Morgan Stanley
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2026 Stock Market Outlook: The Bull Market Still Has Room to Run

Jan 22, 2026

With a dovish-leaning Fed and an AI-fueled rally still in gear, stocks look poised to extend the bull market for a fourth year.

Andrew Slimmon
Head of Applied Equity Advisors Team, Morgan Stanley Investment Management

Key Takeaways

  • The bull cycle may be mature, but it’s not over yet. 

  • Several structural forces, including U.S. Federal Reserve policy and the AI-driven rally, suggest stocks have more room to run in 2026. 

  • Trends in economic productivity, consumer spending, emerging markets, Japan and financial services all point to a broad opportunity set in 2026.

After three standout years for stocks, the bull market may be mature, but it’s not showing classic signs of exhaustion. Stocks could have more room to run in 2026 thanks to supportive monetary policy from the U.S. Federal Reserve and a continuation of the AI-led rally. Investors may also find pockets of opportunity stemming from U.S. consumer spending trends, volatility around the U.S. midterm elections, corporate reform in Japan and a surge in emerging markets as the dollar weakens. 

 

Most bull markets last five to seven years, and history favors the bull market in a fourth year, as noted in my 2026 Equity Outlook. Although not every bull market lasts for four years, the ones that do have always delivered a positive fourth year. Investors who take higher risk may be rewarded in the coming year, and while corrections are likely in a potentially volatile year for stocks, that could be healthy and support the broader trend upward.  

 

Full year calendar year (%) total returns for the S&P 500 in the fourth year of a bull market. Graph shows bull markets starting from the dated bear market low, since inception of the S&P 500 in 1950. 

Source: Strategas, Bloomberg

Past performance is no guarantee of future results. The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. 

Policy Is the Bottom Line 

Most major bear markets tend to start when the central bank becomes more restrictive as it acts to control inflation. Today, with the current path of the Fed seemingly dovish, a policy‑triggered downturn is unlikely for now. U.S. equities tend to perform well when the Fed is cutting rates, and the positive impact of 2025 cuts is likely to be felt into 2026. But a hawkish pivot by the Fed could challenge this optimistic outlook.

 

Fiscal policy could also be a key driver of stocks in 2026: Consumer stimulus via U.S. federal tax funds is expected to generate over $170 billion in relief from policies such as the elimination of taxes on overtime and tips, as well as changes to other tax deductions and extensions. As consumers absorb those gains, stocks may begin to see a positive impact from real GDP growth in the first half of the year. 

 

Finally, deregulation is unlocking lending capacity in the financial sector across regions, which is another form of stimulus. European and U.S. banks are benefiting from incremental deregulation and remain attractively valued. 

 

Watching for the AI Productivity Boom

Big tech and the AI hyperscalers, which anchored the performance of the S&P 500 in 2025, could be positioned for another good year in 2026. While the productivity wave tied to AI hasn’t yet been reflected outside the megacaps, that impact is likely to begin rolling through the broader economy in 2026. That gives equal-weighted indices a chance to finally catch up with the hyperscalers, and creates an opportunity to broaden stock market leadership to a wider group of companies. 

 

And while there is still a debate over whether an “AI bubble” exists, that healthy skepticism is keeping valuations in check, while the broader impact from productivity creates gains across the economy. 

 

For example, during the Internet boom of the 1990s, the largest gains came from a productivity boom three years later. An AI productivity revolution that extends beyond the “Magnificent 7” hyperscalers into the broader economy could power a late-cycle surge of the bull market over the next several years.  

 

Note: The S&P peaked at 28x forward P/E.
Source: Bloomberg

Past performance is no guarantee of future results. The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. 

Midterm Elections Bring Volatility and Opportunity

Midterm election years are almost always volatile, and 2026 should be no exception.

 

As the U.S. Congress moves toward its November election, affordability concerns are likely to gain more attention amid high housing, electricity and healthcare costs. This could increase market volatility as investors position for potential policy impacts. However, volatility and opportunity often travel together. 

 

Historically, election cycles can come with sizable corrections that test investor conviction, but as investors are also looking for entry points amid a long bull market, volatility may be something to lean into in 2026. 

 

Cautious Consumers Show a Healthy Lack of Euphoria

Consumer sentiment isn’t great this year – in fact, it’s worse than it was in the depths of the Great Financial Crisis, according to the University of Michigan Consumer Sentiment Index. But that’s not necessarily bad news for stocks, as low exuberance among consumers often foreshadows strong equity market returns.  

 

A steady, grounded consumer base with restrained optimism is actually constructive to market valuations, particularly as those same consumers are set to benefit from fiscal stimulus. 

 

Global Prospects 

Morgan Stanley Investment Management Applied Equity Team’s percentage allocation to non-U.S. stocks has grown higher than historical levels over the past few years, amid increasing opportunities to pick stocks abroad that have the trifecta of strong earnings trends, stock price momentum and share buybacks.  From a regional standpoint, stocks in Europe often have cheaper prices and more attractive entry points than in the U.S., while Japan is embracing more shareholder-friendly corporate reforms, which could lead to more buybacks. Asia’s semiconductor industry is also set to benefit from the AI boom.  

 

Emerging markets may also provide a wider set of opportunities this year, as they typically do well when the U.S. dollar weakens. Last year fit that pattern and this trend is likely to continue.

 

Final TAKE

In short, a “late cycle” bull market is not necessarily the same as an “end cycle” bull market.  The fourth year of this bull market has room to run, and stock market leadership may broaden in 2026 as AI starts to unlock new productivity potential across the broader economy. Even if it is a more volatile year, stocks stand to benefit from supportive monetary and fiscal policy, as well as a wider set of global opportunities.  

Disclosures

RISK CONSIDERATIONS 
 
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and may therefore be less that what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks.In general, equities securities’ values also fluctuate in response to activities specific to a company. Stocks of small- and medium-capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risks). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.  Ai: Investing in companies in anticipation of a catalyst event, such as AI adoption, carries the risk that such catalysts may not occur, may be delayed, or that the market may react differently than expected. Companies focused on AI may have limited product lines, markets or financial resources, and their management and performance may be particularly impacted by events that adversely affect AI adoption, such as rapid changes in product technology cycles, product obsolescence, government regulation, cybersecurity concerns and competition.

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