Equities 2026 Outlook

Could 2026 herald a new era for equities? Productivity gains, renewed economic growth, margin expansion and recently released ‘animal spirits’ – accompanied by benign central bank policy – are all driving global markets higher. Federated Hermes has upgraded its forward earnings outlook and we’ve also increased our 2026 S&P 500 price target from 7,500 to 7,800.

Here’s how we think we’ll get there:

1. Nominal GDP growth should accelerate in 2026. Given an expected inflation rate of 2.5%, we believe nominal US GDP should run north of 5% in 2026 and 2027. 
2. The labour market should remain ‘not too soft, but not too tight.’ With the US Federal Reserve (the Fed) now in a (belated) cutting cycle, we expect employment to pick up. 
3. AI productivity gains should begin to accelerate. Across the world, companies of every stripe are incorporating the AI revolution into their work processes, likely unleashing a new era of productivity gains.
4. Inbound investment to the US should be a new driver. In our visits with corporate management, company after company said they are particularly focused on this issue, and not just in relation to the US but also elsewhere.
5. The Fed is in a new cutting cycle. With rates at 4.25% against a core inflation rate of 2.5%, the Fed has a long way to go in this easing cycle. Although the broad economy is not as rate-sensitive as it once was, certain sectors are – and they have been in a two-year recession. Relief here will be a rocket booster to overall growth. 
6. Corporate margins should continue to expand due to an ongoing economic mix shift, along with widening AI investments. Over the last decade, it’s been common to hear warnings of ‘peak profit margins’. Although margins have vacillated, the long-term trend suggests that, in fact, corporate profit margins have steadily increased over the last 20 years by an average of 4% per year. When you add it all up, we think it’s time to acknowledge that the base case is continued margin expansion, not ‘peak margins’.  
7. ‘Animal spirits’ are heating up. The pick-up in M&A announcements, rising IPO activity and the bounce in confidence surveys all augur well for forward activity.
8. Earnings are on track to reach nearly $400 by 2028. When you factor in even relatively conservative margin gains ahead, alongside rising top lines due to higher nominal GDP growth and the ever-improving profitability mix of the companies that make up the US stock market, we believe earnings for the S&P are looking pretty solid.
9. The market multiple should also grind higher. As we first noted in our Equity market outlook for 2025 and 2026, when you adjust appropriately for the recent mix shift in the S&P towards tech firms, a fair multiple for the overall index these days is probably around 22x. This is considerably higher than the long-term average of 18x when the S&P was a more industrial-oriented index. 
10. Which brings us to our long-term market target. When you add all the above up, we think a reasonable two-year S&P target is close to 8,600, implying an annual gain north of 14%. This level of return is a bit lower than the 17% annual return for the S&P over the last five years of the post-pandemic recovery but higher than the long-term annual return on stocks of 12% over the last 50 years.

As we’ve recently said, however, markets rarely move in a straight line, and there’s no question that there are sources of near-term volatility. What’s also clear, though, is that too often investors get so caught up in the day-to-day that they miss the bigger picture. That picture is one of a reaccelerating global economy where owners of the best companies own, in effect, a share of this expanding pie. No surprise, then, that patient investors are likely to be rewarded as the economy – and the profits it inevitably produces – continues to expand. Welcome to the One Big Beautiful World.