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This month? I focus the U.S. market’s 2026 outlook — on a balance — between bull and bear views.
For 2026 bulls:
(A) Annual EPS growth outlooks for the S&P500 index members (done by Zacks on Sept. 26th, 2025) remain supportive:
+10.8% got marked across 2024, with annual outlooks for y/y EPS growth of: +9.4% for 2025 +12.7% for 2026, and +13.8% for 2027
(B) There are substantial liquidity catalysts, in play, from global monetary authorities:
Consider a dovish employment-mandate focused FOMC at a 4.08% Fed Funds policy rate
An ECB in Europe already at a 2.00% main refi policy rate, and
A Mainland China People’s Bank 1-year loan policy rate holding at a 3.0% rate
Long-term U.S. Treasuries? The 10-year U.S. yield was 4.14% on Sept. 30th, 2025.
Bond vigilantes can return, particularly if the Supreme Court nullifies U.S. “emergency” tariffs.
“Big Beautiful Bill” fiscal effects have not shown up. Income tax benefits arrive during the April tax filing season in 2026. Medicare cuts happen after the Nov. 2026 election.
(C) Below is the Sept. 2025 London & CME Consensus, for cuts in the Fed Funds rate:
3.75% at the end of Dec. 2025 (with 89% CME Fed odds for 1 25-bps cut by YE)
3.32% at the end of June 2026 (with 96% CME odds for 3-4 added 25-bps cuts)
3.15% at the end of December 2026 (with 29% CME odds for five total 25-bps cuts; AND another added 30% CME odds for more than that!)
For 2026 bears:
(A) Notably, a majority of FOMC members are pessimistic on U.S. labor markets in 2026.
A sustained 5-year-long rise to ~3.0% y/y in the core PCE inflation rate (perhaps augmented more by U.S. tariffs) and forecasts for a lowered +1.7% real GDP growth across 2025 and 2026, solidify a U.S. stagflation scenario.
That’s a major threat for bulls.
The Sept. 17th, 2025 “dot plots” offered by the FOMC?
The FOMC median 2025 Fed Fund rate is 3.6%. This amounts to three in total 25 bps cuts, to YE 2025.
But a big tail of FOMC ‘“dot plot” projections skew much higher (7 votes are for no more 2025 Fed Funds policy cuts).
In brief, Fed Funds cuts this fall may NOT supply short-term liquidity for U.S. stocks.
The FOMC median ‘dot plot’ at YE 2026 is 3.4%. That is only 75 bps cuts from 4.08%.
However, there remains a big tail of projections for a much lower Fed Funds rate, by the end of 2026. That amounts to a de facto “hard landing” recession risk.
(B) There is a potential for unprecedented White House control over the FOMC. But that would also require a Supreme Court ruling. That won’t happen until 2026.
Before that ruling, I think if President Trump (and his team of advisors) smell panic from Fed Chair Powell, they will ramp up the attacks on him.
New FOMC member and Chair of the Council of Economic Advisors Stephen Miran can play the role of an added ‘black hat’ along with FHFA Director Bill Pulte, to increase the political pressure.
Fed Chair Powell flinching and signaling a resignation would be a game changer for the bond markets. Regardless, Chair Powell’s 2nd 4-year term ends on May 15th, 2026.
While his term as Chair concludes in May 2026, Powell's separate and non-renewable 14-year term as a member of the Federal Reserve's Board of Governors does not expire until January 31st, 2028. However, it is customary for a Fed Chair to step down from the Board when their term as Chair ends.
On top of that? We now have a Federal Government shutdown. Permanent job cuts are coming.
The stock market is euphoric, for momentum trading reasons.
FOMO more than anything seems to have underpriced FOMC regime risk, the weak U.S. job market, and Federal shutdown risk. AND vastly over-priced the “AI” revolution.
(C) Entering October 2025, S&P500 traders’ price-in aggressive full-year 2026 and 2027 earnings estimates.
Data pulled on Sept. 24th, 2025 from Zacks systems showed:
The S&P500 LargeCap had a 25.8 P/E using ’25, 22.9 for ’26, and 20.2 on ’27
The S&P400 MidCap had a 19.2 P/E using ’25, 16.4 for ’26, and 14.4 on ‘27
The S&P600 SmallCap had a 18.7 P/E using ’25, 15.6 for ’26 and 13.4 on ‘27
If traders use 2026 F12M P/E ratios, mid-cap U.S. equity indices look fairly valued at 16.4. Much-loved large caps at 22.9 are relentlessly undergoing a valuation expansion.
What about using the closer-in 2025 earnings outlooks?
A 25.8 F12M P/E ratio for the S&P500 market weight index looks shockingly rich.
What about the map cap S&P400 index?
The midcap S&P400 at a 19.2 P/E ratio using 2025 model earnings is rich. The midcap S&P400 at 16.4 in 2026? Where the mid cap’s index value looks OK, if no major growth slowdown augurs in.
The small-cap S&P600 looks cheap for a reason. That reason is a probable concentration of future tariff suffering — inside small and mid-sized U.S. firms.
