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by Alex Harding, CFA, Equity Research and Portfolio Management, Ferguson Wellman Capital Management
Investors contended with plenty of noise in 2025. Tariff uncertainty, the longest government shutdown in U.S. history, and a Fed easing cycle disrupted markets. Nevertheless, economic growth held up and solid earnings propelled equity markets to a double-digit gain for the third consecutive year. Three years ago, the S&P 500 traded at a price-to-earnings (P/E) multiple of 17x; today, it trades at more than 22x, the high end of its historical range. This high-expectation market is being driven by a narrow list of increasingly expensive technology titans. Against this backdrop, investors are asking if a fourth consecutive year of positive returns is attainable or simply a “Mission: Impossible.”
The skeptics have a script ready, filled with obstacles that supposedly make a continued rally unsustainable. However, these concerns look less like cycle-killing obstacles and more like hurdles that we will likely clear.
Obstacle #1: Is the Consumer Tapped Out?
We reject the narrative that the U.S. consumer is exhausted. While sentiment surveys remain historically poor, actual behavior tells a different story. Households continue to display not just a willingness to spend, but also, as measured by debt-service ratios, ample capacity to spend. Furthermore, looking ahead to 2026, consumers are set to receive a welcome “shot in the arm” from fiscal stimulus, which we believe will provide a tailwind to disposable income.
Obstacle #2: Is the Fed Behind the Curve?
Critics argue the Federal Reserve has waited too long to cut rates, risking a recession. We disagree. The Fed has successfully balanced its dual mandate of price stability and full employment. Since tariffs were enacted, monetary policy has been on a knife-edge. Tariffs are inherently inflationary, placing the Fed in a difficult position: recognizing that short-term rates are higher than necessary while remaining cautious about inflationary pressures. In this context, patience was not a policy error; it was a prerequisite for stability.
Obstacle #3: Is AI a Bubble About to Burst?
We shouldn’t mistake strong performance for a bubble. Comparisons to the year 2000 are flawed. Unlike the speculative mania of the dotcom era, today’s leaders are cash-generating behemoths. Capital expenditures as a percentage of GDP are lower than during past infrastructure booms, and crucially, spending is primarily funded by massive internal cash flows rather than debt. This AI cycle continues to be driven by profit growth, not empty hype.
Obstacle #4: “Is the Stock Market Overvalued?”
With the S&P 500 trading at over 22x forward earnings, sticker shock is understandable. Yet, we believe these levels are justified. The bulk of the market’s gains have come from earnings growth rather than multiple expansion. For 2026, consensus expectations are for S&P 500 earnings to grow by 14%. Importantly, the drivers of this growth are broadening to the “other 492” companies outside the Magnificent Eight. Finally, a premium multiple is warranted given that 30% of the index’s profits are derived from eight companies delivering explosive, secular growth.
Our View
While we are not anticipating a 2026 recession, we recently found it prudent to realize some profits and reduce exposure to a possible market correction. Though the AI theme has not run its course, we have modestly reduced our weight in the technology sector following very strong returns. We increased bond exposure, believing current yields will provide insurance if equity markets suffer a correction.
We enter 2026 with the most conservative recommended asset allocation in over a decade, carrying a slight overweight to bonds and underweights to small-cap equities, international equities, and alternatives. The mission to secure a fourth year of gains is not impossible; it is probable. While the market is vulnerable to a correction, fiscal and monetary policy alongside broadening earnings lead us to expect a positive return in 2026, albeit at a more moderate level.
Alex Harding, a chartered financial analyst, is a senior vice president of equity research and portfolio management with Ferguson Wellman Capital Management. The firm manages more then $10 billion in assets for over 1,000 individual and institutional clients. (data as of 12/31/2025)
Disclosure
Opinions and statements of financial market trends based on current market conditions constitute our judgment and are subject to change without notice. The views expressed herein are not guarantees of future performance or economic results and involve certain risks, uncertainties and assumptions that could cause actual outcomes and results to differ materially from the views expressed herein. Due to the rapidly changing nature of the financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction.
