• Bank of America projects the S&P 500 will reach 7,100 in 2026, representing a modest 5% gain from current levels.
  • The bank forecasts 14% earnings growth but expects falling valuation multiples to cap market returns.
  • A shift in market leadership is anticipated, with upgrades to consumer staples and warnings about AI monetization.

Bank of America has adopted a more cautious stance on U.S. equities, telling clients in a new report that strong corporate earnings won't necessarily translate into strong market returns through 2026. The firm set its 2026 S&P 500 target at 7,100, suggesting roughly 5% upside from current levels despite projecting robust 14% earnings growth for index components.

The restrained outlook comes as the S&P 500 continues to register double-digit gains year-to-date, with corporate profits consistently outperforming expectations. According to people familiar with the matter, Bank of America's analysis indicates that liquidity support is fading across multiple fronts—including fewer buybacks, higher capital expenditures, and only limited central bank rate cuts expected through 2026.

"Valuation multiples are likely to contract even during periods of strong earnings growth," the report stated, pointing to price-to-earnings ratios that may compress despite the healthy profit environment. The bank projected a wider trading range of 5,500 to 8,500 for the S&P 500, reflecting heightened uncertainty about the market's trajectory.

Bank of America anticipates a significant shift in market leadership, with capital expenditure-focused companies potentially outperforming consumption-driven names. The firm raised its rating on consumer staples to "Overweight" while downgrading consumer discretionary stocks, suggesting "blue-collar" segments may outperform "white-collar" companies in the coming years.

The report struck a cautious tone on artificial intelligence, noting that monetization remains uncertain despite the sector's rapid growth. Rising power demands from AI infrastructure were identified as a potential bottleneck that could constrain returns, creating near-term headwinds for technology names that have driven much of the market's recent gains.

Other major banks have issued similar moderate projections, with Morgan Stanley forecasting 7,200 and Goldman Sachs targeting 6,900 for mid-2026. The consensus suggests that after a period of unexpectedly strong profits and resilience following April's tariff-induced declines, markets may face a period of normalization as monetary policy support wanes.

Bank of America declined to comment beyond the published report when reached for additional clarification on their methodology. The analysis comes as S&P Global projects modest U.S. GDP growth of 2% for both 2025 and 2026, supporting the notion of continued economic expansion but at a pace that may not justify further multiple expansion.

Correction: An earlier version of this article misstated the timeframe for the S&P 500 target; it is for year-end 2026, not mid-2026.