The S&P600 shows a 18.7 ratio using its model ’25 earnings. That is not attractive. All that happened over the last month was a valuation expansion. The S&P600 has a 15.6 P/E ratio using model ’26 earnings. That is just OK.
(D) A bitcoin price collapse is a major financial instability threat.
3x to 4x market beta bitcoin is embedded in the U.S. equity trading landscape. Bitcoin headed down from a record high at $123K to $113K recently.
On top of that? Market weight (aka “Mag 7” dependent) large cap U.S. share valuations continue to expand, and become increasingly rich.
That’s concentration risk.
And finally, entering October 2025, all of the Cathie Wood ‘Innovation’ tech ETFs have been accelerating….
Image Source: Zacks Investment Research
Next is a forced ranking, based on ETF annualized returns—
ARKB ARK 21Shares Bitcoin ETF ARKQ Autonomous Technology and Robotics ETF ARKW Next Generation Internet ETF ARKF Fintech Innovation ETF ARKK ARK Innovation ETF (the flagship fund) ARKX Space Exploration & Innovation ETF ARKG Genomic Revolution ETF
Zacks October 2025 Sector/Industry/Company Telescope
Sept. 30th, 2025 data showed a narrow leader: Just Financials were at Very Attractive.
Zacks Industry rankings delivered 2 Attractive Sectors: Info Tech & Communications.
Info Tech earnings growth remains well-supported by “AI” data/cloud centers and strong tech mega-cap earnings.
Ditto Communication Services.
Health Care and the Energy sector were at a Market Weight rating this month.
Materials rose a notch to an Unattractive rating.
Consumer Staples fell to a Very Unattractive rating.
Consumer Discretionary held Very Unattractive ratings.
With both Consumer Staples and Consumer Discretionary at the very back of this ranked order, share investor concern should be rising — on the status of a weak U.S. job market hitting consumer spending.
Next are my top Zacks-Ranked stock picks, from the top-ranked Zacks sectors.
(1) Financials stayed Very Attractive. Major Banks, Real Estate, and Investment Banking looked best.
Balancing Bulls and Bears: Zacks OCT Market Strategy
The following is an excerpt from Zacks Chief Strategist John Blank’s full Oct Market Strategy report To access the full PDF, click here.
This month? I focus the U.S. market’s 2026 outlook — on a balance —
between bull and bear views.
For 2026 bulls:
(A) Annual EPS growth outlooks for the S&P500 index members (done by Zacks on Sept. 26th, 2025) remain supportive:
+10.8% got marked across 2024, with annual outlooks for y/y EPS growth of:
+9.4% for 2025
+12.7% for 2026, and
+13.8% for 2027
(B) There are substantial liquidity catalysts, in play, from global monetary authorities:
Long-term U.S. Treasuries? The 10-year U.S. yield was 4.14% on Sept. 30th, 2025.
Bond vigilantes can return, particularly if the Supreme Court nullifies U.S. “emergency” tariffs.
“Big Beautiful Bill” fiscal effects have not shown up. Income tax benefits arrive during the April tax filing season in 2026. Medicare cuts happen after the Nov. 2026 election.
(C) Below is the Sept. 2025 London & CME Consensus, for cuts in the Fed Funds rate:
For 2026 bears:
(A) Notably, a majority of FOMC members are pessimistic on U.S. labor markets in 2026.
A sustained 5-year-long rise to ~3.0% y/y in the core PCE inflation rate (perhaps augmented more by U.S. tariffs) and forecasts for a lowered +1.7% real GDP growth across 2025 and 2026, solidify a U.S. stagflation scenario.
That’s a major threat for bulls.
The Sept. 17th, 2025 “dot plots” offered by the FOMC?
The FOMC median 2025 Fed Fund rate is 3.6%. This amounts to three in total 25 bps cuts, to YE 2025.
But a big tail of FOMC ‘“dot plot” projections skew much higher (7 votes are for no more 2025 Fed Funds policy cuts).
In brief, Fed Funds cuts this fall may NOT supply short-term liquidity for U.S. stocks.
The FOMC median ‘dot plot’ at YE 2026 is 3.4%. That is only 75 bps cuts from 4.08%.
However, there remains a big tail of projections for a much lower Fed Funds rate, by the end of 2026. That amounts to a de facto “hard landing” recession risk.
(B) There is a potential for unprecedented White House control over the FOMC. But that would also require a Supreme Court ruling. That won’t happen until 2026.
Before that ruling, I think if President Trump (and his team of advisors) smell panic from Fed Chair Powell, they will ramp up the attacks on him.
New FOMC member and Chair of the Council of Economic Advisors Stephen Miran can play the role of an added ‘black hat’ along with FHFA Director Bill Pulte, to increase the political pressure.
Fed Chair Powell flinching and signaling a resignation would be a game changer for the bond markets. Regardless, Chair Powell’s 2nd 4-year term ends on May 15th, 2026.
While his term as Chair concludes in May 2026, Powell's separate and non-renewable 14-year term as a member of the Federal Reserve's Board of Governors does not expire until January 31st, 2028. However, it is customary for a Fed Chair to step down from the Board when their term as Chair ends.
