Since the current bull market began on October 12th, 2022, the S&P 500 delivered a total return of 100.6%, or 24.1% annualized. This performance unfolded against a backdrop of constant recession calls, shifting inflation and labor market narratives, policy uncertainty, government shutdown worries, AI bubble chatter, and ongoing geopolitical risks.
Even more striking is how subdued volatility has been. Over the past three years we experienced only seven 5% S&P 500 pullbacks compared with twelve in 2022 alone. Dating back to 1980, the average is roughly five such pullbacks per year (see Chart 1).
And while the Liberation Day 20% drop in April 2025 gave us a vivid reminder that markets can still move sharply, the rebound was equally extraordinary. The index regained its prior high by the end of June and continued to climb higher.
As we look toward 2026, resilience is once again the theme. The U.S. economy is slowing from its post-pandemic pace, but the underlying foundation remains solid. Corporate earnings are rising, consumer spending is healthy, and despite vacillating sentiment, AI-related investment is accelerating. The environment is noisier, but the long-term trend is intact.
A doubling of the S&P 500 in just over three years does not happen without real economic drivers. This bull market was powered by a resilient consumer, exceptionally strong corporate profits, steady progress on inflation, and a monetary policy backdrop that shifted from headwind to tailwind. These same pillars remain in place today, even as early signs of strain begin to emerge.
Consumer spending never cracked, despite higher borrowing costs and constant recession talk. Households benefited from wages outpacing inflation for 31 consecutive months, while higher income groups also benefited from rising asset values and elevated earnings on their cash. In JPMorgan’s most recent earnings call, the world’s largest bank referenced consumer resilience four times. Highlighting that spending remains strong and delinquency rates are better than expected. Because consumer spending drives nearly 70% of GDP, this resilience anchors the broader economy.
S&P 500 earnings grew at double digit rates for the past four quarters, supported by strong demand, disciplined cost control, and productivity gains. Expectations were high entering 2025, with full year earnings growth initially projected near 14%. While estimates eased to roughly 12% growth, expectations for 2026 continue to move higher. S&P 500 earnings per share (EPS) are now expected to reach about $309 in 2026 (see Chart 2), representing 14.9% growth over 2025. Markets tend to rise more sustainably when earnings, not speculation, carry the load, and earnings have done exactly that.
Inflation also moved steadily in the right direction with the key progress coming from cooling services inflation and shelter costs. That improvement gave the Federal Reserve room to begin cutting rates in late 2025, delivering roughly 75 bps of easing across three cuts.
These forces created the foundation for a remarkably strong run in equities. But as we look toward 2026, the question is whether these same pillars can continue carrying the market, or whether the small cracks forming beneath the surface will matter more in the year ahead.
Even with a constructive backdrop, several meaningful risks could shape the market environment in 2026 and introduce a more normal level of volatility than we experienced in recent years.
The labor market stands out as one of the most important variables in 2026. Most indicators point to continued softening. Job creation is slowing down, and measures such as jobless claims suggest finding a new job is more difficult. At the same time, layoffs are relatively subdued. As Chart 3 shows, layoffs as a share of total employment started drifting modestly higher but remain below pre-pandemic levels and well below recessionary periods.
The labor market is a double-edged sword. Limited layoffs support consumer spending and corporate earnings, but slower job growth also caps the pace of economic expansion. Historically, sustained GDP growth required steady job creation. While technology related investment and rising business capital expenditures (capex) helped lift productivity and support growth in recent quarters, productivity gains alone are unlikely to fully offset weaker hiring indefinitely. To maintain growth in 2026, the economy will ultimately need a healthier balance between productivity improvements and continued job growth.
Higher-income households continue to spend, supported by solid stock market returns and income growth. In contrast, the lowest wage quartile households, which saw the strongest wage gains during the pandemic, are now experiencing the slowest wage growth (see Chart 4), even as prices for everyday necessities remain elevated. Pundits are referring to this phenomenon as a “K” shaped economy. This reversal helps explain why consumer sentiment remains subdued, despite solid market performance and a broadly stable economic backdrop. Recent earnings call commentaries reinforce this split, with companies broadly reporting resilient demand from higher-income customers but more cautious, price-sensitive behavior among lower-income consumers. While higher-income households drive a disproportionate share of overall spending, sustained weakness among lower-income consumers could still weigh on growth more than expected.
