INSIGHTS

On February 02, 2026

AAM Viewpoints — Risks and Opportunities: A 2026 Playbook

The U.S. economy in 2025 was characterized by accelerating growth and a relatively low unemployment rate of 4.4%. After starting the year with a negative 0.9% growth rate, gross domestic product (GDP) accelerated as the year progressed. The second quarter’s growth rate jumped to 3.8% followed by a 4.3% increase in the third quarter, despite the longest government shutdown in American history. According to the Atlanta Fed’s GDP Now estimate, fourth quarter GDP may exceed 5%. However, a weakening job market remains in this “low hire, low fire” environment, and “K-shaped economy” became a buzzword for the spending dichotomy between higher income consumers and the bottom 20% of consumers struggling with a higher cost of living.

With all these factors in place, the U.S. stock market has delivered three straight years of double-digit returns. Can it continue? Earnings are now expected to grow a solid 13.6% in 2026. However, the S&P 500 forward P/E (price/earnings ratio) is elevated at 22x at year-end 2025 as seen in the chart below. The valuation has only been this high twice in history. The first occurrence was in the late 1990s dot com bubble and more recently following the post-COVID rally in 2020. The stock market may require the Federal Reserve to lower interest rates to justify these valuations. In the meantime, we believe investors should look for stocks with reasonable valuations in groups or market capitalizations with lower P/E ratios.

S&P 500 Forward Price/Earnings Ratio

Source: LSEG Datastream, Yardeni Research. Past performance does not guarantee future results.
* Corrections are declines of 10% or more (blue shade). Bear markets are declines of 20% or more (red shade). Number of days in parentheses.

We believe the key issues that face the market for the coming year will be how artificial intelligence (AI) evolves. This evolution ranges from the enablers of AI technology to the consumer companies that will ultimately use the innovations. There are similarities to the current ramp up in investments to the 1999 dot com era, but there are also important distinctions from that period. This time around demand is more tangible and beneficial to a broader purpose than just internet e-commerce. In the current environment, the “hyperscalers” have real cash flow and profitability that support capital expenditures. Moreover, it appears as though investments are concentrated in and underwritten by stronger, financed companies and not fueled as much by speculation from hundreds of new companies.

That said, we remain vigilant regarding the risks. AI disruption in the near term is likely to be asymmetric, negatively affecting some industries that are information-based and derive value from rote routines, while positively impacting the enablers such as infrastructure (compute, power, and data). As part of the evolution, those companies that can manage growth, and balance it with their own profitability, will likely thrive and those that cannot, may end up struggling.

We believe opportunities are broadening beyond the narrow leadership of the last few years. We see secular growth opportunities in artificial intelligence, baseload power, and infrastructure trends, as well as healthcare including GPS-1s and the graying of America. We favor traditional value sectors such as financials, utilities, and materials that have the potential for both capital appreciation and income generation. Ultimately, we believe investors need to be mindful of valuations and company selection but remain confident that dividend growth stocks have the characteristics needed for success in 2026.

CRN: 2026-0116-13136 R

The opinions and views of this commentary are those of Brentview Investment Management and are not necessarily that of Advisors Asset Management.