We're Still Bullish on Stocks

The U.S. stock market set 36 all-time highs in 2025 through October — remarkable for an aging bull that entered its fourth year that month. The S&P 500 Index returned 17.5% over that period (21.5% in the 12 months since we published our 2025 Investing Outlook), and a cumulative 91% since the bull market began in October 2022.

So why do some investors feel like there's a piano tied with a fraying rope suspended above their heads? The risks they're worried about include sticky inflation and a weakening job market, continuing trade tensions and potential cracks in the credit markets. Above all, investors are leery of an artificial intelligence (AI) boom that brings to mind bubbles of markets past. Are these concerns just proverbial bricks in the wall of worry that bull markets like to climb? Or are they signposts of something more sinister?

We think the bull market will remain intact and deliver further gains to investors in 2026, driven by a resilient economy, lower interest rates and decent corporate earnings growth. Stock market strategists that we track see the S&P 500 closing out 2026 at a price level between roughly 7,200 and 7,750. We'll ballpark it conservatively, near the midpoint, at somewhere around 7,500. That's up from a close of 6,840 on October 31, the date for prices and returns in this story, implying a price gain of more than 9%. Add in dividends for a total return of just under 11% — call it low double digits.

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"We've had three straight years of double-digit returns," says Shannon Saccocia, chief investment officer in the wealth management division of Neuberger Berman. "The absolute return might be more modest in 2026, but we remain constructive."

Of course, the year will present a number of challenges, including an adjustment to a new Federal Reserve chair in the spring and midterm elections in the fall. But the biggest fear in the hearts of investors is that the market surge we're seeing now will stop short and head south.

At the risk of mixing too many metaphors, it might be helpful to think of the market this way: There may well be a distant storm brewing. But for now, we're issuing a storm watch, not a storm warning, and the clouds could either dissipate or darken from here. That means it's not time to evacuate the market, but it makes sense to batten down the hatches by making sure your portfolio is built soundly and able to withstand whatever comes.

The scary bits for investors

Before a government shutdown turned off the data spigot, it was clear that the labor market was softening. Intensified immigration restrictions have constrained the supply of workers, pressuring job growth.

Economists also theorize that companies may be slow to hire as they assess the potential for AI to help them reduce headcount. For various reasons, a growing number of companies have recently announced layoffs. Among them, UPS (UPS) said it cut 48,000 jobs in 2025; Amazon.com (AMZN) said it was targeting 14,000 jobs.

Kiplinger expects the unemployment rate to peak at 4.7% in mid-2026, then settle back to 4.5% by year-end, equal to year-end 2025.

"Hiring has slowed quite a bit, and those unemployed are unemployed for longer," says Matthew Martin, a senior U.S. economist at Oxford Economics. "If you're a new entrant to the labor force, or you've been laid off, finding a job is really hard."

Meanwhile, inflation is stuck at a rate of 3% — above the Federal Reserve's 2% target — as tariffs work their way through the economy. The government's September inflation report showed price gains in three-fourths of all goods categories, up from two-thirds in August. Historically, the level has been less than half.

"You see the impact of tariffs in goods inflation," says economist and market strategist Ed Yardeni. "We'd have been at 2% inflation if it wasn't for the tariffs," he adds.

Kiplinger expects that after closing out 2025 at 3.0%, the inflation rate for consumer prices will settle back to 2.6% by year-end 2026.

A currently bifurcated economy poses risks on both sides, considering that consumers account for roughly two-thirds of the economy. With lower-income households struggling, economists worry about decelerating spending and the potential for rising delinquencies.

But even with high-end consumers providing the lion's share of support, there's a risk that because so much of that household wealth has been accumulated in a sizzling stock market, a sharp correction could cause the cohort to cut back on spending, making the correction more hurtful for the economy than might otherwise have been the case.

The cockroach theory

Recent cracks in the credit markets made headlines when a handful of bad loans linked to fraud allegations dinged some regional banks and called into question the opaque risks at the so-called shadow lenders in the burgeoning private credit sector.

