By Christopher Combs
Chief Investment Officer, Silicon Valley Capital Partners
December 23, 2025
The show‑me market: 2026 is not a “story” year
There are years when the market buys the narrative before it buys the numbers. And then there are years—usually when valuations are already rich, when rates are no longer a tailwind, and when the winners have become consensus—when the tape looks you in the eye and says: show me.
That is the setup for 2026.
As we head into the year, the S&P 500 is printing record territory, buoyed by resilient growth narratives and the persistent belief that artificial intelligence spending is not a cycle but a regime. But the market’s posture is not relaxed optimism—it’s conditioned optimism. The kind that assumes execution, assumes margins, assumes the capex produces revenue, assumes the Fed keeps cutting, and assumes geopolitics stays “contained.” It’s optimism that leaves very little room for human error.
When markets are priced for perfection, perfection isn’t a nice-to-have. It’s the baseline. And that typically produces a familiar pattern: sharp, confidence-testing drawdowns on any whiff of disappointment—followed by recoveries to new highs if the earnings engine remains intact. 2026, in my view, will rhyme with that pattern: moments of doubt, punctuated by recoveries, inside a broader growth market.
The key feature of the year, though, is not volatility. It’s what drives returns. The easy portion of this bull market—where multiple expansion did the heavy lifting—has largely been spent. With forward valuations already elevated and long rates still meaningfully positive, I do not expect the S&P 500 to meaningfully re-rate higher in 2026. This will be an earnings-driven expansion or it will be an earnings-driven disappointment.
That is the “show-me” bargain.
Theme 1: a two‑speed business cycle that keeps arguing with itself
The defining macro characteristic entering 2026 is not “recession vs. soft landing.” It’s two speeds running at once, throwing off conflicting signals—sometimes in the same week.
The expansion thesis has real evidence behind it:
- Capex is not just healthy; it is historically aggressive in AI infrastructure, and it is broadening into energy and grid investment needed to power that buildout.
- Earnings expectations still point to another year of double-digit growth for the S&P 500.
- 10-year yields are not collapsing—meaning the bond market isn’t screaming deep recession—yet they remain tight enough to enforce discipline on equity multiples.
The late-cycle thesis also has evidence:
- The labor market appears to be weakening, with unemployment having drifted higher, and sentiment still subdued.
- Consumer credit is not breaking, but it is not getting healthier either—delinquencies remain elevated relative to the post-pandemic trough.
- Energy prices are lower than prior-cycle peaks, which is disinflationary and supportive for consumers—but historically, very low energy prices often arrive with a growth scare.
Add one more overlay: the market is increasingly aware of the possibility of overinvestment in AI infrastructure—a supply buildout that runs ahead of monetization. That’s the kind of doubt that can hit multiples quickly even while the long-term story remains intact.
In a two-speed cycle, investors don’t get the luxury of clean signals. They get cross-currents—and 2026 will likely be a year in which those cross-currents repeatedly pull markets off balance.
Inflation expectations, tariffs, and the uneasy math of “sticky enough”
If 2026 is a show-me year for earnings, it is also a show-me year for inflation dynamics—because inflation is the bridge between the real economy and the discount rate that equities live under.
On the surface, market-based inflation expectations are not unmoored. Breakevens and forward inflation measures remain in the neighborhood that suggests “inflation contained, but not dead.” But investors should not confuse “contained” with “cleared.”
Two forces complicate the inflation picture:
Tariffs and trade policy: inflation that doesn’t behave like a cyclical spike
The tariff regime matters not because it guarantees a 1970s replay, but because it shifts the composition of inflation toward categories that hit margins and sentiment—goods, intermediate inputs, and supply chains. The Yale Budget Lab has estimated the average effective tariff rate has risen to levels dramatically higher than the sub-3% regime that prevailed at the end of 2024.
That would be manageable if businesses could fully absorb it. But survey data suggests the more realistic outcome is partial pass-through. A Reuters report citing a CFO survey showed many firms expected tariff-driven impacts and anticipated raising prices.
In practice, tariff inflation is not just an inflation print; it is a margin story and a confidence story:
- Companies pass prices through and risk demand elasticity.
- Or they eat costs and risk margin compression.
- Or they shuffle supply chains and risk execution delays and capex overruns.
In a priced-for-perfection market, each of those paths invites skepticism.
Sticky inflation: the quiet ceiling on “how far the Fed can go”
Even if headline prints cooperate, “sticky” inflation measures tend to reflect services and wage-linked dynamics. The Atlanta Fed’s sticky-price CPI remains elevated relative to a clean 2% world.
