Bank of America stated that after three consecutive years of double-digit returns and elevated valuations, the room for U.S. stocks to deliver excess returns in 2026 is quite limited.

The bank forecasts the S&P 500 to reach around 7,100 by the end of next December, a gain of about 4% from Wednesday's close. The index has risen roughly 16% so far in 2025, following gains of over 23% in each of the previous two years.

Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, wrote in a report that the bank expects U.S. companies to achieve double-digit earnings growth next year, but the stock market will see “modest price returns.”

The strategist noted that while the current concentration of market leadership and high valuations resemble the dot-com bubble era of 2000, the outcome is unlikely to be the same. However, she pointed out that as large tech companies’ heavy investments in artificial intelligence (AI) have yet to translate into profits, the market could face an AI “growth gap.”

This cautious outlook comes as the S&P 500 experiences a volatile period. Traders are grappling with anxiety over the AI theme and uncertainty around the extent of Federal Reserve rate cuts. Most forecasters remain optimistic about the benchmark index’s performance—after hitting a record high in late October, it fell 5% before regaining momentum in the final week of November. The S&P 500 currently trades at 22 times forward 12-month earnings estimates, 19% above its long-term average.

Deutsche Bank’s Binky Chadha expects the index to reach 8,000 next year, while Morgan Stanley’s Mike Wilson projects 7,800. J.P. Morgan and Goldman Sachs have set targets of 7,500 and 7,600, respectively, implying a fourth consecutive year of 10% or higher returns for the S&P 500.

Subramanian wrote, “Current market liquidity remains ample, but the future direction is likely contraction rather than expansion. Share buybacks are declining, capital expenditures are rising; meanwhile, central banks are easing less, and the Fed will only loosen if economic growth weakens.”

She also presented a more optimistic scenario: if corporate earnings significantly exceed expectations, the S&P 500 could surge to 8,500, a 24% rise from Wednesday’s close.

She also outlined a pessimistic scenario: if the AI hype fades and macroeconomic tailwinds fail to materialize, the index could fall about 24% to 5,500.

Regarding whether the stock market faces bubble risks, Subramanian acknowledged such risks exist but does not foresee a market crash. Her analysis notes that compared to 2000, investors today have lower equity allocations, earnings growth supports returns, and speculative, unprofitable stocks are less aggressively pursued.

“We see far more differences than similarities between today’s market and 2000,” Subramanian said.