In a weak start to the last full trading week of the year, both the S&P 500 ETF (SPY) and the Nasdaq 100 ETF (QQQ) closed in the red, highlighted by weakness in the tech and AI sectors and relative strength from value stocks.
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That comes amid a warning from Bank of America, which expects the S&P 500 (SPX) to reach 7,100 in 2026. That implies upside of only 4% from current levels. For context, the benchmark index has historically returned around 10% each year. Head of U.S. equity and quantitative strategy Savita Subramanian cautioned that companies with large weights in the index could face “significant multiple compression,” while the expansion of AI in the workforce could result in fewer jobs. To counter this risk, Subramanian recommends an overweight allocation to consumer staples stocks and an underweight allocation to consumer discretionary stocks.
Citi has a more bullish outlook and forecasts the S&P 500 to reach 7,700 in 2026, implying upside of roughly 13%. Unlike Bank of America, Citi believes that AI will continue to drive momentum in the market, along with lower interest rates and earnings growth. The firm’s price target is based on an earnings per share (EPS) estimate of $320, above the consensus estimate of $310, and a forward price-to-earnings (P/E) multiple of 24x.
“While the AI emphasis is expected to be persistent, the evolution will likely follow a perceived winner versus loser dynamic,” said strategists at Citi.
Meanwhile, Fed Governor Stephen Miran has cautioned that “unnecessarily tight” interest rates could weaken the labor market and argued that inflation is lower than what government data point to due to lagging indicators. “Shelter inflation is indicative of a supply–demand imbalance that occurred as much as two to four years ago, not today,” Miran said in prepared remarks for a speech at Columbia University. “Given monetary policy lags, we need to make policy for 2027, not 2022.”
On Tuesday, the Bureau of Labor Statistics (BLS) will publish nonfarm payrolls and unemployment data, providing investors with a gauge of labor market health. The market will receive another important statistic on Thursday when the BLS releases consumer price index (CPI) inflation data.
The S&P 500 (SPX) closed with a 0.16% loss, while the Nasdaq 100 (NDX) fell by 0.49%.
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