JPMorgan Chase CEO Jamie Dimon compared the soured loans to cockroaches: "When you see one cockroach, there are probably more," he said. For now, most market watchers are characterizing the problems as idiosyncratic, meaning isolated instances of fraud, and see no infestation.

But as bankers comb through their ledgers for potential trouble spots, some are sure to appear. "Bear in mind that delinquencies within the credit market broadly are very low. We'll see an increase from below-normal delinquencies to normal levels as the cycle matures," says David Lefkowitz, head of U.S. equities at UBS Global Wealth Management. "That could be a headwind for regional banks — our investment preference is for money-center banks — but we don't think this is going to metastasize into something more troubling."

It's not particularly comforting that Savita Subramanian, head of equity and quantitative strategy for BofA Global Research, found similar sentiments when she reviewed commentary from the 2007 market peak prior to the global financial crisis. Back then, there was "cautiousness, but optimism overall," she says, "with some mentioning that risks are small and not likely to bleed into financial markets."

Looking at the U.S. stock market broadly, there's no getting around the fact that valuations are stretched. The S&P 500 benchmark trades at a price-to-earnings (P/E) ratio, based on estimated earnings, of 23. That's above the five-year average of just under 20 and the 10-year average of 18.6.

And BofA analysts are seeing an increase in bear-market warning signs. Six of 10 bear-market indicators have already triggered warnings; on average, 70% are triggered just before market peaks. Two that appeared in September indicate a sense of complacency on the part of investors and an increased appetite for speculation, says Subramanian.

The B-word surfaces

Investment bubbles are a thankfully rare but occasional fact of investing life, starting with the 17th century's tulip-bulb mania. Comparisons of today's AI-obsessed market with the internet-driven dot-com bubble of the late 1990s are proliferating. When that bubble burst in the spring of 2000, a nearly 50% bear market and recession ensued.

BofA reports that stock prices today eclipse March 2000 levels on nine of 20 valuation metrics, including the market value of the S&P 500 in relation to gross domestic product (GDP), average price-to-book-value ratio, average price-to-operating-cash-flow ratio and the market's median price-earnings ratio. A record 54% of fund managers surveyed by BofA say that AI stocks are in a bubble.

"Investors have been chasing mega-cap tech; they can't afford not to be in it. But at some point that will end, and I think that period is potentially closer than farther out," says BofA's Subramanian.

The massive numbers that define the AI boom specifically are mind-boggling and, therefore, have invited some skepticism about whether sufficient AI-related revenue will materialize soon enough to justify them.

The companies investing the most in AI — they're dubbed AI hyperscalers and include cloud-computing giants such as Amazon.com, Microsoft (MSFT) and Alphabet's (GOOGL) Google — have cumulatively increased capital expenditures from $153 billion in 2023 to an estimated $390 billion in 2025, according to Goldman Sachs analysts, accounting for 27% of capex for companies in the S&P 500. (Capital expenditures include spending on long-term assets such as property, equipment and technology. In this case, think AI infrastructure such as chips, power and data centers.)

Estimates of 20% growth in AI capex in 2026 are too low, according to Goldman. Without AI capex, business spending in the U.S. economy overall would be "weak," says Martin, at Oxford Economics.

Although AI adoption rates are "still quite low," overall, he says, they are growing, with usage rates in some sectors, such as finance and technology, much higher.

Ultimately, corporate America will have to realize significant AI-generated productivity gains to support the high levels of capital spending, says Martin. "It's very hard to forecast the magnitude of AI, and the timing. We continue to highlight the risk, but it's not something we're penciling in for the near term."

Results for the most recent quarter, however, provided a window into how investors can turn on a stock when they perceive a misalignment between AI spending and its potential payoff. After Meta Platforms (META) vowed to spend "aggressively" on AI, raising its forecast for 2025 capital spending to as much as $72 billion and signaling even more for 2026, the stock sank more than 11% the next trading day.

The bullish case for stocks

Given so much to worry about, why are we still bullish on stocks? Because a more nuanced look at the potential perils diffuses them somewhat. Although investors should certainly expect pullbacks in a market that has soared nearly 40% just since April, we'd rather make some portfolio adjustments to accommodate the growing risks than throw in the towel now.

