Wall Street’s most cautious strategist sees only modest S&P 500 gains in 2026
Despite a choppy year-end, most Wall Street forecasters are entering 2026 with optimism. But Bank of America is sounding a more measured note.
Savita Subramanian, the bank’s head of U.S. equity and quantitative strategy, expects a more challenging backdrop as consumer finances weaken and the AI boom hits a temporary slowdown. Her S&P 500 forecast sits at 7,100, well below the 7,500 Wall Street median. She sees mid–double-digit earnings growth next year, but warns that investors will pay lower multiples, with valuations compressing by 5% to 10%.
Subramanian noted that investors spent much of 2025 debating which hyperscaler stocks to own. BofA prefers companies adopting AI rather than building it, but even those gains may take time to materialize.
“We’re also concerned about the tension between AI-related job displacement and the need for consumption to stay resilient in 2026,” she wrote.
Expecting consumer pressure, the bank upgraded consumer staples to overweight and cut consumer discretionary to underweight. Discretionary stocks have gained 5% this year, outperforming flat staples.
BofA’s sector overweights include financials, real estate, materials, healthcare, and energy, while communications services and utilities remain underweight. Tech and industrials stay at market weight.
Subramanian warned that middle-income households—key drivers of U.S. consumption for a decade—are being squeezed by steep inflation in dining, healthcare, and utilities.
While Fed cuts and tax adjustments may help lower-income households, middle-income workers will feel more strain, especially as entry-level office jobs shrink amid AI-driven efficiency. Some companies are even shifting toward high-school apprenticeship hiring models.
Liquidity, a major force behind 2025’s market strength, may also be peaking. With fewer expected global rate cuts, reduced government stimulus, and thinner buybacks due to higher capex and debt loads, the market may face tougher conditions. Even the “wealth effect,” powered by big asset gains this year, has cooled as gold and crypto pull back—potentially leaving some day traders facing hefty April tax bills.
As for the year’s red-hot AI trade, Subramanian warns of an “air pocket.” Monetization remains unclear, power constraints are slowing build-outs, and capital intensity is skyrocketing. Tech-sector debt issuance is now 10× higher than a year ago, with hyperscaler capex ratios surging from 13% in 2012 to 64% today.
For now, she says, investors are “buying the dream”—but the risks are rising.
