The first half of 2026 will be a tough act to follow. In our 2026 full-year outlook, we were bullish on stocks, but we cautioned investors to dial back risk in their portfolios.
Right on cue, the broad market peaked on January 27, then sank more than 9%, a whisker below the 10% threshold that marks an official correction. But it’s the about-face from the market’s low at the end of March that has been truly stunning, with the S&P 500 Index taking just 11 trading days to set a new high — and subsequently notching six more by April 30, the date for prices, returns and other data in this story.
For context, consider that a pullback of that magnitude takes an average of 45 days to break even, according to financial research firm CFRA. “It’s funny,” says Dan Phillips, chief investment officer at BMO Wealth Management. “People always say markets go down in an elevator [that is, quickly] and up on an escalator [more gradually]. This market is the exact reverse.”
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Another market adage says bull markets climb a wall of worry (and bear markets slide down a river of hope, goes the second part). This bull has plenty of worries to fuel its climb: Start with a war with Iran and an accompanying oil shock lifting Brent crude from about $71 a barrel to $114 recently, and gas prices in the U.S. from an average $2.98 a gallon to $4.30.
That in turn ignites fears of sticky inflation and other knock-on economic effects, including reduced spending by increasingly strapped consumers. Plus, unresolved worries from earlier this year linger, including the potential for artificial intelligence to upend the software industry and cut a wide swath through white-collar jobs, and whether the opaque private lending market is about to implode.
And yet, the bull marches on. The second half of the year presents a few sizable hurdles, including a changing of the guard at the Federal Reserve, the midterm elections and a historically weak period for stocks.
But investors who look beyond some choppy, volatile months and focus instead on the strong underpinnings of stellar corporate earnings and a resilient U.S. economy should be rewarded by the end of this year and into 2027, say the majority of market experts we’ve spoken to.
In our January outlook, we thought 7,500 was a realistic level for the S&P 500 at year-end. The median brokerage target is now a bit higher, according to S&P Global Market Intelligence, at a touch over 7,600. Let’s call it a roughly 5% price gain from the April 30 close of 7,209, or more than a 10% gain from the start of 2026.
Add in a dividend yield of just over 1.3%, and a total return approaching 12% for 2026 appears within reach.
Embrace uncertainty
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You hear it all the time, says Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management: Expect volatility; there’s a lot of uncertainty.
“When do you ever hear, ‘It’s full of certainty out there’? Markets do better when there are high levels of uncertainty,” he says. “Embrace the uncertainty!” Investors seem to have heeded his advice, taking the war, rising inflation and the potential downsides of AI in stride.
In fact, given the strength of the spring snapback, Slimmon is a bit worried that investors are on their way from complacent to euphoric, which is a bad sign for bull markets. “I think it would be healthy to have a new worry — the more they crop up, the more it pulls down speculation and extends the life span of the bull.”
For now, despite recurring threats of a stalemate in the Iran war, economists and investors continue to look past it, expecting an imminent de-escalation, which would imply a relatively limited impact on the U.S. economy.
For example, of the economists surveyed in April by Blue Chip Economic Indicators, a monthly survey of economic forecasts, 87% recently lowered their 2026 outlook because of the surge in oil prices, with the April consensus forecast for overall gross domestic product (GDP) growth in 2026 coming in at 2.2%, down from expectations of 2.5% growth in March.
But most of the slowdown is slated to occur in the second and third quarters, and the economy could be largely back on track in the fourth quarter, with the economists expecting a growth rate of 2.0% by then. Kiplinger’s outlook is for 2.1% GDP growth for the year, the same as in 2025.
All eyes, of course, are on the price of oil, the locus of the economic and financial cost of the war. Assuming exports from the Gulf normalize in the next couple of months, commodity analysts at Goldman Sachs see Brent crude at $90 a barrel by the fourth quarter, and U.S.-based West Texas Intermediate oil at $83 a barrel.
“Full normalization of energy costs could take well into 2027 because of extensive damage to energy infrastructure in the Middle East,” says Kiplinger economist David Payne.
Inflation expectations have increased apace. In March, the government’s inflation report showed that consumer prices rose 0.9% month over month, led by a 10.9% increase in energy costs, including a 21.2% jump in gasoline — the largest monthly increase since the series was first published in 1967.
