A Nomura Securities strategist presents the outlook for U.S. equities in 2026, expecting the S&P 500 to reach around 7,200 at year-end. The strategist reviews market developments in 2025 and the factors likely to drive performance in 2026.
Although market sentiment temporarily deteriorated at times in 2025 owing to tariff announcements and postponements, as well as developments involving Israel and Iran, the Federal Reserve’s dovish stance contributed to resilience in the economy and equity markets. Many forecasts proved inaccurate, but equity supply and demand remained firm, and the major stock indices ended the year higher.\n\nSupportive factors for 2026 include an environment in which nominal economic growth exceeds nominal interest rates (G>R), expectations for double-digit earnings growth, and a reduction in shares outstanding through robust share buybacks. Together with long-term expectations for AI demand, these factors are expected to support higher share prices. At the same time, they are unlikely to eliminate the overvaluation of equities over the long term.\n\nThe S&P 500 is projected to reach approximately 7,200 at the end of 2026 and approximately 7,450 at the end of 2027, with the forward 12-month P/E ratio assumed to be around 21x. Ranges are also provided for March, June, September and December, with the index expected to trade within a range of approximately 6,400–7,400. Both the contribution of AI-driven productivity gains and downside risks to the economy are expected to influence performance.\n\nIn terms of stock selection, the focus is on a barbell strategy combining semiconductors with REITs, small- and mid-cap stocks, and quality stocks, while equal-weighted indices are also attracting attention from a diversification perspective. REITs are expected to benefit from lower interest costs, while small- and mid-cap stocks may be reassessed as undervalued from a valuation perspective.