"As in almost any year, you'll see some pullbacks, some news that makes people nervous," says Keith Lerner, chief investment officer and chief market strategist at Truist Wealth. "But pullbacks are the admission price for being in the market." (For more on Lerner's views, see our interview with the Truist CIO on what investors may face in the new year.)

Jeffrey Schulze, head of economic and market strategy at ClearBridge Investments, an asset management firm, agrees: "We're buyers of dips because we see the market continuing to move higher."

Start with the economy

The combination of fiscal stimulus for both consumers and businesses provided by the recently enacted tax and spending bill, together with lower interest rates courtesy of the Federal Reserve, provides a bullish backdrop typically seen only coming out of recessions, says Schulze. Much of the stimulus will come in the form of individual tax refunds. "That will help support low- and middle-income consumers in 2026, leading to a more uniform consumption picture," he says. "It's a reason to be optimistic on the consumer and the economy overall."

Still, Kiplinger expects only modest to moderate economic growth in 2026, as tariffs, federal workforce cuts and canceled contracts with government contractors, nonprofits and universities work their way through the economy. GDP growth should come in for the year at just under 2%, relatively unchanged from the 1.8% growth rate expected for 2025.

Meanwhile, there's nothing the market loves more than a Fed rate cut — especially when it arrives with no associated recession. At the end of December, traders expected the Fed to cut its benchmark target rate two more times in 2026, to a range of 3.0% to 3.25%.

In this case, there can be too much of a good thing, and the Fed will have to find a balance between disappointing the market by cutting rates less than expected and cutting too much — something to watch as a new regime takes shape at the central bank in May. "We're not concerned about a slowdown or recession," says Charles Tan, chief investment officer of global fixed income at fund company American Century. "We're more concerned about the Fed over-easing and the economy overheating."

Cutting rates too much could reignite inflation. It could also destabilize the stock market by injecting stimulus it doesn't need, says economist Yardeni, causing what he terms a market "melt-up."

Yardeni, among Wall Street's staunchest bulls, sees the S&P 500 ending 2025 at 7,000 and 2026 at 7,700. "Those targets would be exceeded sooner in a melt-up, forcing us to raise our odds of a bearish outcome — a correction, bear market or meltdown." In October, Yardeni raised his odds of a melt-up to 30%; he sees 50% odds of a healthier bull market and 20% odds of a bear.

Revving the engine

Corporate profits drive the stock market, and for the most part, they're accelerating. At the end of October, in the midst of third-quarter earnings season, 83% of S&P 500 companies that had reported by then had logged earnings that exceeded analyst expectations; 12% reported results below expectations, according to earnings tracker LSEG I/B/E/S.

In a typical quarter, 67% of firms beat estimates and 20% miss. In aggregate, reported profits were 8.3% above expectations, compared with a long-term average of 4.3%. Overall, Wall Street analysts were expecting year-over-year earnings growth for S&P 500 companies of 11.6% in 2025 and 14.1% in 2026.

The tech sector still leads with the highest expected earnings growth in 2026 (23%), followed by materials and industrials, with expected growth in profits of 21% and 19%, respectively, year over year.

"With the Fed cutting and a large fiscal package, the broadening of earnings that was supposed to materialize in 2025 is a greater possibility in 2026," says Schlulze. "But it's a show-me story for now."

The other B-word

Though fears of a bubble are widely discussed, many of the market watchers we talked to think "boom" might be a better descriptor — at least for today.

"Down the road, I think there is a substantial probability that we will see a bubble at some point, followed by a potentially gut-wrenching correction," writes Chris Buchbinder, an equity portfolio manager at Capital Group, in a recent note. "But I don't think we are there yet." For now, says the bullish Yardeni, "The only thing we have to fear is too much fear about bubbles."

Consider some of the quality markers that differentiate today's market from the dot-com bubble, for example, beyond the fact that today's market leaders, in contrast to their late '90s counterparts, boast robust profits. In addition, free cash flow yield (free cash flow divided by stock price) for the median large-cap stock was recently almost triple what it was in 2000, according to Morgan Stanley chief strategist Michael Wilson.

