What risks await the US market in 2026? The AI bubble may not be the main one
The S&P 500 Index has added 17.9% since the beginning of the year, above its historical average of 10.6% over the past 68 years.
Next year, the Bloomberg consensus expects the S&P 500 to average 7,464 points, up 7.7% from its closing price on Dec. 24. Out of 28 analysts, only two expect the market to fall.
The boom of technology companies thanks to artificial intelligence has been one of the key drivers of market growth for the third year in a row. But towards the end of the year, warnings of a bubble in the AI market began to sound with increasing frequency. For example, IBM CEO Arvind Krishna said at the beginning of December that global commitments in the field of artificial intelligence amounted to about $8 trillion.
In my opinion, you can't make any profit from it because $8 trillion in capital investment means you'll need about $800 billion in profits just to pay interest.
One of the most popular investors Michael Burry, who foresaw the mortgage crisis of 2008, also "disperses" the negative sentiment. He compares the current market to the dot-com bubble in 2000.
Will AI remain a market driver next year or cause the market to collapse?
Everyone talks about the bubble: is there such a risk?
Among those who clearly point to a bubble as a risk to investors next year is Bank of America.
We forecast an era of heightened volatility and bubble formation, where ups and down cycles will dominate
BofA writes that the current development of the bubble is being supported by governments themselves, as AI has become critical in geopolitical dominance. But the market is still in the early stages of a bubble: valuations of key AI-related companies are not yet at their highs, there is no discernible use of credit that typically inflates bubbles, and the Fed is easing monetary policy rather than tightening.
BofA's own indicator only points to an overheated market: it reached 0.6-0.7 points in July this year, but fell to 0.2-0.3 points in November, while levels above 0.8 are characteristic of bubbles, the bank said in its November materials. BofA has a wide range of scenarios for the S&P 500 for 2026 - a collapse to 5,500 points in the event of a recession and a jump to 8,500 points in the event of strong growth in corporate earnings per share.
UBS estimates the probability of a bubble at 35%. The bank believes that only a small number of companies have extreme high valuations, and that stock volatility is moderate.
The optimists include Morgan Stanley and JPMorgan. Morgan Stanley believes that there is no AI bubble: companies now earn much more than in 1999-2000, their cash flow yields are about three times higher, the adjusted forecast P/E multiple for the S&P 500 is about a third lower, and the share of profitable and financially stable companies is much higher than during the dot-com bubble. And AI is already making a meaningful contribution to earnings growth.
JPMorgan analysts, although pointing to the risk of record market concentration - the 30 largest AI companies already account for 44% of the S&P 500 capitalization - do not see any signs of the end of the business cycle. The bank's analysts have a target level for the S&P 500 at the end of 2026 of 7,500 points. They expect the earnings of companies in the index to increase by 13-15% over the next two years (EPS forecasts for 2026 and 2027 are $315 and $355, respectively). The main contribution will come from the top-30 companies in AI. But the rest will also show strong earnings growth of 9-10%. If the Fed reduces the rate more actively, the index could exceed 8000 points.
Where do we expect the threat to come from?
BofA notes that the market has become more dependent on a limited number of factors, including because the influence of AI giants is large. In addition, liquidity in the market is high now, but may decline as companies cut buyback programs, increase capex, and credit conditions may tighten.
Among other risks, BofA cites possible problems in the U.S. economy, which is already developing in a K-shaped scenario, where the situation for the better-off is improving and for the less well-off is worsening.
Another risk is a change in the Fed's leadership in the spring of 2026. In May, the chairman of the U.S. central bank Jerome Powell's term of office expires. The Bank does not rule out that the new head of the U.S. central bank will become the target of "bond avengers".
In addition, next year there will be midterm elections for the U.S. Congress - its new composition may be "less friendly" to Wall Street, writes BofA.
Morgan Stanley also sees risks in the possibility of tightening credit conditions, which will hit more volatile segments of the market. In the long term, the bank considers the run it hot scenario as a threat: deliberate maintenance of growth and moderate inflation. An overheated economy could cause a new spike in inflation and force the Fed to tighten policy again.
This article was AI-translated and verified by a human editor
