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2026 Is Poised For Another Year Of Double-Digit Gains, Despite Recent Volatility

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Stocks have been under pressure over the last month, in large part due to the Middle East conflict.

Although, markets were already exhibiting a bit of weakness prior to that with big tech and AI-related names seeing some profit-taking after heady gains.

And it looked like we were headed for a typical pullback.

But the campaign against Iran exacerbated what was already taking place, and the pullback/correction was accelerated.

A pullback is defined as a decline between -5% and -9.99%, and they happen on average of 3-4 times a year, while corrections are defined as a decline between -10% and -19.99%, and they happen on average of about once a year.

As painful as they are when going thru them, they are very common. Every bull market has them.

It’s also important to remember that geopolitical conflicts and events usually only have a short-term impact on the markets. In fact, over the last 40 years of geopolitical shocks, markets usually bounce back quite fast. And historically, they are typically higher 12 months later. Same goes for 6 months. Even the 3-month outlook leans positive.

And if you know pullbacks and corrections are commonplace moves, and geopolitical impacts on the market are usually short-lived, you can instead look at them as opportunities to buy rather than places to sell.

Already, the markets are off their worst levels. And the small-cap Russell 2000 and mid-cap S&P 400 are back in the plus column for the year, with YTD gains of 1.94% and 3.12% respectively. And the other indexes are not far behind.

And with the prospect of the Iran conflict coming to a close, and the flow of oil thru the Strait of Hormuz returning to normal, the market could soon put the Middle East conflict behind it.

So, what about the tech selloff that was developing prior to the conflict?

That too could very well have run its course.

The tech-heavy Nasdaq, which led the indexes last year with a 20.4% gain, and the S&P 500, which was up 16.4%, have lagged this year as concerns over AI Capital Expenditures weighed on tech stocks.

Stocks like Microsoft, Alphabet, Amazon, and others have seen sharp drops this year. And the headlines point to increased CapEx as the culprit, with people wondering if those investments will ever pay off.

Ironically, many of those very same companies continue to show double-digit top and bottom line growth, and cite increasing AI demand for driving their buildout. So, there’s a bit of cognitive dissonance there.

But the idea that the AI boom is over, and that companies investing heavily in AI will never see a return, couldn’t be further from the truth, in my opinion.

First, it’s important to keep in mind that we are still in the relatively early stages of the transformational AI boom.

Remember, ChatGPT was only released in November of 2022. And that sparked the AI boom.

And I believe it has years more to go.

To be sure, it will enter different phases along the way. Companies like NVIDIA, for example, are selling AI infrastructure (chips, servers, AI training systems, and more). Those are the ones seeing the biggest benefit right now.

Others have to buy these products to build their AI models and tools. Those are the ones seeing the most cost.

Then those tools are sold to others to build their products, or used internally to build their own products.

Point is, we are in the infrastructure phase right now and it’s accelerating.

The tools and models phase is in the early innings.

And the application and productivity phase has really just begun. And that’s where the real broader economic payoff happens.

But the winners will multiply as the cycle moves thru its stages.

So, prior to the Middle East conflict, I would chalk up the recent volatility in AI names as nothing more than some long overdue profit taking.

Last year’s stellar performance in the S&P, for example, marked the third year in a row of double-digit gains.

And I’m expecting this year to be the fourth.

In addition to the ongoing AI boom, there’s a myriad of other reasons to expect another year of big gains, including tamer inflation reports, the resiliency of the economy, surging productivity, and the expectation for lower interest rates, to name a few.

For those who wished they would have taken better advantage of last year’s rally, the good news is that this year could be even more spectacular.

And that’s exactly what I’m expecting.

Couple that with even better entry points thanks to the recent pullback, and the gains could be even better.

History Repeats Itself

Last year saw the S&P 500 gain 16.4%. That was on top of 2024’s 23.3%, and 2023’s 24.2%.

The historic tech boom, led by AI, played a large part in sending stocks soaring.