When adjusted for profit margins, the S&P 500 trades at a 40% discount to its price-to-earnings multiple back then. "Free cash flow generation, operational efficiency and strong profitability are all characteristics of a higher-quality index than what we saw during the late 1990s," Wilson says. BofA analysts note that S&P 500 companies today have lower financial leverage than their turn-of-the-century counterparts, and the index has a higher percentage of companies with quality ratings of B+ or better.

Moreover, according to Goldman Sachs, the AI infrastructure spending boom has yet to reach the profligate levels of previous innovation cycles. "We are not concerned about the total amount of AI investment," analysts wrote in a recent note. As a share of U.S. GDP, AI investment today is less than 1%, they note; during the electrification of manufacturing in the 1920s and the internet boom of the late 1990s, spending peaked at around 1.5% to 2% of GDP, and reached well over 3% with the buildout of railroads in the 1880s.

It's worth noting that mini-bubbles are inflating and deflating in other corners of the market with few ill effects overall, says Liz Ann Sonders, chief investment strategist at Charles Schwab. "I think there is a lot of speculative fervor in the market, but the good news, with quotes around ‘good,' is that recently the froth is more evident outside the mega-cap leadership names."

Quantum computing names, drone companies, meme stocks, micro caps, tech stocks with no profits and, recently, gold are all examples. "You can see some air come out of those bubbles without it causing major damage to the market," says Sonders.

Of course, major bubbles are only recognized in hindsight, after they burst. Let's say we're in one right now. Bubbles can inflate for years, and being out of the market while they do is costly.

The S&P 500 more than doubled from the time former Fed chair Alan Greenspan called out the market's "irrational exuberance" in late 1996 until it crashed in early 2000. "While I acknowledge the difficulty of assessing bubbles with foresight, I believe we are closer to 1998 than 2000," says Buchbinder, noting, for example, that we have yet to see an initial public offering boom in innovative start-ups such as OpenAI, the company behind ChatGPT.

Where (and how) to invest now

How will we know when the end of this phenomenal bull run is near? We won't. Back in 2001, Warren Buffett used the analogy of Cinderella at the ball to warn investors about overstaying in an overheated market. "The giddy participants all plan to leave just seconds before midnight. There's a problem, though," he wrote. "They are dancing in a room in which the clocks have no hands."

That's why it's crucial now to make sure your portfolio allocation is in line with your tolerance for risk — from both an emotional and financial standpoint. Can you withstand a 10% to 20% correction? How about the average bear-market drawdown of 38.5%? Or the 40%-plus average loss in what CFRA Chief Investment Strategist Sam Stovall calls a "mega meltdown"?

If the thought of any of that makes you uncomfortable, it's time to de-risk a bit. That doesn't mean dumping the winners that have fattened your portfolio over the past few years, but it does mean making sure they haven't taken over your holdings. Good investing habits, including staying diversified and rebalancing your portfolio by periodically trimming winners and buying laggards, are more important than ever.

Consider that the information technology sector currently accounts for 36% of the S&P 500; at the individual stock level, the top 10 stocks in the index, led by Nvidia (NVDA), Apple (AAPL), Microsoft and Amazon, account for 40%.

Although strategists at many investment firms continue to favor the technology sector, those at Wells Fargo Investment Institute recently recommended that investors trim holdings, downgrading the sector from "favorable" to "neutral" due to its rich valuations. They advised investors to shift some funds into utilities, industrials and financial stocks.

It may also pay off in 2026 to venture beyond large-company stocks generally. "A little bit down-cap offers a lot of opportunity," says Kara Murphy, chief investment officer at Kestra Investment Management. Smaller large-company stocks and midsize stocks look interesting, she says.

One way to access such stocks is through the Invesco S&P 500 Equal Weight ETF (RSP), an exchange-traded fund that weights each S&P 500 stock equally, reducing concentration risk and tilting toward smaller companies in the index. Or consider Dean Mid Cap Value (DALCX), recently added to the Kiplinger 25, the list of our favorite no-load mutual funds.

