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Investing.com -- Bank of America is dialing back expectations for U.S. equities next year, warning that strong earnings may not translate into strong market gains.
Analyst Subramanian forecasts that the S&P 500 will reach 7,100, saying “7100 implies ~5% price return.”
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The analyst stated that while both multiple expansion and earnings growth lifted the index by 15% this year, in 2026, “earnings will do the lift…with about 10pt PE contraction.”
BofA expects earnings growth of 14%, or $310, but argued that liquidity tailwinds are fading.
Subramanian wrote, “liquidity is full blast today, but the direction of travel is likely less not more – less buybacks, more capex, less central bank cuts than last year and a Fed cutting only if growth is weak.”
The firm also set a wide S&P 500 range, saying the “bear/bull range for the S&P is 5500…to 8500.”
The bank added that policy uncertainty has weighed on broadening this year, but added that “from here, bonus depreciation should pull forward capex,” corporate guidance is “2 to 1 bullish,” and sentiment “is far from euphoric.”
Still, BofA signaled a shift in leadership, arguing “Capex > Consumption; blue collar over white,” and raising Staples to Overweight while lowering Discretionary to Underweight.
On artificial intelligence, BofA warned of an “AI air pocket ahead,” noting that while market breadth and lofty multiples “rhyme with 2000,” today’s environment is different because stock allocations are lower, earnings growth has supported, and speculation is less extreme.
However, the bank cautioned that “AI monetization is to-be-determined as power is the bottle” and that “capex funded by operating cash flow is running out.”