Mark and Elise Levy’s November Economic Update
2026 Market Outlook: Equities, AI, and Economic Drivers
The U.S. economy is expected to benefit from fiscal support next year, notably the One Big Beautiful Bill Act (OBBBA), which may help corporate America sustain mid-single-digit revenue growth. Coupled with AI-driven efficiency gains, these factors could support double-digit earnings growth—a key driver for stock prices given limited room for P/E (price/earnings) expansion. Corporate America’s ability to meet these lofty earnings targets will be central to equity performance in 2026.
Artificial intelligence remains a major force shaping markets. Hyperscalers like Alphabet, Amazon, Meta, Microsoft, and Oracle are expected to increase AI-related capital expenditures to nearly $520 billion in 2026, about 1.6% of U.S. GDP. These investments are likely to boost productivity, corporate margins, and S&P 500 earnings. While AI’s transformative potential underpins optimism, stretched valuations and execution risks remain key considerations.
AI is also reshaping labor markets, with recent data showing that roughly 20% of October layoffs were AI-related. Current adoption rates are still low in many traditional sectors, offering significant upside potential. As AI tools become more accessible and regulatory clarity improves, broader deployment may unlock productivity gains and cost reductions across the economy.
The Federal Reserve’s anticipated rate-cutting cycle in 2026 is aimed at normalizing policy, supporting inflation control, and fostering healthy job growth. Stocks historically perform well under such conditions, particularly near all-time highs. Investors should watch for potential volatility around AI expectations, interest rates, and U.S.-China trade developments.
Fed policy, fiscal deficits, and Treasury issuance will dominate fixed income markets. While credit spreads are near 20-year lows, the ability of corporate America to meet earnings expectations and avoid recession will be critical. Overall, interest rate movements remain the key driver of bond returns in 2026.
Recent volatility and declining market breadth suggest rising concentration risk in mega-cap names. However, the S&P 500 remains within a long-term uptrend. Continued monitoring of trend support and participation metrics will be crucial for assessing potential pullbacks.
2026 is shaping up to be a transformative year. Equities will be influenced by AI innovation, fiscal policy, and earnings growth, while fixed income markets will remain focused on interest rates and debt dynamics. Midterm elections and technology trends will also play key roles.
- Mark and Elise
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