Written by Linh Tran, Market Analyst at XS.com
The S&P 500 entered December in a state of choppy trading around the 6,850 zone, following a strong upward move primarily driven by the technology sector and expectations that the Fed is preparing to enter a rate-cutting cycle. Although the index has risen significantly this year, most major institutions on Wall Street remain optimistic about the 2025–2026 period. BNP Paribas forecasts that the S&P 500 could reach 7,500 points by the end of next year if corporate earnings continue to improve, while projections from UBS, JPMorgan, and Deutsche Bank even set higher targets, in the 7,500–8,000 range for 2026.
These figures indicate that the market still believes in an upward trend, but they also place the S&P 500 in a sensitive position as many expectations have already been priced into current valuations.
In the short and medium term, the factor with the greatest influence on the trajectory of the S&P 500 remains the monetary policy of the Federal Reserve (Fed). The market is pricing more than an 89% probability that the Fed will cut 25 basis points at the December meeting (according to FedWatch data). The likelihood of rate cuts in 2026 is increasing as recent indicators show U.S. growth and consumption gradually cooling. The 10-year Treasury yield has also declined from its previous peak, creating favorable conditions for growth stocks. However, risks cannot be excluded: if inflation unexpectedly reverses or the labor market runs hotter than expected, the Fed may have to delay or slow the pace of rate cuts. In that case, the positive expectations already reflected in equity prices could be easily reversed.
Regarding corporate earnings prospects, recent data show that profits among companies in the S&P 500 are recovering quite solidly. UBS forecasts earnings could grow 14.4% through 2026. In addition, most companies are showing positive EPS growth, and all 11 sectors are making positive contributions. This is a very important signal, because a sustainable bull cycle typically requires broad-based sector participation rather than relying on a handful of large stocks as seen earlier in the year.
However, one factor that puts the S&P 500’s trend at risk is its relatively high valuation and the extremely heavy concentration in Big Tech/AI. With a forward P/E of around 22–23 times, the index is currently above its 5-year and 10-year averages, reflecting very high expectations for future growth. MarketWatch reports that Alphabet and Nvidia alone have contributed up to one-third of the S&P 500’s gains this year, illustrating the outsized influence of a few stocks in lifting the index. The OECD warns that the rapid rise of the AI sector is showing signs of an asset bubble, particularly if interest rates do not fall as quickly as the market expects. This makes the S&P 500 more vulnerable to unexpected shocks, even when the overall earnings picture remains positive.
Overall, in my view, the fundamental outlook for the S&P 500 still leans toward a positive medium-term scenario. If the Fed enters a steady rate-cutting cycle in 2026, the U.S. economy maintains a state that is neither too hot nor too weak, and corporate earnings continue to improve as forecast, the index could extend its upward trend, potentially rising above 7,000 points in the medium term and targeting 7,500 points in the longer term. However, this upward trajectory is likely to experience significant intermittent corrections due to high valuations, dependence on leading stocks, and risks from macroeconomic or geopolitical data in the current uncertain environment.
Although the S&P 500’s outlook remains positive, the market will require greater selectivity and stronger tolerance for volatility from investors. In this context, the market may increasingly focus on groups with solid income and earnings fundamentals, those benefiting from lower interest rates, and those less exposed to valuation risks.
The valuation aspect becomes even more sensitive when the S&P 500 is concentrated in a handful of large stocks, especially Big Tech/AI. Morgan Stanley and JPMorgan both warn that the combination of high concentration and expensive valuations is raising concerns reminiscent of the dot-com bubble, even though today’s earnings foundation is much stronger than in 2000.
This does not mean the market is destined to collapse, but it does suggest that the upcoming uptrend faces certain risks. If the leading groups (AI, Big Tech) face opposing forces from yields, regulations, competition, or simply a wave of profit-taking, the S&P 500 could correct sharply even if the rest of the market remains relatively stable.