Bank of America is becoming more cautious on U.S. equities for next year, warning that solid earnings growth may not necessarily translate into strong stock market returns.
Analyst Savita Subramanian expects the S&P 500 to reach 7,100 in 2026, noting that this target reflects only about a 5% price gain.
She explained that the index rose 15% this year due to a combination of multiple expansion and earnings strength. But in 2026, she expects earnings to provide most of the support, accompanied by a 10-point contraction in the price-to-earnings ratio.
BofA projects 14% earnings growth, or about $310, but cautioned that liquidity support is starting to fade.
According to Subramanian, liquidity conditions are currently strong, but the trend is shifting toward lower buybacks, higher capital spending, fewer central bank cuts than last year, and a Federal Reserve that will only cut rates if growth weakens.
The bank also introduced a wide performance band for the S&P 500, saying its bear-to-bull range stretches from 5,500 to 8,500.
BofA noted that policy uncertainty has limited market breadth this year. Still, it pointed out several potential tailwinds ahead: accelerated capital spending due to bonus depreciation, corporate guidance that is trending “two-to-one bullish,” and investor sentiment that remains well below euphoric levels.
The firm also signaled a leadership shift, arguing that capital spending will outperform consumption, and that blue-collar sectors will outperform white-collar industries. As a result, it upgraded Staples to Overweight and downgraded Discretionary to Underweight.
Regarding artificial intelligence, Bank of America warned of a potential “AI air pocket” as the market adjusts. While narrow breadth and high valuations may resemble 2000, the bank said today’s environment differs because stock allocations are lower, earnings growth is healthier, and speculative excess is far more restrained.
Even so, BofA cautioned that AI monetization remains uncertain, noting that power supply constraints are becoming a limiting factor and that capital spending funded by operating cash flow is starting to run thin.