Here’s the key translation for equity investors:
- If inflation remains sticky enough to keep the 10-year yield anchored in the 4% neighborhood, multiples will struggle to expand.
- If tariffs create episodic inflation bumps in early 2026—as some economists expect—markets may be forced to reprice the glide path for cuts.
Bottom line: inflation in 2026 may be “good enough” for growth, but not “clean enough” for a valuation melt-up. That is why I continue to emphasize: this is an earnings market, not a multiple market.
The U.S. credit cycle: late‑cycle friction, not necessarily late‑cycle failure
Credit is the transmission mechanism investors underestimate—until the week it becomes the only thing that matters.
The most useful way to frame credit entering 2026 is not “crisis.” It is late-cycle friction: higher rates have already done their work, and the marginal borrower is now feeling it.
One clear signal: the delinquency rate on credit card loans at all commercial banks sits around 3% (Q3 2025). That’s not 2009. But it is also not the free-money era. It implies that the consumer is still spending, but increasingly doing so with constraints.
Late-cycle credit dynamics typically show up in three ways relevant to equities:
- Consumer spending becomes uneven. Higher-income consumers remain resilient, while lower-income cohorts become more sensitive to gasoline, rents, and monthly payment burdens.
- The labor market becomes the swing variable. As long as employment remains “slowly cooling,” delinquencies rise but stay contained. If job losses accelerate, delinquencies can turn from drift to jump.
- Markets become allergic to leverage stories. Highly levered balance sheets—corporate or household—lose their benefit of the doubt.
This matters for 2026 because consumer spending is still the backbone of U.S. GDP, and because a credit-tightening impulse can hit growth even without an official recession.
Equity implication: credit is the biggest reason I expect multiple expansion to be limited. When the credit cycle is mature, investors demand a higher risk premium for “hope” and a lower risk premium for “proof.”
Current oil prices and the reflation thermostat
Oil is the economy’s thermostat. It doesn’t set the weather, but it can rapidly change the indoor temperature.
As of today (December 23, 2025), Brent is roughly $62 and WTI roughly $58, with markets weighing weak demand against geopolitical risks tied to Venezuela and the Russia–Ukraine theater.
From here, oil’s impact on the 2026 business cycle is not linear. It’s conditional:
- Moderate oil is often growth-friendly: it keeps inflation contained and supports consumer discretionary spending.
- Too-high oil is reflationary and profit-negative for most sectors (energy aside).
- Too-low oil is disinflationary but can be a signal of demand weakness.
The Energy Information Administration’s December outlook suggests lower average WTI prices in 2026 compared with 2025. If that path holds, oil becomes a quiet ally for the consumer and a quiet ally for disinflation—both supportive for the soft-landing narrative.
But the market won’t treat oil as a macro variable in isolation. It will treat it as part of the “two-speed” argument:
- Falling oil can support purchasing power.
- Falling oil can also whisper that global growth is cooling.
That ambiguity is why oil will continue to be a sentiment swing factor in 2026.
Energy production: the stabilizer with a complicated equity message
U.S. energy production has been one of the most underappreciated macro supports of the last cycle: it reduced U.S. vulnerability to external shocks, improved the trade balance, and helped dampen inflation spikes compared with prior decades.
Yet for 2026, the EIA forecasts U.S. crude oil production averaging about 13.5 million barrels per day, slightly lower than 2025, as gains in some regions are offset by declines elsewhere.
This matters in three distinct ways:
Macro resilience remains strong—even if growth slows at the margin
Even “flat-ish” U.S. production is a stabilizer in a world where shipping lanes and sanctions remain constant headline risks.
Energy becomes tied to the AI capex story
Data centers, grid upgrades, natural gas, and power generation are increasingly not side stories—they are part of the AI industrial complex. Reuters notes that AI compute demand implies enormous incremental power capacity needs over time.
Equity sector rotations can be violent
If oil prices remain moderate and production is stable, energy equities may not lead. But energy infrastructure and “picks and shovels” tied to electrification can still attract capital.
In other words: energy is no longer just about oil. In 2026 it is increasingly about power, capacity, and reliability.
Current stock market valuation: forward P/E is the market’s credibility test
Valuation is not a timing tool. It is a vulnerability tool.
FactSet’s work shows the S&P 500 forward 12‑month P/E has been around 21.8, above longer-term averages. FactSet Meanwhile, the market is sitting at record highs into year-end.
At the same time, the 10‑year Treasury yield is roughly 4.17% (as of December 22, 2025).