On top of that? We now have a Federal Government shutdown. Permanent job cuts are coming.
The stock market is euphoric, for momentum trading reasons.
FOMO more than anything seems to have underpriced FOMC regime risk, the weak U.S. job market, and Federal shutdown risk. AND vastly over-priced the “AI” revolution.
(C) Entering October 2025, S&P500 traders’ price-in aggressive full-year 2026 and 2027 earnings estimates.
Data pulled on Sept. 24th, 2025 from Zacks systems showed:
If traders use 2026 F12M P/E ratios, mid-cap U.S. equity indices look fairly valued at 16.4. Much-loved large caps at 22.9 are relentlessly undergoing a valuation expansion.
What about using the closer-in 2025 earnings outlooks?
A 25.8 F12M P/E ratio for the S&P500 market weight index looks shockingly rich.
What about the map cap S&P400 index?
The midcap S&P400 at a 19.2 P/E ratio using 2025 model earnings is rich.
The midcap S&P400 at 16.4 in 2026? Where the mid cap’s index value looks OK, if no major growth slowdown augurs in.
The small-cap S&P600 looks cheap for a reason. That reason is a probable concentration of future tariff suffering — inside small and mid-sized U.S. firms.
The S&P600 shows a 18.7 ratio using its model ’25 earnings. That is not attractive. All that happened over the last month was a valuation expansion.
The S&P600 has a 15.6 P/E ratio using model ’26 earnings. That is just OK.
(D) A bitcoin price collapse is a major financial instability threat.
3x to 4x market beta bitcoin is embedded in the U.S. equity trading landscape. Bitcoin headed down from a record high at $123K to $113K recently.
On top of that? Market weight (aka “Mag 7” dependent) large cap U.S. share valuations continue to expand, and become increasingly rich.
That’s concentration risk.
And finally, entering October 2025, all of the Cathie Wood ‘Innovation’ tech ETFs have been accelerating….
Image Source: Zacks Investment Research
Next is a forced ranking, based on ETF annualized returns—
ARKB ARK 21Shares Bitcoin ETF
ARKQ Autonomous Technology and Robotics ETF
ARKW Next Generation Internet ETF
ARKF Fintech Innovation ETF
ARKK ARK Innovation ETF (the flagship fund)
ARKX Space Exploration & Innovation ETF
ARKG Genomic Revolution ETF
Zacks October 2025 Sector/Industry/Company Telescope
Sept. 30th, 2025 data showed a narrow leader: Just Financials were at Very Attractive.
Zacks Industry rankings delivered 2 Attractive Sectors: Info Tech & Communications.
Info Tech earnings growth remains well-supported by “AI” data/cloud centers and strong tech mega-cap earnings.
Ditto Communication Services.
Health Care and the Energy sector were at a Market Weight rating this month.
Materials rose a notch to an Unattractive rating.
Consumer Staples fell to a Very Unattractive rating.
Consumer Discretionary held Very Unattractive ratings.
With both Consumer Staples and Consumer Discretionary at the very back of this ranked order, share investor concern should be rising — on the status of a weak U.S. job market hitting consumer spending.
Next are my top Zacks-Ranked stock picks, from the top-ranked Zacks sectors.
(1) Financials stayed Very Attractive. Major Banks, Real Estate, and Investment Banking looked best.
Zacks #1 Rank (STRONG BUY) Stock: Mitsubishi UFJ Financial Group (MUFG - Free Report)
(2) Info Tech fell to Attractive from Very Attractive. Computer-Software led.
Zacks #1 Rank (STRONG BUY) Stock: Workday (WDAY - Free Report)
(3) Communications Services stayed Attractive. Telco Equipment was best. Again.
Zacks #1 Rank (STRONG BUY) Stock: Ciena (CIEN - Free Report)
Note: This pick is a classic example of “AI” froth!
(4) Industrials fell to Market Weight from Very Attractive. Metal Fabricating, Business Products, stayed on as strong industries.
(5) Utilities rose to Market Weight from Unattractive. Utility-Water Supply as best.
(6) Energy rose to Market Weight from Unattractive. Oil Misc. looked the best.
(7) Health Care rose to Market Weight from Unattractive. Medical Products and Drugs at market perform.
(8) Materials rose to Unattractive from Very Unattractive. Metals-non-Ferrous stayed solid (due to rising gold and silver prices!).
(9) Consumer Discretionary stayed at Very Unattractive. However, Other Consumer Discretionary and Leisure looked good.
(10) Consumer Staples fell to Very Unattractive from Unattractive. Tobacco was best, at just a Market Weight rating.
Conclusion
When the Cathie Wood Ark Invest “Innovation” tech ETFs rally, swiftly, back to their 2021 prior highs?
Led by the Bitcoin ETF returns? Be wary. Take big share profits off the table.
‘Nuff said!
Enjoy the rest of the Zacks OCT 2025 Market Strategy Report.
Warm Regards,
John Blank, PhD.
Zacks Chief Equity Strategist and Economist