That pushed the year-over-year increase in inflation to 3.3%, up from 2.4% in February. Kiplinger expects an annual inflation rate of 3.0% at the end of 2026 — 4.0% if oil prices stay where they are.
Not your father’s oil shock
Why then, given the havoc wreaked in the oil patch, has this market remained so resilient? “We’ve been here before,” says BMO’s Phillips, “and the economy has managed through it.” Oil hovered in the $100-per-barrel range for months following the Russian invasion of Ukraine, he notes, and from roughly 2011 to 2015, oil prices similar to today’s “were the norm, and we did just fine,” he adds.
It’s not that surprising, then, that the stock market tends to shake off oil crises, with the S&P 500 returning an average 12% in the 12 months after an energy shock, going back to 1990 (see the table on the facing page).
Structural changes in the U.S. economy have helped, notes Jeff Schulze, head of economic and market strategy at ClearBridge Investments. First, the U.S. is far more energy independent, having become a net producer of energy rather than a net consumer.
Consumers, meanwhile, are less exposed to the cost of energy goods and services, which represented 3.9% of consumption in March, says Schulze, not far off record lows. “The overall wallet of consumers has gotten bigger while the share spent on energy has gotten smaller,” he says.
And we’re far more energy-efficient. Compare the current economy to the one nearly two decades ago, when West Texas Intermediate crude first neared $100 per barrel — equivalent to more than $150 in today’s dollars. Since 2007, the amount of economic output per barrel of oil has increased tremendously, says Phillips.
Back then, we got about $8 to $10 of economic output for each dollar of oil. Today, we get almost $30. Look at it this way, he says: “In 2007, for every dollar of oil you could get a Value Meal at McDonald’s. Today, you could go to a pretty nice restaurant and get yourself a steak.”
It’s also fortuitous that tax refunds are rolling out as gas prices have started to soar. By Phillips’s calculations, drivers will end up having paid $25 billion more at the pump in March and April combined. That could increase if gas prices continue to climb and as peak-driving season arrives.
But an expected $100 billion increase in tax refunds this year compared with last year provides an ample cushion. “With near-full employment and tax refunds, we believe the U.S. economy can see its way through recently elevated oil prices,” he says.
A more important question is whether the Federal Reserve can see its way through higher energy costs. After three back-to-back quarter-point cuts in the Fed’s benchmark target interest rate in late 2025, the Fed’s April meeting marked the third straight pause on rates, with the federal funds target range holding at 3.50% to 3.75%.
In his last press conference as chair, Jerome Powell said the Fed was moving closer to a neutral position on rates, although for now it retains a bias toward easing. (Powell also said he would stay on as a Fed governor, and he reiterated concerns about the potential for continued legal attacks on the central bank’s independence.)
Before the Iran war, markets were expecting at least two 0.25 percentage point cuts this year and saw a significant chance of a third. More recently, the majority of traders were looking for no cuts this year, according to the CME’s FedWatch tracker, with less than 13% expecting a quarter-point cut by year-end and nearly 9% expecting a quarter-point hike.
Shannon Saccocia, Chief Investment Officer–Wealth at investment management firm Neuberger, sees things differently. “The basis for a hike is difficult to find,” says Saccocia, who still expects two quarter-point cuts this year.
Although the new Fed chair, Kevin Warsh, has pointed to AI-driven productivity gains as a potential source of disinflation, monetary policy “will more likely hinge on whether higher energy costs begin to feed into other components of the consumption basket, which could complicate the path toward further easing,” says Jason Pride, chief investment strategist at investment management firm Glenmede.
Triple threat
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The transition to a new Fed chair is one of a trio of challenges for the market that also include the run-up to midterm elections and a seasonally weak period for the market, says Philip Orlando, chief market strategist at investment firm Federated Hermes. This year marks only the seventh time in 90 years when the three have occurred together, and that could result in a rocky summer, says Orlando.
Start with the new Fed chair. Looking at market performance going back to when Eugene Black took the helm in 1933 to when Powell took over in 2018, the pattern is the same. After a bit of a honeymoon, the market stumbles some three to six months into a new chair’s tenure, with the maximum pullback for the S&P 500 in the first six months a median 10%.
