Remember when the market felt unstoppable? 2023 delivered over 20%, 2024 repeated the trick, and 2025 is already up around 15% as Thanksgiving approaches. It’s been a glorious run—one of the best stretches in decades. But every party has that moment when the music slows down a little, right?
Well, one of the biggest names on Wall Street just turned the volume down. Their message is pretty clear: enjoy the gains you’ve got, because 2026 might feel a lot more… normal.
A Reality Check for 2026
The latest forecast making the rounds doesn’t predict disaster. Far from it. But it does suggest the days of effortless 20% yearly jumps are probably behind us—at least for a while.
Analysts now see the S&P 500 finishing next year around the 7,100 level. If that holds, it translates into roughly 5% total return from where we closed earlier this week. Five percent. After the rocket ride we’ve been on, that feels almost modest, doesn’t it?
In my view, that’s actually healthy. Markets can’t sprint forever. Sometimes a breather is exactly what keeps the longer bull market alive.
What’s Driving the Modest Outlook?
The math is pretty straightforward once you break it down.
Earnings per share for the companies in the index are still expected to grow a very respectable 14% next year. That’s solid—well above the long-term average. Corporate America keeps finding ways to make more money, and that’s the real fuel for stocks over time.
But here’s the catch: investors aren’t likely to keep paying higher and higher multiples for those earnings. The price-to-earnings ratio—the famous P/E—has expanded a lot recently. The thinking now is that it contracts by about 10 points in 2026.
This year both earnings growth and multiple expansion worked together to push stocks up 15%. Next year, earnings will have to do most of the heavy lifting on their own.
When you net it out—stronger profits minus a more cautious valuation—you land right around that 5% gain. It’s not exciting, but it’s realistic.
The Three Scenarios Every Investor Should Know
Of course, nobody has a crystal ball. That’s why good forecasts come in three flavors:
- Base Case – 7,100: +5% total return. Earnings do the work, valuations cool off a bit. A “normal” year by historical standards.
- Bull Case – 8,500: +25% upside. Everything clicks—earnings beat, multiples hold or even expand again, economic soft landing becomes the consensus story.
- Bear Case – 5,500: -20% decline. Recession hits, earnings disappoint, risk-off mood takes over. Classic bear market territory.
Interesting side note: a 20% drop is exactly the average drawdown during past U.S. recessions. History rhymes, as they say.
Why Multiples Matter More Than Most People Think
I’ve been investing long enough to see this movie before. When valuations get stretched, the market becomes a tug-of-war between growing profits and contracting multiples.
Sometimes earnings win and you still make decent money. Sometimes sentiment wins and everything gets marked down anyway. Right now the consensus leans toward the second outcome for 2026.
Think of it like buying a rental property. If cap rates compress (the real-estate version of P/E expansion), you can make great total returns even if rents grow slowly. When cap rates normalize again, rent growth has to carry the load. Same concept here.
Historical Context: We’ve Been Spoiled
Let’s zoom out for perspective.
Over the past decade the S&P 500 has averaged roughly 12% annual returns. That includes dividends and is one of the strongest 10-year stretches ever. Go back further and the long-term average drops closer to 9-10%.
So a 5% year isn’t some catastrophe—it’s just reversion toward normal. After three straight years above 15%, a pause feels almost inevitable.
| Period | S&P 500 Annual Return |
| 2023 | ~24% |
| 2024 | ~23% |
| 2025 YTD | ~15% |
| 10-year average | ~12% |
| Long-term average | ~10% |
| 2026 forecast (base) | ~5% |
Seeing it laid out like that drives the point home. We aren’t necessarily heading for trouble—we might just be heading back to earth.
What Should Regular Investors Actually Do?
Here’s where the rubber meets the road. A subdued forecast doesn’t mean sell everything and hide in cash. It means adjust expectations and maybe tilt the portfolio a little.
- Keep contributing to retirement accounts—time in the market still beats timing the market.
- Consider rebalancing if you’re heavily overweight the mega-cap growth names that led the rally.
- Look at sectors with more reasonable valuations that could benefit from solid earnings growth (financials, industrials, energy come to mind).
- Dividend payers suddenly look more attractive when total return might lean heavily on fundamentals.
- Keep a cash buffer for opportunities if we do swing toward that bear-case 5,500 level.
Personally, I’m not hitting the panic button. Earnings are still growing double-digits. That’s a pretty good foundation. It just might not feel as exhilarating as the past few years.
The Bottom Line
Wall Street isn’t calling for the end of the bull market—just a more grown-up phase of it. After an extraordinary run, a year of single-digit gains would actually be one of the more responsible outcomes imaginable.
Maybe the real story for 2026 isn’t that stocks “only” go up 5%. Maybe the story is that corporate profits keep chugging higher and the market digests higher interest rates and richer valuations without throwing a full-blown tantrum.
If that’s the worst thing that happens after everything we’ve enjoyed lately? I’ll take it.
Stay disciplined out there. The market always gives us new chapters—it rarely repeats the last one exactly. And honestly? That’s what keeps it interesting.
