This is the time of year when Wall Street strategists look into their proverbial crystal balls to get a sense of what investors may face in the new year. This year, Kiplinger Personal Finance Magazine spoke with Keith Lerner, the chief market strategist and chief investment officer for Truist Wealth.
Lerner says the U.S. stock market will contend with "a carousel of concerns" but should come out ahead in 2026, thanks to strong fundamentals. Read on to see what's behind Truist's bullish view.
Kiplinger: What do you see ahead for financial markets in 2026? Do you have a target price for the S&P 500?
KL: We don't do targets. When we think about markets, we take a weight-of-the-evidence approach and keep an open mind. We look through four main lenses: History, the economic cycle, fundamentals and market signals.
Okay, let's start with history.
Warren Buffett said if all you needed was history, the richest people would be librarians. But it's a good starting point.
There's an old saying that's still true: Bull markets don't die of old age. We've had 10 bull markets since 1957. Seven of those have lasted more than three years. In year four, you had further gains every time — an average of 16%. But there's a caveat: Year three tends to be choppy, with an average return of 1%.
We really didn't have much of that in 2025, so maybe that takes a little bit away from the next year's gain. Either way, the average cumulative price gain for those seven bull markets is 229%. At this point [through October 31], we're up 91%. That suggests the bull market has further to go.
We also did a study that found when the Federal Reserve cuts interest rates with the market near record highs, a year later, stock prices are up more than 90% of the time, with an average gain of 13.1% — with the key caveat that we don't fall into recession. And I should add that as you move into the fourth year of a bull market, it's not unusual to see pullbacks, with drawdowns of 8% to 10% common.
What's your take on the economy?
We're looking for a slight uptick in economic growth in 2026, after landing at about 1.8% in 2025. So a little bit better, but not gangbusters. The economy helps us to say whether we want to be on offense or defense or somewhere in between. We still want to be tilted toward equities, because we think there's further to go. But we're not at maximum equity exposure because it's not the beginning of the cycle.
There are three main factors that we think will support the economic environment: One, the tax changes that we saw in mid-2025 won't get implemented, or we won't see the benefits, until 2026. Consumers will see some tax refunds in the first quarter when they file their taxes, so we'll hopefully get a little bit of a boost in consumer spending from that. There are a lot of incentives for businesses as far as capital expenditures and accelerated depreciation; that will be helpful for companies.
And on the tariff front, we're at a point where companies are adapting, and at least on the margin there will be more clarity than we saw in 2025. The last factor is that the Fed is cutting rates — we think toward 3% on their benchmark rate by the end of 2026, from a target range of 3.75% to 4.0% at the end of October.
What's the risk to your economic outlook?
There's a divergence between labor-market and other economic data. Some of the reports on gross domestic product look stronger, but the labor market, any way you look at it, is softening. If we show a negative job-growth trend, it suggests that consumer spending, which is two-thirds of the economy, is going to slow down. That's a risk, but not our base case.
Let's discuss fundamentals.
The north star for the bull market is still corporate profits. As the stock market has reached new highs, so have the estimates for earnings. This year we've seen earnings growth expectations broaden out from tech and growth stocks to the average stock and to small caps. In the past couple of months, we've seen earnings trends move up across the board.
Here's the tension in the fundamental story: Valuations by almost any historical metric are high. A price-earnings ratio is a reflection of confidence — the market is expecting good things to happen. If they don't, it could become vulnerable. We need to see an economy that continues to chug along, and we need to see this dominant theme of artificial intelligence, tech and rising earnings trends continue to support the market.
Are you worried about an AI bubble? If uptake of the technology slows, or it isn't monetized as expected, will the boom turn into a bust?
Every bull market has a dominant theme; this one's is AI. Think of it as the ChatGPT bull market. ChatGPT came out in November 2022; the bull market started in October.
People ask me all the time if we're in a bubble. There are definitely pockets of froth, but overall, we're not seeing it. The tech sector is up just over 30% year over year through October. Back in the 1990s tech bubble, we saw 12-month gains of over 100% — that's a red alert you're in bubble territory. The sector is trading at around a 30 P/E; back then, it was closer to 50. That doesn't mean there's no risk. But the tech sector has the strongest earnings trend — estimates keep getting moved higher. That's what we're watching.
What are the market signals you're watching?
One reason the bull market deserves the benefit of the doubt is that the primary uptrend remains intact. Stocks overall are trading above their long-term moving averages [a series of average closing prices over a certain period — say, the past 200 days]. And that's not just in the U.S. but around the globe.
As the bull market matures, we're also watching investor sentiment, although it's an indicator that works better at market bottoms, when there's a lot of fear, than at market tops. When people become complacent and you see huge inflows into the market or sentiment surveys that show more bulls than bears, that's risky.
I would say sentiment is a bit elevated, but we're not seeing extreme euphoria. The carousel of concerns continues to spin, and as one recedes another comes up. These concerns keep euphoria in check.
Given your outlook, what's your portfolio advice?
Although investor goals and risk tolerances vary, we generally maintain a slight tilt toward equities. Compared with a portfolio of 50% stocks and 50% bonds, we recommend around 52% in equities, 44% in fixed income, 2.5% in gold and the rest in cash.
In the equity bucket, we've got 76% in the U.S. and 24% in international. We're still Team USA — that's where the earnings are, and the innovation as well. We have an overweight position in large-cap stocks with a growth tilt, but the outlook for small caps is improving, with lower rates and improving profits.
We're neutral on international markets, but in a world where there are a lot of crosscurrents, you want to be diversified. International markets are still relatively cheap; there is more stimulus in Europe and a new leader in Japan that the market is looking at as pro-business. The dollar looks like it has bottomed, but if it weakens further, for whatever reason, that's a reason to own international stocks. We've also added to emerging markets but are still underweight relative to market benchmarks.
On the fixed-income side, we think yields will trend lower in 2026. We like intermediate-term, high-quality, plain-vanilla Treasuries. We're underweight on high-yield corporate bonds — we're taking our risks on the equity side.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
