Published December 5, 2025
Below we offer Delta Research’s 2026 Market Outlook. This overview is relatively brief and offers a good review of markets, their valuations, and their driving forces. Like all years, we expect 2026 will carry the usual mix of good market days and bad, rallies and pullbacks. Our models seek to keep you on the right side of the market regardless of whether it’s rising or falling, to protect your capital in down markets and participate meaningfully in upside markets. Enjoy this market overview!
“Delta’s market outlook begins by considering the possibility of a recession in the coming year. If there is no recession, the market will likely appreciate next year. If there is a recession, a down year in the market with the potential for significant drawdowns is likely.
The chart below shows S&P 500 intra-year declines and calendar-year returns since 1980. Years underlined in green indicate periods without a recession. Areas circled in red denote recessions (2022 is circled because it recorded two consecutive negative GDP quarters, even though it was not classified as a recession by the NBER). Non-recessionary periods are almost always positive.
Before COVID, two of the most reliable forward indicators of recession were the U.S. Treasury yield curve and the Leading Economic Index (LEI). Since COVID, these indicators have become less reliable. The LEI has been negative with few exceptions since the summer of 2022. The 6-month average LEI has been negative for 41 months, the longest in five decades. Although the yield curve currently has a positive slope (an indication of no recession), it was negative in 2022. GDP growth has been positive since mid-2022.
Direction: Up
Our reasons for forecasting a low recession probability in 2026 include:
• Easier policy and financial conditions. The Federal Reserve is lowering interest rates. The Federal Reserve’s long-term target for the Fed Funds rate is 3%. The current target range of the Fed Funds rate is 3.75-4.00%. A new Fed Chair is scheduled to take office in May 2026 and is likely to be more dovish on rates than the current Fed chair, Jerome Powell. Generally, financial conditions are easing.
• Productivity and profits. Productivity is rising, profit margins are near all-time highs, and earnings have exceeded expectations 14 out of the past 15 quarters. The impact of tariffs is becoming less of a factor as companies have made adjustments. “Bull markets usually don’t end with the Fed cutting rates and earnings growing double digits.” – Goldman Sachs
• Fiscal impulse. A significant amount of fiscal support (the combination of tax cuts, tax refunds, and government fiscal spending) is set to be injected into the economy in 2026.
• Growth expectations with upside risk. Since COVID, Wall Street has tended to underestimate GDP growth. This may be because Wall Street has underestimated the magnitude of the AI capex investment and consumers’ resilience (near all-time high net worth and historically low debt-service ratios). Both the Fed and consensus Wall Street estimates show continued growth in 2026. The most accurate forecast of GDP growth in the past couple of years, the Atlanta Fed GDPNow model (which we highlight every week), has often tracked above consensus: for example, the 3Q2025 model estimate is 3.9% growth versus consensus expectations of about 2.7%.
Magnitude: Double Digit
Given our view that the market will end next year higher, the following is an attempt to predict the magnitude.
• Consensus S&P 500 EPS expectations are $309 for 2026 and $353 for 2027. The S&P 500 is currently trading at 22x forward earnings. If the market holds this multiple and we look one year ahead, the S&P 500 could be $7,766 (22 x $353) – broadly in line with expected EPS growth.
• When the Fed has lowered the Fed Funds rate with the market at an all-time high (most recently, October 2025), the S&P 500 was higher 12 months later on average by ~20% with the worst 1-year outcome still 15%.
• Historically, when the Fed cuts rates during a non-recessionary period, equities tend to appreciate over the subsequent 12-24 months. The chart below highlights the importance of getting the recession prediction right. If 2026 tracks the non-recession pattern (the green line in the chart below), ~12% appreciation is a reasonable expectation.
• The University of Michigan Consumer Sentiment survey shows consumers are near all-time sentiment lows. Historically, 12-month S&P 500 returns following sentiment troughs have averaged ~24%.
Bottom line: If our no recession prediction is accurate, we expect a fourth consecutive year of double-digit gains in 2026.
Key Risks
The primary risks to our outlook are valuation and inflation. Many market observers are worried about the historically high Price/Earnings (P/E) of the market. The current forward 12-month P/E is 22x versus a 30-year average of 17x.
There are many economic and structural reasons why a P/E of 22x makes sense today. They include high profit margins, high earnings growth rates, sector-dominant companies with high barriers to entry, the AI capex growth story, and the scarcity value of publicly traded companies offering daily liquidity. Since 2000, the number of publicly traded stocks has fallen from about 7,500 to about 4,500. Conversely, the number of private equity-backed companies (not publicly traded) has grown from ~2,000 to ~11,500 in the same time period.
If inflation remains persistently elevated, the Fed may not be able to lower rates as much as anticipated. High interest rates have been a primary cause of recession in the past.
Market Update
After closing the month of November with a solid Thanksgiving week performance, investors chose to sell stocks to open December. The S&P 500 slipped -0.5% with interest rates ticking higher. Investors have been laser focused on the Federal Reserve’s mid-December meeting and possible rate cut. With government-issued economic and inflation data running months behind schedule, there have been fewer inputs for investors to parse through. Strength in the tech and crypto sectors helped stocks rebound Tuesday with the S&P reclaiming +0.3% on the day. Bitcoin prices had fallen -35% in two months as investors suddenly shunned crypto assets. Earnings from semiconductor firms Marvell and Intel also supported the rebound. A somewhat weak report from labor market watcher ADP fueled optimism around an interest rate cut sending rate-sensitive banks, housing, and small cap shares surging Wednesday. Those gains pushed the small cap index up +2% while the broader market indexes lagged. Investors got another couple of private data reports on the labor market Thursday. Those reports were mixed with stock indexes reacting with little change. Friday brought an inflation reading, albeit from September. The report sent interest rates back upward to undo the prior week’s drop. Stepping back, rates in the closely-watched 5-10 year span have been choppy but ultimately flat for three months now. Very short-term rates, those affected the most by Fed policy have dropped notably. Stock investors responded with a mixed performance Friday sending rate-sensitive areas down while strength in tech held up the broad market.
The S&P 500 moved only marginally every day this week. The net result was a scant (SPY) +0.34% rise. The Nasdaq 100 (QQQ) outperformed with a +1.01% gain. Small cap stocks (IWM) added +0.81%.
Warm wishes and until next week.