Another key issue heading into 2026 is, of course, AI. AI-related investment has been a meaningful driver of economic growth and market sentiment, but from an equity perspective, its most important impact has been to amplify leadership among a small group of very large companies. Many of the firms at the center of the AI build-out are also the largest stocks in the S&P 500, with the top 10 now accounting for more than 40% of the index (see Chart 5). This concentration worked well for index investors in recent years as these leaders delivered outsized earnings and returns.
This dynamic also helps explain today’s valuation backdrop. The S&P 500 currently trades around 22.5x estimated earnings, a level influenced by a small group of dominant, AI-exposed leaders. While many of these companies trade at premium multiples, those valuations have been supported by real earnings growth rather than speculative excess. The key risk is less about valuation extremes and more about concentration-driven dependence. With so much of the index tied to a handful of AI-exposed leaders, even a modest slowdown in earnings momentum could have an outsized impact on performance.
AI investment is also becoming more visible in capex. Capex as a share of operating cash flow has risen sharply for the largest technology companies, often referred to as hyperscalers, which operate massive global data center platforms. Combined, these companies now reinvest $365 billion, or roughly 65% of operating cash flow (see Chart 6), on capex over the past year, and consensus expectations point to further increases in the coming years. This level of spending highlights how central AI and related infrastructure is to future S&P 500 Index earnings growth.
In that context, a meaningful reduction in hyperscaler capex could weigh on performance as investors digest the next phase of the AI cycle. The good news is that many of these companies also operate durable core businesses that generate substantial free cash flow. A slowdown in AI spending could therefore also benefit shareholders through higher dividends and stock buybacks.
The past three years exhibited strong returns with unusually low volatility, despite constant public skepticism. The rally was grounded in resilient consumers, rising earnings, easing inflation, and supportive monetary policy, with the Liberation Day rebound underscoring the market’s solid foundation.
As we head into 2026, the environment is shifting. The labor market is cooling, the consumer is increasingly bifurcated, market leadership is more concentrated than at any point in recent decades, and policy uncertainty could again play a role in shaping sentiment. At the same time, AI and technology related investment is a meaningful driver of both economic activity and earnings, raising the stakes for a small group of dominant companies.
The implication is not that the business cycle is ending, but that the next phase might look different. Volatility will likely return and stock market leadership may broaden or rotate. In this environment, GHPIA continues to emphasize diversification and growth at a reasonable price discipline, focusing on durable businesses with sustainable earnings power rather than relying on narrow leadership or purely thematic, momentum-driven exposure.
GHP Investment Advisors, Inc. Benchmarks are determined using any combination of valuation approaches deemed relevant by GHPIA, including Price to Earnings (P/E), Price to Cash Flow (P/CF), and Price to Book (P/B), and other relevant analyses. Consideration is given to such factors as historical and projected financial growth for the company, profit stability, leverage, the quality of earnings, valuations of comparable companies, the size and scope of the company’s operations, the strengths and weaknesses of the company industry information and assumptions, general economic and market conditions, and other factors deemed relevant. While Benchmarks are based on valuations and assumptions that GHPIA believes are reasonable under the circumstances, actual realized returns on such investments may differ materially and do not take into account any fees or expenses that may be associated with investing in those assets. There is no assurance that the investment objectives and strategies described herein will be achieved or successful. P/E, P/BV, and P/CF data are provided by FactSet.
Investment Insight is published as a service to our clients and other interested parties. This material is not intended to be relied upon as a forecast, research, investment, accounting, legal, or tax advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The views and strategies described may not be suitable for all investors. Individuals should seek advice from their own legal, tax, or investment counsel; the merits and suitability of any investment should be made by the investing individual. References to specific securities, asset classes, and financial markets are for illustrative purposes only. Actual holdings will vary for each client, and there is no guarantee that a particular account or portfolio will hold any or all of the securities listed. Past performance is no guarantee of future results. Investments carry risk and investors should be prepared to lose all or substantially all of their investment.
Top Row L to R: Brad Engle, Mike Sullivan, Sebrina Ivey, Christian Lewton, Jason Kitner
Bottom Row L to R: Carin Wagner, Angela Kennedy Lee, Jenny Merges, Brian Friedman, Deirdre Mcguire, Barbara Terrazas, Reed McCoy