“Historically, there’s volatility surrounding the Fed chair, and this year that volatility will be on steroids,” Orlando says.
The second challenge is the midterm elections — the run-up to which is typically marked by a spike in volatility as political rhetoric and policy uncertainty intensifies, spooking investors.
Going back to 1945, average S&P 500 price returns for the second and third quarters of midterm-election years have been a negative 2.6% and 0.8%, respectively, with four of the five months from May through September showing losses, according to CFRA.
The good news is that the 12 months following midterms are usually rewarding, with stocks returning more than 15% on average, according to data going back to 1990 from investment management firm Capital Group.
If the House flips to majority Democratic but the Senate remains in Republican control — as many pundits expect — it should be fine for investors. That configuration under a Republican president has delivered an average annual return of 13.7% dating back to 1933, according to Orlando — the second-best average on record. (A Democratic House and Senate with a Republican president is the worst, returning just 4.9%, on average.)
Finally, you’ve probably heard the old Wall Street saw, “Sell in May and go away.” It stems from a seasonal market malaise that typically dampens returns from May through October. Compare the 2.1% average return for those months (since 1945) with the average 6.7% delivered from November through April.
What should investors do with this forecast of a summer squall? “Play defense now,” says Orlando, with bargain-priced small-company and international stocks, the latter with a focus on emerging markets. They are likely to be more resilient in a pullback, he says.
“Then look for an opportunity to put money to work in late summer or early fall in growth and tech names.” Whatever you do, don’t give up on the bull. Federated’s 2026 year-end target for the S&P 500 is 7,500; for 2027, it’s 8,200.
“Suppose I’m right,” says Orlando. “We hit an air pocket and the market drops 10%, then bottoms in October — you could be looking at a 25% increase through December 2027,” he says.
Earnings to the rescue
Bulls like Orlando are betting that a phenomenally strong corporate earnings picture wins the day — and the year, and the year after that. And they’ve got good reason: The first quarter has been a blockbuster, and analysts are revising earnings estimates higher for the future.
As of the end of April, first-quarter earnings growth for companies in the S&P 500 was set to top 27% compared with the first quarter of 2025, according to earnings tracker FactSet. That would mark the sixth straight quarter of double-digit, year-over-year earnings growth if the number holds when all reports are in.
“What’s remarkable,” says market strategist Ed Yardeni, of Yardeni Research, “is that industry analysts continue to raise their S&P 500 earnings-per-share growth rates for all four quarters of this year. The gains are all in the double digits.”
Analysts are looking for average earnings per share of $331 this year for S&P 500 companies, compared with $271 in 2025, up more than 20%; they estimate earnings of $379 per share in 2027.
It’s no surprise energy companies are expected to see the highest earnings growth this year, up nearly 45%, followed by — again no surprise — technology stocks, up 39%. The sector expected to see the least growth is real estate, where earnings are forecast to increase just 5.0% in 2026. But the breadth of earnings growth is encouraging: The share of S&P companies with positive growth estimates for the 12 months ahead could reach 90% over the rest of the year, says Yardeni.
Another bullish fundamental: Net profit margins — the percentage of sales turned into profits after expenses — were tracking at an average 14.7% for the first quarter as of the end of April, the highest level since FactSet started logging the metric in 2009 and well above the high of 13.2% set in the fourth quarter of 2025.
And S&P companies are expected to spin even more revenues into gold as the year progresses, according to FactSet.
Where to invest now
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The U.S. is the best house on the investment block for the back half of 2026, with the large-company, growth-oriented stocks that have powered much of the bull market back in favor after a several-month hiatus — and yes, that means technology and AI leaders.
That sounds like a bit of a shift away from a preference for the value-focused small-company and international stocks that many strategists recommended before the war, but the latter remain potent portfolio diversifiers and still offer attractive return potential, so a balanced approach is best.
Within tech, it’s important to be selective, as a wide dispersion of recent returns represents renewed bullishness about the continuation of massive AI-related corporate capital spending, as well as an increasing worry about AI’s existential threat to other parts of the sector.
For the year to date through late April, for example, semiconductor equipment makers were up 63%; IT consultants and software-application providers were down 28% and 24%, respectively.
