As we head into 2026, markets are generally pretty bullish. Despite a couple of policy-related hiccups and bubble scares in 2025, the S&P 500, Dow Jones, and Nasdaq all posted healthy returns. And why shouldn’t that continue?
Analysts are of the opinion that the good times will continue to roll—not least because of the massive stimulus packet set to land in the One Big Beautiful Bill Act. However, there’s also an understanding among Wall Street analysts that the conditions for success are getting narrower and narrower. For example, much of the market’s optimism this year has derived from the promise of AI despite questions mounting about how and when the bets will pay off. If any news to the spook confidence emerges, it could have an outsized impact on stocks.
Likewise, the economy has managed to weather the potential downsides of tariffs, immigration policy, inflation, and employment. So far, employers have managed to find a balance: Reduced business confidence and higher prices, leading to reduced headcounts, have been offset by a shrinking labor market as people have been told to, or have chosen to, leave the U.S.
But what if you had to sum all of this up in one word? Well, thanks to the powers of AI, you can. Fortune fed the 2026 outlooks of 15 of Wall Street’s biggest banks into a Perplexity model, and asked it to summarise them all with a single word:
It spat out “precarious.”
Perplexity’s reasoning will be familiar to many of its human users. It said the documents “acknowledge 2026 as a year of powerful secular trends coupled with structural vulnerabilities. Markets are resilient but fragile, dependent on narrow conditions holding while risks accumulate across geopolitical, monetary, and valuation dimensions.”
The AI paradox
The most tenuous—one might say precarious—balance for investors to strike in 2026 is the equilibrium between opportunity and hysteria when it comes to AI.
In a note titled “Promise and Pressure,” J.P. Morgan Wealth Management’s CEO Kristin Lemkau noted that in 2026 “AI is set to transform industries and investment opportunities, but it also brings the risk of over enthusiasm.” Big Tech has tripled its annual capital investment (capex) spending from $150 billion in 2023 to what could be over $500 billion in 2026, JP notes, and nearly 40% of the S&P 500’s market cap feels the direct influence of either the perceptions or realities related to AI usage.
The dotcom bubble remains a warning for many. JPM writes that it has established five barometers to establish similar irrational exuberance. On the first, capacity, the institution notes the industry is comfortably keeping up with demand. The second is the abundance and availability of credit, which the AI trade has, noting: “public markets will be willing to finance the largest tech companies, which all have tighter spreads than the broad investment grade index.”
The third is obscuring risk, for example, through lax underwriting or financial standards. The bank noted it is “searching for signs” of such behaviour, and highlighted concerns about “circular” investments within the AI supply chain.
On the speculation front, there was a relatively clean bill of health: “Exuberance is building, but it would need to reach much higher levels before we would grow more cautious.” And finally on the gap between valuations and cash flows, the wealth management arm highlighted that in the dotcom era companies went public with no revenue, but now “AI companies have generated their returns entirely through earnings growth.”
It concluded: “It seems clear that the ingredients for a market bubble are present. That said, we think the risk that a bubble will form in the future is greater than the risk that we may be at the height of one right now.”
The macro front: “precarious”
2026 looks “anything but dull” according to Deutsche Bank’s global outlook. Internal political fragmentation will be a hindrance in Europe, economists Jim Reid and Peter Sidorov wrote, while the U.S.-China rivalry may rear its head in November when the current year-long trade truce expires.
Recession probabilities “are somewhat elevated given the precarious nature of the labor market,” the duo added.
In recent months, the U.S. economy has posted meagre job creation though the unemployment rate has stayed fairly steady as the labor force shrinks. As Macquarie’s David Doyle explained to Fortune earlier this year: “We’re in this equilibrium, but if the layoffs pick up even a little bit you could see that throw the equilibrium off, and unemployment starts to rise. The flip side of that is once we get beyond that near-term softness, near-term weakness, it’s possible things go the other way and unemployment can fall.”
He was echoed by Goldman Sachs, with chief economist Jan Hatizius writing in his outlook that the main vulnerability for the U.S. economy is the labor market, with softness potentially placing the country into recession territory. While Goldman is optimistic this will be avoided, Hatzius said it is “too soon to dismiss” the prospect.
Labor chatter has also been the key force shaping the trajectory of the Fed in recent months, allowing for cuts despite the other side of the mandate—inflation—sitting stickily above the target of 2%. Indeed, some analysts aren’t expecting it to be close to target for a few years yet.
In its outlook for 2026, Bank of America’s senior economist Aditya Bhave and his team wrote they believe core inflation will still sit at 2.8% come the end of 2026, and 2.4% come the close of 2027. In the near term, this will derive from tariff pressure, as well a one-off price level adjustment for the men’s World Cup.
If such price rises do come to pass, it could halt the easing cycle many analysts are expecting from the Fed over the next few years—even if the central banks has a more dovish chairman at the helm.
The consumer question
Since the end of the pandemic, Wall Street has been continually taken aback by the remarkable resilience of U.S. consumers.
What emerged toward the end of 2025, however, is that not consumers have the same fate: They are a so-called K-shaped economy has emerged. As Moody’s Mark Zandi previously told Fortune earlier this year, while the wealthy cruise on regardless, roughly half the U.S. states are effectively in a recession: Lower-income households are “hanging on by their fingertips financially,” he said.
But despite the concerns about the conflicts the U.S. economy must navigate to succeed, the overall outlook remains bullish. Vanguard, for example, pointed to the fact that 2025 had been a positive year against the odds, noting: “Despite major headwinds in 2025 like rising tariffs, sudden plateauing of labor supply and growth slowdowns, economies held firm.”
Deutsche Bank concluded: “While our global economists and strategists are largely positive for 2026, expect no lay-up in volatility and sentiment swings.”
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