"The further down you go in market value, the more careful you have to be about quality," says Murphy. Look for companies with earnings to begin with, then zero in on those with high-quality, consistent earnings, she says. One place to start might be with the iShares Core S&P Small-Cap ETF (IJR), a member of the Kiplinger ETF 20, the list of our favorite exchange-traded funds. Firms must be profitable to be included in the index the fund tracks, in contrast to the popular Russell 2000 small-company benchmark.

Diversifying outside the U.S. paid off in 2025 and is still a smart move. "Looking forward, we think the non-U.S. space is going to do better than what we've seen over the last decade," says Schulze, at ClearBridge. International stocks will benefit from greater clarity on the trade front, and they still trade at a significant historical discount relative to U.S. stocks, he says. The Vanguard Total International Stock ETF (VXUS) gives you exposure to developed and emerging international markets for a low expense ratio of 0.05%.

Value stocks — those trading at bargain prices relative to earnings, book value or other measures — can provide some defense for your portfolio, complementing "growthier" tech stocks. And you don't have to make an all-or-nothing choice between the two.

"I am investing with the intent of fully participating in the powerful AI trends as they continue to unfold among dynamic, growth-oriented companies," says Capital Group's Buchbinder. "However, I am also playing defense, actively looking for companies that may be out of favor today but could do relatively well if the AI bubble pops." Stocks that fit the bill include energy companies, such as Halliburton (HAL) and Cenovus Energy (CVE), and cable firms, including Comcast (CMCSA) and Charter Communications (CHTR), he says.

Subramanian is also a fan of large and midsize value stocks, favoring "old-economy companies that are laser-focused on dividends and have a whole ethos built around maintaining that dividend." Real estate investment trusts (REITs) are AI-adjacent, says Subramanian, but haven't rallied to the degree that tech and utilities have. One worth exploring is data-center REIT Digital Realty Trust (DLR).

Among financials, Subramanian likes the large, regulated banks, which are better positioned than private lenders and regional banks for any sort of downturn, with healthier balance sheets and higher-quality loans. "And they have the potential for massive efficiency gains from AI," she adds. The Invesco KBW Bank ETF (KBWB) is a good choice. For a broader basket of value picks, consider one of our favorite value funds, Dodge & Cox Stock (DODGX), a Kip 25 member that ranked in the top half of its peer group in seven of the past 10 years.

If you've been buying utility stocks to supply the defense for your portfolio, Subramanian suggests you consider health care stocks instead; BofA recently downgraded the former and upgraded the latter. Medical supplies distributor Cardinal Health (CAH) has good prospects for the year ahead.

Gold glittered in 2025, touching more than $4,000 per ounce, up more than 50% for 2025 through October. Look for a choppy period during which the yellow metal continues to digest its recent gains, says Lerner, the Truist strategist.

"We're not goldbugs, but we came into 2025 very positive because of geopolitical uncertainty, the falling dollar and more central-bank buying," he says. "We're still positive on gold as a portfolio diversifier, but we think things went too far, too fast."

A small stake is plenty for most investors; Lerner recommends roughly 2.5%. ETFs are an easy way to gain exposure: SPDR Gold Shares (GLD) is the biggest and most liquid; iShares Gold Trust Micro (IAUM), with an expense ratio of 0.09%, is among the cheapest.

Fixed-income investors will find a good balance of risk and reward in high-quality bonds of intermediate-term maturities. Murphy, the Kestra strategist, is cautious on high-yield IOUs, favoring investment-grade corporates. Yields on the short end of the yield curve will likely fall in line with the Fed's cuts, but what happens at the long end is still in question.

"I'd rather be in the belly of the curve," says Murphy, with maturities of three to seven years. Intermediate-term issues benefit by rates coming down, she says (because rates and prices move in opposite directions), but still have higher absolute yields. The Vanguard Intermediate-Term Corporate Bond Index Fund (VICSX), invested exclusively in investment-grade bonds, yields 4.7%.

Finally, if you're nervous about the stock market but still want to participate, consider a buffered ETF, which will cushion losses to a pre-determined degree in exchange for a cap on potential gains. Timing is important when you buy these funds; one we like now is the Innovator U.S. Equity Power Buffer ETF January Series (PJAN), which you can buy at the end of December.

You can contact the author at Anne.Smith@futurenet.com.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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