That combination matters because it pins down the range of plausible outcomes:
- When forward P/E is already elevated, it implies expectations of smooth earnings delivery.
- When long rates are not collapsing, it implies the market cannot easily justify paying “any price” for growth.
This is the mechanical reason I keep returning to the same phrase: earnings validation.
The market can tolerate high valuations if:
- earnings growth is real,
- margins hold,
- and the AI capex cycle translates into revenue and pricing power.
But if any of those wobble, valuation stops being a neutral statistic and becomes the market’s critique.
Geopolitical rift risk: Ukraine–Russia and Venezuela as volatility catalysts
Markets often treat geopolitical risk as noise—until it becomes a supply shock, a cyber event, a sanctions escalation, or a shipping disruption.
Two arenas stand out for 2026, not because we can forecast a headline, but because we can forecast market sensitivity:
Ukraine–Russia: the Black Sea channel and energy logistics
Reuters reporting highlights ongoing risks tied to operations affecting Black Sea infrastructure and routes. Even if the market’s base case is “war grinds on,” any escalation that disrupts flows can spike oil, freight, or risk premia.
Venezuela: energy supply, sanctions, and tail-risk spikes
Reuters also notes U.S. actions tied to Venezuelan oil in the context of intensified sanctions and maritime pressures. The global market may remain well supplied in the near term, but geopolitics can still turn stable supply assumptions into unstable price action—especially when positioning is complacent.
Equity implication: geopolitics in 2026 is less likely to be a sustained bear market driver and more likely to be a drawdown trigger—a catalyst that compresses multiples temporarily, tests conviction, and then fades if earnings hold.
That description should sound familiar. It is the “priced for perfection” pattern.
Theme 2: priced for perfection means skepticism is the default setting
A priced-for-perfection market behaves differently than a cheap market.
In a cheap market:
- good news rallies,
- bad news gets forgiven,
- and “future growth” receives time.
In a priced-for-perfection market:
- good news often gets shrugged off because it was assumed,
- bad news gets punished because it violates the baseline,
- and the market demands not just growth, but clean growth.
That is why 2026 is likely to be a year where:
- capex announcements are treated with suspicion (“prove the ROI”),
- execution delays are punished (“why is this taking longer?”),
- and margin commentary matters as much as revenue.
If you want the simplest rule of thumb for the year, it is this:
2026 is a year where the market will trade the spread between expectations and reality.
2026 earnings growth expectations: the single most important input
On consensus, 2026 is supposed to be strong.
FactSet’s earnings outlook for calendar year 2026 implies roughly 15% earnings growth for the S&P 500, with mid-single-digit sales growth and margin resilience, and it highlights that the “Magnificent 7” are expected to grow faster than the rest of the index.
But here is the catch: high expected growth is not automatically bullish when the market is already priced for it.
In fact, the market is not just expecting earnings growth. It is expecting a particular shape of earnings growth:
- early-year strength,
- minimal margin pressure from tariffs,
- AI monetization that grows into AI infrastructure,
- and no major demand shock.
That’s a narrow corridor.
And even if the corridor is plausible, the “show-me” dynamic intensifies because analyst estimates a year out can be overly optimistic. FactSet notes that the bottom‑up 2026 EPS estimate sits around $309, and historically, analysts have tended to overestimate one-year-ahead EPS by an average amount (with outcomes heavily dependent on whether “unusual” shocks occur).
Equity implication:
- If earnings land close to current expectations, the market can grind higher even without multiple expansion.
- If earnings slip—especially for the mega-cap capex leaders—the market will likely de-rate quickly, even if the long-term story remains intact.
This is why I expect significant drawdown periods inside the year: the market is conditioned to react sharply to any evidence that the earnings bridge from 2026 to 2027 is getting shaky.
Multiple expansion potential: don’t bet on it—treat it as a bonus
Let’s be explicit: I do not expect meaningful S&P 500 multiple expansion in 2026.
With forward P/E already elevated and the 10‑year yield still above 4%, the probability distribution for multiples is asymmetric:
- It is easier for the multiple to compress than expand.
- It can still expand temporarily during risk-on bursts, but sustaining that expansion would likely require a major drop in long rates or a clear “productivity miracle” narrative becoming consensus.
This is not a bearish statement. It’s a math statement.
Total return, simplified, is:
Total return ≈ earnings growth + dividends + change in valuation multiple
If we assume:
- earnings do the work,
- dividends add a modest contribution,
- and the multiple is flat to slightly down,
then 2026 becomes a year where returns are positive but earned, not gifted.