It reminds me of the tech boom in 1995-1999 when the market surged by double-digits each year for 5 long, glorious years in a row, resulting in a 220% increase for the S&P, while plenty of individual stocks were up several hundred percent to several thousand percent.

And I believe we could possibly see the same thing again now. Maybe 5 years, or more, of boom times – for similar reasons, and some unique to the present day

Tech Booms: Past And Present (Dot-Com To AI)
 

The tech boom back then saw everybody go nuts for technology stocks, driven by the internet and dot-com companies.

It was new and exciting. And the internet was forecast to change the way people shopped, did business, and interacted with each other.

The promise was real, as we now know.

Today’s technology boom is being driven by Artificial Intelligence (AI).

And it’s forecast to be just as transformative as the personal computer, the internet and the mobile phone. And it’s expected to touch virtually every industry in some way shape or form, as well as impact ordinary lives.

The AI trade has worked so well for a reason -- because the AI boom is real, and is supported by real earnings, and real growth potential.

I know, there are some who think AI is in a bubble.

Don’t believe it.

The AI trade is alive and well. And will likely be one of the key drivers for stocks for years to come.

A recent comment underscoring the AI trade came from AMD CEO Lisa Su, who characterized the demand for AI as “insatiable,” and said her company alone could grow by 35% a year for the next 3-5 years because of that. In fact, she said the AI market is "faster than anything we've seen before.” And she predicted the AI data center market could grow to “$1 trillion” by 2030.

A resounding outlook for the scale of AI.

Here’s a few more, by NVIDIA CEO Jensen Huang:

“AI is the most powerful technology force of our time.”

“AI will revolutionize every industry, from healthcare to transportation.”

“We are at the beginning of a new computing era.”

Yes, AI stocks have moved a lot. Some are at high valuations. But again, we are still relatively early in the AI revolution.

The amount of investment in AI will dwarf that of the dot-com era. In fact, it already has. And the unprecedented spending and innovation is expected to last for years.

While it transforms the world as we know it, it also has the potential to transform one’s portfolio.

But there are plenty of other catalysts that make the market outlook even more exciting.

Continued . . .

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A Productivity Boom Is Underway Too 

The latest Productivity and Costs report by the Bureau of Labor Statistics (BLS), showed nonfarm business productivity rising at a 2.8% annual rate in Q4’25, well above expectations for 1.9%. It also raised Q3’s rate up to 5.2% from the originally stated 4.9%, making it the strongest quarterly gain in 5 years.

What’s noteworthy is that productivity growth typically slows in the late stages of expansion as capacity tightens and incremental gains are harder to extract. But it accelerates at the beginning of a new growth phase when new technologies are adopted, and businesses unlock efficiencies that weren’t previously possible.

That’s why people are comparing it to the late 1990’s. Productivity jumped back then due to the technology gains from the internet boom.

And we could be seeing the same thing now thanks to the technology gains from the AI boom.

The pattern is clear, as productivity jumps, broader economic expansion follows. And the current above-trend productivity gains are another marker for potentially big growth ahead – for the economy and the market.

Inflation And Interest Rates

While inflation is still too high, it’s been more moderate than the Fed had been worrying about.

The last Consumer Price Index (CPI, retail inflation) report showed core inflation (ex-food & energy) at 2.5% y/y, down from 3.3% earlier last year.

The Producer Price Index (PPI, wholesale inflation) is at 3.5% y/y, also down from last year’s high of 3.7%.

And the Personal Consumption Expenditures (PCE) index came in at 3.1%. That’s a bit above last year’s high of 3.0%, but well off the highs of 5.4% just a few short years ago.

The easing of inflation, in part, gave the Fed the green light to cut interest rates 3 times last year.

And they’ve maintained their outlook for another rate cut this year.

As you know, the Fed has a dual mandate, which is price stability (read low inflation), and maximum employment. While inflation is still elevated, the Fed has acknowledged it has eased significantly and that “longer-term expectations remain consistent with our 2% inflation goal.”

This is important because the labor market has recently become the chief concern for the Fed. And a softening labor market could make the Fed act on rates again sooner rather than later.

