is expressed in terms of standard deviations to the mean, or sigma. The mean reading going back to 1960 is a modest premium for stocks of 0.09 sigma, with a standard deviation of 1.05. As such, stocks normally sell for a slight premium valuation compared to bonds. The current valuation is a 0.38 sigma premium for stocks — not a discount but easily within the normal range. Other, more traditional measures also show reasonable multiples for stocks. The forward P/E ratio for the S&P 500 is about 23, within the normal range of 15 to 24. On price/book, stocks are priced at the high end of the historical range of 1.8 to 5.5, given that IT stocks, with low capital bases, are the biggest component of the market. The theory holds on dividend yield as well. The current S&P 500 yield of 1.09% is below the historical average of 2.9%, but the relative reading to the 10-year Treasury bond yield is 27%, not far from the long-run average of 39%. On price/sales, the current ratio of 3.2 is above the historical average of 1.8, but well below the 4.0 multiple at the peak of the dot-com bubble. Further, the gap between the S&P 500 earnings yield and the benchmark 10-year government bond yield is 326 basis points, compared to the historical average of 400. Lastly, the ratio of the S&P 500 price to an ounce of gold is 1.6, near the midpoint of the historical range. These valuation measures suggest to us that the stock market, near-record highs, is not in danger of entering bubble territory. FORECAST FOUR: The current equity bull market, which began in October 2022, can run through 2026, although S&P 500 returns are not likely to be as strong as they have been over the past three years. The current bull market started in October 2022 and is now more than three years old. During that time, the S&P 500 has risen more than 90%, having endured high inflation, economic uncertainty, a credit rating downgrade of the U.S. Treasury, a hard-fought presidential election, the onset of tariffs and trade wars, and now a government shutdown. But it has weathered these crises, supported by an economy that continues to grow, inflation and interest rates that have been heading lower, and robust profitability from S&P 500 companies. How much farther can this bull market go? We studied the 13 bull markets that have occurred since the end of World War II. On average, the S&P 500 gained 164% during these 13 periods, which averaged 57 months in duration, or just about five years. We also note that the recent bull markets have generated higher returns over longer periods. On average, the five bull markets since 198