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LivestreamMenuBMO Capital Markets sees the S & P 500 continuing to rally, thanks to a robust macroeconomy and an even stronger earnings backdrop. In a report published Thursday, the Canadian bank raised its 2026 year-end target for the S & P 500 to 7,850. The new forecast would equate to an 8% rally in the broad market index, which closed at 7,266.99 on Wednesday. Stocks have faced a turbulent year so far, initially hitting multiple new record highs due to enthusiasm surrounding the artificial intelligence trade. However, diminished enthusiasm for AI and memory chip makers in the past few days has caused the technology sector — and stocks as a whole — to sell off. But BMO chief investment strategist Francois Trahan believes that the strong earnings story is enough to lift markets from current levels. Unprecedented earnings “Surely, the U.S. consumer is feeling stress from the affordability crisis, a point that dampens the otherwise amazing U.S. growth story,” Trahan wrote. “Still, the robust earnings story is somewhat unprecedented and provides a phenomenal boost for stock prices,” he said. “The earnings story is the ‘tide that lifts all boats’ and after all the stimulus in the pipeline, it’s not that unusual. The scale is the rarity.” Trahan added that it’s highly unusual for S & P 500 forward earnings to clock in at the present rate of 29%. Earnings are also growing rapidly for mid-cap stocks, at 18%, and small-caps, at 24%. “In the history of forward earnings (back to 1980), we have only seen larger numbers when we were coming out of the financial crisis and earnings had been depressed, and again in the wake of the pandemic. We did not have a recession last cycle setting us up for unprecedented momentum — and it’s broad-based,” the strategist said. More worryingly, Trahan said that earnings growth this fast usually comes with inflation as a byproduct. On the plus side, he noted that it usually takes some time for inflationary pressures in the pipeline to affect the broader inflation indexes. Inflation story “It’s clear to us that inflation will end up being THE story of 2026. It might even overtake AI when all is said and done,” Trahan said. “That said, investors are much more likely to focus on the earnings backdrop in the near term.” While the strategist believes that the S & P 500 might surpass his 7,850 year-end target “in the coming months before giving back some of those returns when core inflation gains momentum, which is likely to happen this fall.” Against that backdrop, Trahan maintains a bullish bias towards more cyclical sectors of the market.Read More
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