By Steve Garmhausen

The stock market has done better than expected in 2025. Can it repeat that feat in 2026? Going into this year a number of outlooks called for single-digit returns, citing high valuations and interest-rate uncertainty. But the S&P 500 so far is up nearly 18%, fueled largely by the artificial intelligence infrastructure buildout. Will market leadership continue to broaden beyond AI-related names? Will inflation and a weakening jobs market sink stocks? For this week's Barron's Advisor Big Q, we asked several investment professionals to share their bear and bull cases for the coming year.

Lisa Shalett, chief investment officer, Morgan Stanley Wealth Management: In terms of things that could go wrong, we could find ourselves in a stagflationary nightmare where growth ends up slowing and inflation flares back. That would occur through a combination of success in the deployment of generative AI, which leads to material pickup in unemployment, which materializes into real, genuine malaise in consumer spending at the same time a new Fed chair decides they want it "hot," and they convince the Fed governors to cut rates below 3%, and that ultimately causes an inflationary spike. So you get inflation on the one hand and poor growth on the other because unemployment is high, and the only thing that's working are the same Magnificent Seven gen-AI stocks.

The bull case is the one that's priced in: Goldilocks! Everything is great! We got monetary stimulus, we got fiscal stimulus, we got financial services deregulation, and we got Goldilocks in terms of gen AI: You get all the benefits of productivity and none of the pain of labor layoffs. In reality, I think we're going to be somewhere in between those scenarios. I think the scenario that's currently priced in is probably a little too bullish, but I think my bear case is too bearish. What we're typically saying is that the S&P 500 grinds it out but there's a lot of volatility and a lot of confusion during the year, especially leading up to what I think will be a very contentious midterm election. I think the markets are going to care about whether the Republicans lose control of Congress.

Kevin Grimes, CEO and chief investment officer, Grimes & Co.: Bull case first: There's a fair amount of stimulus for next year, and it starts with monetary policy. The Fed is likely to continue cutting next year if justified. Kevin Hassett is going to come in at some point as chair and is probably going to be as easy as possible as far as policy goes. So I think you're going to have accommodative monetary policy, and the Fed is likely to start buying bonds again to try to bring down longer-term rates. On the fiscal side, all that stimulus from the One Big Beautiful Bill is going to hit. You have tax cuts, the elimination of tips for overtime, and the higher SALT deduction cap. They're saying next year could be one of the biggest refund years ever. A bunch of business tax cuts also go into effect in 2026. The Joint Committee on Taxation estimates $87 billion in tax cuts between 2025 and 2026, so you're talking about a lot of money. That will hopefully help the lower leg of the K-shaped economy. Other softer stimulus includes the World Cup coming to North America and the fact that it's our nation's 250th birthday, which will mean spending on travel and celebration. So the bull case is that there's a lot of stimulus, and if the economy were to falter, the Fed has bullets in the gun.

The bear case comes back to bond yields. Anything that causes long-term rates to go up, whether it's an uptick in inflation or inflation expectations, would be bad. It's hard to see the 10-year Treasury below 4% for any extended period of time if the economy is OK. Longer-term bond yields over 4.5% are tough for risk assets. The interplay between stimulus and longer-term borrowing costs is the name of the game for next year. I think we'll see modest returns and some volatility, so it'll probably be less pleasant than what we've experienced the past several years.

Kara Murphy, chief investment officer, Kestra Investment Management: If we have a big up market next year, it'll be because we start to see corporate earnings take off outside of AI names. We keep getting little glimmers of it, but it hasn't materialized enough to substantially impact the markets. And corporate earnings this year have still been held up by AI-related firms. We want to see more traditional, old-economy companies start to benefit from an earnings resurgence. That would create a healthy rally in the market. And there are some good reasons to believe we're going to see a resurgence in broad economic growth. The more beneficial tax treatment of capital expenditure could find its way into all sorts of different types of businesses, which would be a really nice boost. There's also the productivity dream of AI, but I'm not so sure that will happen in the next 12 months.

On the bear side, I think that would likely happen in one of two ways, either because the Fed is wrong about weakness in the labor market, and the labor market weakens more rapidly than what they're expecting today, and then they're rushing to cut into that. And I'm looking at these headlines about Venezuela. I've been in this business for more than 25 years, and geopolitics are always among the risks. There's always the potential for a big surprise that will disrupt the market. Our base case for 2026 is moderate upside in equities and moderate upside in fixed income: high single digits in both, with a preference for equities.

Brian Tall, chief investment officer, Brighton Jones Wealth Management: A bull-case scenario would include strong earnings from the tech sector, and especially the Mag Seven and other AI heavy-type companies, which would ease concerns about valuations. Inflation drifting back into the low- to mid-2% range would ease concerns about inflation reaccelerating. Fewer policy surprises out of the White House would be beneficial. And then, of course, a credible appointment to lead the Fed. For the bull case, pretty much all things need to look pretty good in each of those segments. As far as a bear case, I think any one of those areas providing a negative surprise could pretty quickly derail the positive trajectory that we've been on. For example, if a new Fed chair is not seen as credible, and they slash interest rates more than what the market feels is reasonable, and inflation hasn't drifted lower, you might see short-term rates drop but the longer end of the yield curve spike up. That would be pretty jarring, even if, say, tech sector earnings came in positive. But for next year, we would lean more toward the bull scenario.

Andrew Krei, co-chief investment officer, Crescent Grove Advisors: In the bear case, the economy doesn't crater but markets are finally forced to take rates and concentration risk seriously. Inflation stays sticky, pressuring the long end of the yield curve and handcuffing the Fed's reaction function. This compresses equity multiples and tightens financial conditions even without a classic recession. At the same time, the "AI capex" trade stops getting a free pass. Spending remains heavy without any payoff to show for it. The market's narrow leadership becomes a vulnerability, leading to a modest down year for the S&P 500, with bigger drawdowns in the most crowded megacap winners.

In the bull case, we see a combination of reaccelerating growth and inflation cooling faster than expected, giving the Fed room to cut meaningfully. Long rates stabilize or fall, liquidity improves, and risk appetite stays strong even with elevated starting valuations. AI names grow into their valuations as profitability and productivity gains become evident. Investors remain enthusiastic about the AI theme, but the rally broadens beyond just the biggest names. The result is a strong year for equities, with more balanced leadership.

Our base case is constructive on growth but realistic on markets. The economy keeps growing thanks to loose fiscal policy and a dovish Fed, yet returns are moderate because the good news is largely in the price. Inflation cools only gradually, so the Fed opts to pause its cutting cycle despite political pressure to be more dovish. That leaves us in a choppy, late-cycle environment with elevated volatility. Leadership continues to broaden away from a handful of megacaps toward more traditional industries and non-U.S. markets, with gains driven more by earnings than by higher valuations.

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December 17, 2025 16:35 ET (21:35 GMT)

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