That’s the editorial version of the same point: optimism outweighs pessimism, but expect disruptions along the way.
Monetary policy: the market is pricing cuts, but the “why” matters
The Federal Reserve’s projected policy path (via its Summary of Economic Projections) has signaled an easing trajectory into 2026. Federal Reserve
The market, however, has a habit of pricing more cuts than the Fed projects—especially when growth wobbles or inflation prints cooperate. Some fixed-income strategists explicitly discuss scenarios where the policy rate drifts closer to 3% by late 2026. Reuters
And Fed Governor Christopher Waller has indicated a view that inflation could ease and that rates could come down further—an idea that, if it gained consensus, would matter for both discount rates and risk appetite.
Still, equity investors need to keep one disciplined distinction:
- Cuts because inflation is falling while growth holds are equity-positive.
- Cuts because growth is failing are not—at least not initially.
In a two-speed cycle, it is entirely possible to see:
- more cuts than expected,
- alongside weaker labor outcomes,
- and a market that rallies and sells off in alternating waves depending on whether investors interpret cuts as “good news” or “bad news.”
Equity implication: more cuts can support duration assets (growth stocks), but in a priced-for-perfection market, the path will be jagged. Rate cuts will not eliminate volatility; they may rearrange it.
Theme 3: the “Big Beautiful Bill,” the after-tax impulse, and why deficits still matter
Fiscal policy enters 2026 with a meaningful tailwind—and a meaningful counterweight.
The One Big Beautiful Bill Act (OBBBA) includes major tax provisions, including a permanent extension of 100% bonus depreciation for qualifying property placed in service after January 19, 2025. The IRS has published summaries of multiple provisions affecting households and deductions, adding to the near-term after-tax impulse for some cohorts.
Independent analyses put the bill’s headline budget cost in the multiple-trillion-dollar range over the coming decade. And some estimates suggest household after-tax income effects are particularly pronounced in 2026 relative to 2025.
This is where I integrate a stated theme:
The reflation impulse + capex impulse can be powerful in 2026
The combination of:
- a fiscal package that supports after-tax incomes and business investment incentives,
- plus an enormous AI and infrastructure capex cycle,
is a powerful near-term growth cocktail.
But here is the institutional caveat: fiscal stimulus can be equity-positive while also being multiple-negative.
Why? Because deficits and debt issuance can push up term premia and keep long yields elevated—even if the Fed is cutting the front end. That pushes directly against sustained multiple expansion.
So, yes: fiscal supports growth, and that supports earnings. But fiscal can also keep valuations from getting any richer. In 2026, those two forces can coexist: earnings acceleration without multiple expansion.
That is a very plausible bull market pattern—and it is consistent with a show-me tape.
Potential impact of the 2026 tax cuts: what matters for equities
Tax policy matters for markets through three channels:
- After-tax corporate cash flows
- Capex incentives
- Household consumption and confidence
The most direct equity bridge is through investment incentives like full expensing / bonus depreciation. By lowering the effective cost of investment, policy can pull forward capex and raise near-term growth—even if the long-term multiplier is debated.
But the market will apply skepticism. If capex rises and productivity rises, that is equity-positive. If capex rises and returns do not materialize, the market will punish the spenders—especially in mega-cap tech, where capex is already the story and where expectations are already lofty.
CapEx expenditures forecasted for 2026: the scoreboard of the AI supercycle
If 2026 is a show-me year, capex is a show-me variable. Investors will not just ask “how much are you spending?” They will ask “what are you getting for it—and when?”
CreditSights estimates the top five hyperscalers collectively move from roughly $443B in 2025 to about $602B in 2026, with roughly 75% tied to AI infrastructure—on the order of $450B.
MUFG’s AI Chart Weekly also highlights the “big five” spending level exceeding $600B and provides a company-level snapshot for 2026 estimates.
2026E Hyperscaler Capex (forecast) — largest to smallest
| Company | 2026E Capex (USD $B) | |
| Microsoft | 160 | |
| Amazon | 155 | |
| Alphabet (Google) | 125 | |
| Meta Platforms | 120 | |
| Oracle | 42 |
Source basis: hyperscaler capex estimates referenced in MUFG’s AI Chart Weekly and aligned with CreditSights’ aggregate framework.
What this means for the business cycle—and for 2026 returns
This scale of spending is not just “tech investment.” It is industrial investment:
- data centers,
- power procurement,
- grid interconnection,
- cooling,
- construction labor,
- semis, networking, storage.
That’s why I call it a two-speed cycle. Parts of the economy are in an investment boom. Other parts are late-cycle and rate-sensitive.
