BrightHaven January 2026 Market Update

The past year was marked by robust S&P 500 earnings growth of around 12-14%. This growth helped propel markets higher for the 3^rd year in a row coming out of the 2022 bear market. However, it wasn't without headwinds. Since 2020, the economy and markets have weathered several ominous events: the COVID-19 pandemic, supply chain disruptions, surging inflation, aggressive Fed rate hikes, tariff uncertainties, geopolitical uncertainties, and global war. Is there anything new under the sun? These shocks suppressed activity and caused some volatility, but the U.S. economy adapted and emerged stronger.

We believe this strength will continue in 2026. Indeed, Wall Street analysts are projecting the S&P 500 companies to grow earnings around 14% in 2026. While analyst price target estimates for the markets are to be taken with a grain of salt (if even that), their earnings estimates are usually quite accurate.

Business confidence, as measured by the ISM Manufacturing Index, has lingered below 50 for nearly three years, signaling contraction in manufacturing. However, we anticipate a recovery in 2026, driven by improving fundamentals and policy shifts. Energy prices face downward pressure following the U.S. securing access to Venezuelan reserves. Venezuela's oil production has plummeted 70% from its peak, averaging around 1.1 million barrels per day in 2025, but with political stability and investments, output could once again rise to ~3 million bpd in time. This could ease global supply constraints and support lower energy costs, benefiting consumers and businesses alike.

Looking ahead, we share the enthusiasm of leading experts for continued momentum in key areas. Dan Ives of Wedbush Securities views 2026 as an "inflection point" for the AI revolution, predicting tech stocks could climb 20-25% as AI build-out accelerates beyond big tech to second- and third-tier players. We believe the AI boom will persist, with use cases expanding across industries, countering any short-term skepticism around capital expenditures.

Tom Lee of Fundstrat echoes this positivity, forecasting the S&P 500 to reach 7,700 by year-end 2026, with stronger EPS growth than in 2025 amid Fed rate cuts and improving economic breadth. Josh Brown of Ritholtz Wealth Management highlights a strong consumer and resilient economy, noting that while valuations are elevated, sectors like financials and industrials offer opportunities as the market rotates. Steve Eisman, known from "The Big Short," points to a K-shaped economy where AI-driven growth offsets pockets of weakness, arguing that lofty valuations are justified given the tech sector's transformative potential.

Addressing valuation concerns head-on, recall Benjamin Graham's formula from The Intelligent Investor for growth companies: P/E = 8.5 + (2 × earnings growth rate). With the S&P 500 increasingly resembling a growth index (revenue growth, gross margin expansion, higher overlap with Growth indices v. Value indices) applying this formula suggests the market isn't overpriced. Michael Cembalest of J.P. Morgan reinforces this, noting the S&P's PEG ratio (price-to-earnings adjusted for growth) remains reasonable and aligned with historical multiples. As you can see from the chart below, the S&P 500’s PEG ratio is right at 1.22. This is lower than the long-term average of 1.32.

Further support for these valuation multiples comes from a dovish Federal Reserve. A new Fed chair under the Trump administration, expected to be announced early this year, will more than likely usher in more accommodative monetary policy. Although the Fed cut rates three times in 2025, they continued to sell off assets on their balance sheet in the open market. This action is called quantitative tightening and adds upward pressure on interest rates. In less-covered news, the Fed finally ended this quantitative tightening on December 1, 2025, after selling roughly $2.4 trillion of bonds and mortgages in the market since 2022. In a mid-December announcement, the Fed signaled that they will reverse this policy and start buying bonds in the market. I believe this could be more important for lowering interest rates than moving the Fed Funds rate.

While Jerome Powell's term ends in May, the transition may prioritize stability amid ongoing debates over rate cuts. But the Fed could find reason (with pressure from the White House) to increase open-market activities to lower longer-term rates. Treasury Secretary Scott Bessent predicts a "blockbuster" 2026, with efforts to root out fraud, such as the childcare scandal being uncovered in Minnesota, saving billions and providing relief through tax refunds and economic expansion. Bessent’s goals for the end of Trump’s term is for sustained 3%+ annual GDP growth, reduce the federal deficit to around 3% of GDP, and increasing domestic oil production by 3 million barrels per day. He calls it the “3-3-3” strategy.

Of course, markets are never without volatility. A potential correction is always on the horizon, but history shows these are often buying opportunities in bull markets. As a reminder, the S&P 500 historically has a correction (goes down 10% or more) on average every 366 days and the average drop is around 14%. Our cash position equips us to capitalize on any dips while maintaining exposure to high-conviction growth areas.

We remain bullish on the long-term trajectory of the U.S. economy, supported by AI and robotics innovation, recovering business sentiment, easing energy pressures, and solid corporate earnings. As always, our strategies are tailored to your goals, balancing growth with prudent risk management. Thank you for your continued trust in BrightHaven Financial Advisors. Please reach out to discuss your portfolio or any questions.