MW AI air pocket, struggling consumer could prove a double whammy for stocks next year, says Bank of America

By Barbara Kollmeyer

Wall Street's most wary forecaster so far sees modest S&P 500 gains next year

Consumers are under increasing stress and for Bank of America strategists, that's a potential roadblock to stock gains next year.

Even if the year-end run has been a little bumpy, Wall Street forecasters seem largely optimistic headed into 2026.

Our call of the day from Bank of America warns of a more cautious year ahead, owing to increasingly stressed consumers and a speed bump headed for AI.

Savita Subramanian, head of U.S. equity & quantitative strategy, forecasts a finish of 7,100 for the S&P 500 SPX, below the MarketWatch-compiled Wall Street median of 7,500. She expects earnings to grow by mid-double digits, but investors to pay a smaller multiple for them, expecting compression between 5% to 10%.

Subramanian said investors have spent a lot of time this year trying to figure out what hyperscalers to own. The bank prefers AI adopters, but even then says benefits of owning those could be some time away.

"We also worry about the tension between AI taking jobs vs. consumption remaining resilient in 2026," Subramanian wrote.

Braced for consumer struggles, Bank of America lifted consumer staples - items considered essential - to overweight. Consumer discretionary, or non essentials, are now underweight from market weight. The State Street consumer discretionary ETF XLYhas gained 5% this year, outperforming the staples XLP that have been flat.

Their overweights are financials, real estate, materials, healthcare and energy and communications services and utilities are underweights, while tech and industrials are market weights.

"We see a strong, broadening capex cycle, but are more worried about consumption," she said. "The linchpin of consumption is jobs, and middle income professional services employees have driven consumption growth for the past decade."

Those consumers are now facing "aggressive inflation" in areas such as dining out, healthcare and utility bills. "Fed rate cuts, no tax on tips and overtime are better for low income consumers, and from here, the administration is more likely to prioritize populist reform and cast a lifeline to lower income consumers via cost management and stimulus checks," she added.

"Meanwhile, just as an increasing number of college grads hit the labor market, entry level office jobs are being cut amid efficiency gains and anticipation of more to come with AI. We now hear of companies proactively shifting to high school apprenticeship models," she said.

Other headwinds? Liquidity, which has boosted stocks this year with lots of money chasing few ideas, is looking as "good as it gets," and fewer global rate cuts are forecast, along with less government stimulus.

And while the wealth effect has been on "overdrive" this year thanks to hefty gains in most asset classes, investors have been spooked of late by falls in gold and crypto. Some day traders could face unwelcome tax bills in April from staggering asset gains.

Share buybacks are also looking thinner ahead, given higher capital expenditure and debt. "Liquidity is bullish today, but the direction of travel is likely worse, not better," she said.

As for hot AI trade this year, she said investors need to brace for "an air pocket. Monetization is to be determined and power is the bottleneck and will take a while to build out. So for now investors are buying the dream," said the strategist.

So far, AI hyperscalers that have been more capital intensive than big oil companies have been rewarded, but that could fade as concerns grow over how they are raising it. The tech sector's supply of debt is now 10 times higher than a year ago, as hyperscaler capital intensity has jumped to 64% from 13% in 2012.

Read: The Fed may need to act as potential trouble brews in a key corner of the financial market

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are modestly higher and bitcoin (BTCUSD) is rebounding above $93,000.

   Key asset performance                                                Last       5d     1m      YTD      1y 
   S&P 500                                                              6829.37    0.25%  0.49%   16.11%   12.21% 
   Nasdaq Composite                                                     23,413.67  0.86%  -0.37%  21.25%   18.64% 
   10-year Treasury                                                     4.077      7.80   -8.30   -49.90   -10.40 
   Gold                                                                 4239.7     1.04%  6.25%   60.64%   58.53% 
   Oil                                                                  58.84      0.50%  -1.34%  -18.13%  -14.39% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

A look at consumer health is due from Dollar Tree $(DLTR)$ earnings.

American Eagle Outfitters stock $(AEO)$ is up 10% on a sales beat and higher outlook from the retailer.

Marvell Technology $(MU)$ is up over 8% on an upbeat outlook for the chip company's data business.

Okta $(OKTA)$ is dropping, despite an earnings beat. CEO Todd McKinnon said investors are getting this wrong about AI and software.

ADP private-sector employment for November is due at 8:15 a.m., followed by September import prices at 8:30 a.m., September industrial production at 9:15 a.m. and the Institute for Supply Management's services report at 10 a.m.

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The chart

Only the young? This chart from Deutsche Bank shows who has been subscribing to OpenAI this year - the under 50 crowd.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   BYND    Beyond Meat 
   TSM     Taiwan Semiconductor Manufacturing 
   AMD     Advanced Micro Devices 
   AAPL    Apple 
   PLTR    Palantir Technologies 
   AMZN    Amazon 
   META    Meta 

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-Barbara Kollmeyer

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December 03, 2025 06:53 ET (11:53 GMT)

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