Add in the fact that current Fed Chair Jerome Powell’s term ends in May, and the new nominee, Kevin Warsh, is expected to push for cuts in the first couple of months he’s at the helm, and we could be looking at a rate cut as early as June.

Plus, as interest rates begin to fall again, you can be sure plenty of money tied up in money markets will find their way back into equities, further supporting stock prices.

The Earnings Outlook Is For Growth

Let’s also not forget that earnings are the main driver of stock prices.

While everyone was fretting over tariffs last year, the earnings picture never wavered and continues to point to growth.

Q4’25 earnings season just put in another better-than-expected showing with a 14.0% EPS growth rate.

Q1’26 is forecast at 12.8%.

Q2’26 is forecast at 17.1%.

Q3’26 is forecast at 14.2%.

And Q4’26 is forecast at 16.0%.

Wow!

And again, earnings are the key driver of stock prices.

Small-Caps Are Also On The Rise

The bull market rally, now in its fourth year, is broadening.

Tech is still a big driver. And will be for years to come. But other industries are breaking out as well. And categories.

That includes small-caps.

While small-caps lagged the S&P in the first half of the year last year, they outperformed in the second half. And small-caps, along with mid-caps, are leading the indexes in 2026, so far.

Last year’s rate cuts definitely helped. And will continue to do so.

While it’s true that all-sized borrowers should see relief with lower interest rates, since small-caps tend to have a larger proportion of debt than their bigger counterparts, and often borrow at less favorable terms, the rate cuts should have a sizable impact on small-caps.

Additionally, the budget bill that passed last summer, which included additional tax provisions for corporate America, not the least of which is the 100% immediate expensing of capital expenditures, will also have a positive impact.

Especially since small-caps are typically in the earlier part of their growth cycle. Those tax provisions should allow them to spend/invest more money, accelerate their growth plans, and get the entire tax benefit in year one.

I think we’re on the cusp of a small-cap renaissance.

But note: that expensing, which should have a sizeable impact on smaller-cap companies, also benefits large-cap companies too – like Microsoft, Alphabet and Amazon mentioned at the top, that have invested significant amounts in their AI and data center buildouts. And they too will get the immediate tax benefit of that, without having to wait 5, 7, 15, and in some cases 39 years.

And that too will help fuel the ongoing AI boom.

Stock Picking Secrets Of The Pros

So, how do you fully take advantage of the market right now?

By implementing tried and true methods that work to find the best stocks.

For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 29 of the last 38 years (a 76% win ratio), with an average annual return of nearly 24% per year? That's more than 2 x the S&P, including 4 bear markets and 4 recessions. And consistently beating the market year after year can add up to a lot more than just two times the returns.

It also killed in 1995 with a 52.6% gain; 1996 with 40.9%; 1997 with 43.9%; 1998 with 19.5%; and 1999 with 45.9%. It was also up in 2000 by 14.3% while the S&P was down.

Did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!

Those two things will give any investor a huge probability of success and put you well on your way to beating the market.

But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.

So, the next step is to get that list down to a smaller, actionable list of stocks that you can buy.

And one of the best ways to do that is to see what stocks the pros, who use these methods, are picking.

Whether you’re a growth investor, or a value investor, prefer fast-paced momentum stocks, or mature dividend-paying income stocks, there are certain rules the experts follow to maximize their gains.

This applies to large-caps and small-caps, biotech and high-tech, ETFs, stocks under $10, stocks about to surprise, even options, and everything in between.

Regardless of which one fits your personal style of trade, just be sure you’re following proven profitable methods and strategies that work, from experts who have demonstrated their ability to beat the market.

The best part about these strategies and stock picks (aside from the returns), is that all of the hard work is done for you. There’s no guesswork involved. Just follow the experts and start confidently getting into better stocks on your very next trade.

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All the best,

Kevin 

Kevin Matras serves as Executive Vice President of Zacks.com and is responsible for all of its leading products for individual investors. He invites you to download Zacks' just-released Ultimate Four Special Report before this weekend's deadline.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades.


 

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