Equity implication: capex is simultaneously:
- a growth tailwind (stimulus, jobs, demand for suppliers),
- an inflation input (construction, equipment bottlenecks),
- and a valuation risk (if ROI is delayed or monetization disappoints).
In a priced-for-perfection market, that third point is underappreciated—until it suddenly isn’t.
Theme 4: AI capex is inflationary on the way in
AI infrastructure is not “software spending.” It is physical.
Reuters reported Citi’s estimate that AI infrastructure spending could exceed $2.8 trillion by 2029, and that meeting compute demand could require 55 gigawatts of new power capacity globally by 2030—implying massive incremental investment.
That is inflationary on the way in because it bids for:
- turbines, transformers, switchgear,
- land, permits, interconnects,
- skilled construction labor,
- and financing.
Layer tariffs on top, and the near-term inflation impulse can become more stubborn than many investors want to assume.
This doesn’t guarantee inflation re-accelerates. But it does mean that disinflation will not be effortless.
Theme 5: AI adoption is deflationary on the way out
The other side of the AI story is the part markets want to believe: productivity.
AI adoption can be deflationary by:
- lowering unit labor requirements,
- speeding workflow throughput,
- reducing error rates and rework,
- compressing time-to-market in knowledge work.
This is the long-term offset to the AI capex inflation impulse: inflationary inputs, deflationary outputs.
But markets will not pay today for productivity that arrives in 2028. In 2026, they will focus on whether:
- AI products are monetizing now,
- cloud demand is converting now,
- and enterprise adoption is showing up in revenue now.
Again: show me.
Putting it together: plausible 2026 stock market outcomes -See WHERE ARE WE NOW 2026 OUTLOOK
The cleanest way to frame 2026 is to stop pretending we can forecast every macro variable and instead focus on what actually drives the index in a high-valuation environment:
- Earnings delivery
- The rate path (and why cuts happen)
- Capex ROI credibility
- Tariff-driven margin pressure
- Credit cycle stability
- Geopolitical headline risk translating into energy and risk premia
Base case: “grind higher, but earn it”
- Earnings grow near consensus but with normal volatility in revisions.
- Multiples are flat to slightly down (no meaningful expansion). FactSet
- The year contains at least one material drawdown as the market re-tests the AI ROI narrative or reacts to tariff/inflation surprises.
- Full-year returns end positive, driven primarily by earnings.
Upside case: “better earnings + more cuts, but still no re-rating”
- Inflation stays contained enough that cuts proceed, possibly faster than currently projected. Reuters
- Earnings surprise to the upside, especially outside the Magnificent 7 breadth problem.
- Multiples don’t expand much, but they don’t compress, allowing earnings to flow through to index gains.
Downside case: “capex doubt meets credit friction”
- AI capex continues, but monetization disappoints in timing, and the market demands proof.
- Tariffs create enough cost pressure to dent margins, while consumer credit tightens further.
- The market de-rates temporarily, producing a sharp drawdown—even if the economy avoids a formal recession.
In all three scenarios, the most important point remains: 2026 is not structurally dependent on multiple expansion. It’s structurally dependent on earnings validation.
What to watch in 2026: the scoreboard items that will move markets
If you want to anticipate the drawdowns and recoveries rather than emotionally endure them, watch the variables that change the market’s confidence:
- Forward earnings revisions (especially for the capex leaders)
- Capex guidance vs. ROI commentary (not just the spend number)
- Tariff policy developments and pass-through behavior
- Sticky inflation indicators (services and labor-linked measures)
- Credit delinquencies and lending standards drift
- Oil’s message: is it falling because supply is ample—or because demand is cracking?
- Geopolitical escalation translating into energy or shipping
Bottom line: optimism outweighs pessimism—but perfection is fragile
Our 2026 outlook can be summarized simply:
- We are in a two-speed business cycle: capex, yields, and earnings acceleration argue for continued expansion; weakening labor dynamics and a mature credit cycle argue for caution and episodic scares.
- This is a show-me market. With valuations elevated, investors will demand earnings validation, and they will treat execution delays and capex ambiguity with skepticism. FactSet
- I do not expect broad market multiple expansion in 2026. The return engine is earnings growth (plus dividends), not re-rating. FactSet
- The policy mix—tax incentives plus capex—creates real stimulus potential, but it also risks keeping long rates and inflation inputs “sticky enough” to cap valuations.
- Expect moments of doubt, and don’t be surprised by drawdowns with recoveries if the earnings trajectory remains intact.