(Bloomberg) - Two months into the year, the S&P 500 Index has gone nowhere. That’s not a huge knock, given the shocks markets have endured, from geopolitical unrest to AI disruption threats.
But it’s a far cry from where Wall Street’s bulls expect the benchmark will end 2026. Despite all the potential headwinds, the average target for the S&P 500 is 10% higher from here by December’s close, same as it was when the year started. Strategists also kept their allocation weightings unchanged, according to a sell-side sentiment indicator from Bank of America Corp.
Their optimism rests on expectations for above-average US economic growth and an increase in corporate earnings. And, while it is early still, none of the strategists tracked by Bloomberg have turned cautious since the US started a war in the Middle East that, for now, has pushed energy prices sharply higher.
“It comes back to the underlying macroeconomic and corporate earnings strength, which seem to be unaffected thus far by geopolitics,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute. “The Iran conflict has the potential to be different from the others, in that if oil were to stay elevated for a period of months or quarters it could threaten a global economic and corporate earnings recession.”
The US war with Iran is just the latest blow to investor sentiment this year. Persistent inflation and ever-changing tariff policies have made it difficult for businesses to plan. Artificial intelligence applications threaten to upend various industries. Private credit firms have faltered under the weight of bad loans. And President Donald Trump has embarked on an ambitious foreign policy that is roiling US allies and foes alike.
Analysts Monday advised clients that any pullback related to Iran would be a dip-buying opportunity. Firms from Morgan Stanley to Piper Sandler & Co. defended their constructive equity views, citing the past geopolitical volatility that usually proved to be short lived.
The S&P 500 Monday ended little changed, erasing an early drop of 1.2% on the first market day after the US bombing of Iran sparked chaos in the Middle East. For some, the bullishness feels misguided.
“The level of complacency is off the charts,” said Matt Maley, chief market strategist at Miller Tabak + Co LLC. “We’ve gotten to a point where investors will buy every single small dip until it doesn’t work. The problem with this is that when we eventually get the inevitable correction, a lot of investors will get burned very badly.”
Equity sentiment has “remained stalwart and bullish this year,” according to BofA’s head of equity and quantitative strategy Savita Subramanian, even as market internals have shifted and “once-bubbling pockets of growth have violently de-rated.”
Strategists’ bullish views remain predicated on the premise that Corporate America’s profit engine is enough to keep powering stocks higher, despite all the near-term worries.
Yet in the latest earnings season, strong financials readouts — S&P 500 firms grew profits by 13%, almost six percentage points better than expected — were not enough to get equity investors excited. The S&P 500 fell 1.7% from when JPMorgan Chase & Co. kicked off the reporting cycle to when Walmart Inc. closed it out.
Alternative investment manager Blue Owl Capital recently halted redemptions in one of its vehicles and began selling loans to raise cash for investors, warning that rising borrower stress, higher interest costs and lingering leverage from the cheap-money era are starting to strain parts of the private credit market. For equities, that raises the risk that tighter lending and potential defaults could spill over into corporate earnings, particularly into more leveraged sectors.
“Everyone believes that either the ‘Fed put’ or the ‘Trump put’ will stop even the smallest decline from taking place,” said Miller Tabak’s Maley. “This is a big mistake. At some point, one of these issues is going to cause earnings estimates to begin to drop, and that will scare investors in a meaningful way.”
By Alexandra Semenova
