Under the bullish sentiment on Wall Street, Bank of America sings a solo "cooling down" counter-trend: S&P 500 will enter the "low excess returns" phase next year after three years of running.

According to Bank of America, after achieving double-digit returns for three consecutive years and seeing valuations rise to high levels, the US stock market has very limited upside potential for excess returns in 2026. The bank predicts that the S&P 500 index will close at around 7100 points by the end of next December, up about 4% from the Wednesday closing price. The index has risen about 16% so far in 2025, with gains of over 23% in the previous two years. Savita Subramanian, head of US equity and quantitative strategy at Bank of America, wrote in a report that the bank expects US companies to achieve double-digit earnings growth next year, but the stock market will see "modest price returns." The strategist wrote that while the current situation of a concentrated leadership in the stock market and high valuations is similar to the dot-com bubble period in 2000, it will not lead to the same outcome. However, she pointed out that as the large tech stocks continue to invest heavily in artificial intelligence (AI) without translating it into profits, the market may face an AI "growth hiatus". As this cautious outlook is released, the S&P 500 index is experiencing volatility. Traders are grappling with anxiety brought on by the AI theme and uncertainty about the extent of the Fed rate cuts. Most forecasting institutions still have positive views on the future performance of this US stock benchmark - the index hit a record high at the end of October, then dropped 5%, but regained momentum in the last week of November. The forward 12-month P/E ratio for the S&P 500 index is currently 22 times, 19% higher than its long-term average. Binky Chadha of Deutsche Bank expects the index to rise to 8000 next year, while Mike Wilson of Morgan Stanley predicts 7800. JPMorgan and Goldman Sachs gave target prices of 7500 and 7600 points respectively, all of which imply that the S&P 500 index will achieve a return rate of 10% or more for the fourth consecutive year. Subramanian wrote: "Market liquidity is still abundant at present, but the future direction is likely to be contraction rather than expansion. Stock buybacks are decreasing, capital expenditures are increasing; at the same time, central bank rate cuts are weakening, and the Fed will only take easing measures in the event of weak economic growth." The strategist also presented a more optimistic scenario: if corporate earnings significantly exceed market expectations, the S&P 500 index could soar to 8500 points, up about 24% from the Wednesday closing price. She also envisioned a pessimistic scenario: if the AI boom fades and macroeconomic favorable conditions do not materialize, the index could fall by about 24% to 5500 points. Regarding the possibility of a bubble risk in the stock market, Subramanian acknowledged the existence of related risks, but she believed that a market crash is unlikely. In her analysis, she pointed out that compared to 2000, investors' allocation to stocks is lower, earnings growth supports returns, and the market's enthusiasm for speculative and unprofitable stocks is more restrained. "We believe that the differences between the current market and 2000 are far greater than the similarities," Subramanian said.