Market Warning: BofA Sees Slower S&P 500 Gains Ahead

Wall Street’s most cautious strategist expects only mild S&P 500 gains in 2026

While most Wall Street forecasters are optimistic heading into 2026, Bank of America is urging restraint. Savita Subramanian, the firm’s head of U.S. equity and quantitative strategy, warns that stressed consumers and a slowdown in the AI boom could weigh on the market next year.

She projects the S&P 500 will end 2026 at 7,100, well below the Street’s median call of 7,500. Earnings may grow at a solid mid–double-digit pace, but she expects valuations to contract by 5% to 10% as investors grow more cautious.

Subramanian notes that investors spent much of this year debating which hyperscalers to own. BofA now favors AI adopters, though it cautions that meaningful benefits may take time. The bigger concern: AI-driven job cuts potentially clashing with the need for strong consumer spending.

Expecting consumer strain, BofA upgraded consumer staples to overweight and slashed consumer discretionary to underweight. Discretionary names are up 5% this year, outpacing staples, which are flat.

The bank’s overweights include financials, real estate, materials, healthcare, and energy. Communications services and utilities remain underweights, while tech and industrials stay neutral.

Middle-income consumers—the backbone of spending over the last decade—are now getting hit with steep inflation in dining, healthcare, and utilities.

Meanwhile, entry-level office roles are being trimmed as companies lean into AI efficiencies, with some shifting toward high-school apprenticeship hiring models. While Fed cuts and tax tweaks may support lower-income households, the middle tier faces mounting pressure.

Subramanian also flags fading liquidity tailwinds. With fewer global rate cuts ahead, less fiscal stimulus, and weaker buybacks due to rising capex and debt, markets may lose an important source of support.

Even this year’s wealth effect has cooled as gold and crypto have pulled back, leaving some day traders staring at big potential tax bills.

And the AI trade? She sees “an air pocket” coming. Monetization remains unclear, power constraints are real, and hyperscalers are spending heavily—so heavily that tech-sector debt issuance is now 10× higher than a year ago. Capital intensity among hyperscalers has jumped from 13% in 2012 to 64% today.

For now, Subramanian says, investors are still “buying the dream”—but tougher conditions may be approaching.