Our favorite tech fund is T. Rowe Price Global Technology (PRGTX), a member of the Kiplinger 25, the list of our favorite no-load mutual funds. A good choice for exchange-traded fund investors is Kiplinger ETF 20 member State Street Technology Select Sector SPDR (XLK).
Arista Networks (ANET), a technology hardware and equipment company, makes a Goldman Sachs list of long-term growth stocks that have notched at least 10% revenue growth in each of the prior two years, and are expected to do so in the current and next two years.
Eaton (ETN) is on Goldman’s list of stocks likely to benefit from spending on AI and on buttressing power infrastructure.
Value-focused stocks are a good foil for the high-octane portion of your portfolio. Consider Dodge & Cox Stock (DODGX), a longtime Kip 25 constituent. The fund’s biggest sector holdings at last report are healthcare and financial services.
Be careful about running headlong into oil stocks. The sector is a hedge against continued political upheaval, and some strategists recommend it. But it also carries significant risk, according to analysts at CFRA. They downgraded the sector in April, despite expectations of oil prices averaging $100 a barrel in 2026.
“Beware of the sugar high,” they caution, in a sector that appears overvalued currently and vulnerable to downward earnings revision in 2027, when CFRA sees lower oil prices.
Small-capitalization stocks have been on a tear, with the Russell 2000 small-stock index outpacing the S&P 500 over the past 12 months, for the year to date and since the market bottomed on March 30.
Small and midsize companies should benefit from moderating wage growth — a big line item for them — and will see other cost savings as AI becomes more broadly adopted across the economy, says Schulze, at ClearBridge.
Funds we like include Kip 25 members Oberweis Small-Cap Opportunities (OBSOX), a growth-oriented fund, and T. Rowe Price Small-Cap Value (PRSVX), which tilts toward bargain-priced fare.
Outside the U.S., strategists have largely soured on most developed markets, particularly Europe, where economic growth expectations are fading. “They’ve been hit harder by this war,” says Keith Lerner, chief investment officer at Truist Wealth. “They’re not insulated from the energy part of it.”
Japan remains intriguing, though, as it reaps the benefit of recent shareholder-friendly reforms. Fidelity Japan (FJPNX) ranks in the top 5% of its category so far this year through April. If you want to take currency swings out of the equation, consider the iShares Currency Hedged MSCI Japan ETF (HEWJ).
Emerging markets are the favored international play currently for many portfolio strategists. EM stocks were outperforming U.S. stocks on a one-year and year-to-date basis before the war, and since the war started have remained resilient, down just 0.3%, as measured by the MSCI Emerging Markets index.
We like Kip 25 fund Baron Emerging Markets (BEXFX) for active management; iShares Core MSCI Emerging Markets (IEMG) is our low-cost, indexed ETF pick, with an expense ratio of just 0.09%.
Consider capitalizing on surprisingly good earnings with FullerThaler Behavioral Small-Cap Growth (FTXNX), available with no load or transaction fee at brokerage platforms including Schwab and Fidelity.
The fund looks for firms reporting large earnings surprises, seeking to profit from behavioral biases that can cause markets to under-react to positive new information. There should be plenty of fodder: FactSet reports that at the end of April, companies reporting earnings surprises were coming in an average 20.7% higher than what analysts expected — above the five- and 10-year averages of just over 7%.
Our advice for fixed-income investors at the moment is short — as in short term. Worries about stubborn inflation and a growing federal budget deficit could keep upward pressure on long-term rates, and rates and bond prices move in opposite directions.
You can’t go very wrong with Vanguard Short-Term Treasury Index (VGSH), an ETF with an effective duration (a measure of sensitivity to interest rate movements) of just 1.9 years, implying a roughly 1.9% loss in value if rates move up a percentage point. But pay attention to possible inflection points: As yields on 10-year T-notes crest 4.50%, says Truist’s Lerner, they might be worth a look.
Lastly, you might be inclined to jump into Treasury inflation-protected securities, but proceed with caution. TIPS can help you maintain purchasing power and diversify your portfolio, but longer-duration issues can react sharply to interest rate swings, which means you could be surprised by a decrease in value if rates move higher, even if inflation expectations are rising.
Stick with a low-duration option such as Vanguard Short-Term Inflation-Protected Securities Index (VTAPX).
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
