Markets are, in general, quite optimistic at the beginning of the year. Despite some policy missteps and bubble scares in 2025, the S&P 500, Dow Jones and Nasdaq have posted solid returns. And why wouldn’t this continue?
Analysts believe the good times will continue — in large part because of the massive stimulus package expected to arrive with the One Big Beautiful Bill Act. However, there is also an understanding among Wall Street analysts that the conditions for success are getting increasingly narrow.
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For example, much of the market’s optimism in 2025 has come from the promise of AI, despite growing doubts about how and when these bets will pay off. If any news emerges that could spook confidence, it could have a disproportionate impact on stocks.
Likewise, the economy has managed to resist the possible negative effects of tariffs, immigration policy, inflation and employment. So far, employers have managed to strike a balance: reduced business confidence and rising prices, which led to staff cuts, have been offset by a shrinking job market as people have been forced or decided to leave the United States.
But what if it were necessary to summarize all of this in a single word? Well, thanks to the power of AI, it can be done. Fortune put the 2026 projections of 15 of Wall Street’s biggest banks into a Perplexity model and asked it to sum it all up in a single word:
He spat “precarious.”
Perplexity’s reasoning will be familiar to many of its human users. The tool stated that the documents “recognize 2026 as a year of powerful long-term trends, combined with structural vulnerabilities. Markets are resilient but fragile, dependent on tight conditions holding while risks accumulate at geopolitical, monetary and valuation levels.”
The AI paradox
The most delicate — one might say, precarious — balance that investors need to strike in 2026 is between opportunity and hysteria when it comes to AI.
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In a note titled “Promise and Pressure,” JP Morgan Wealth Management CEO Kristin Lemkau noted that by 2026, “AI is poised to transform industries and investment opportunities, but it also carries the risk of overenthusiasm.”
Big techs have tripled their annual investment spending (capex), going from US$150 billion in 2023 to what could exceed US$500 billion in 2026, says JPM, and almost 40% of the market value of the S&P 500 is directly impacted by perceptions or realities linked to the use of AI.
The dot-com bubble remains a wake-up call for many. JPM writes that it has established five indicators to identify a possible return of this kind of irrational euphoria.
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In the first, capacity, the institution notes that the sector is managing to comfortably keep up with demand.
The second is the abundance and availability of credit, which “operation IA” has, noting: “Public markets will be willing to finance the biggest technology companies, all with tighter spreads than the broad investment grade index.”
The third is the obscuring of risk, for example through loose credit granting criteria or weak financial standards. The bank said it was “looking for signs” of this type of behavior and highlighted concerns about “circular” investments within the AI supply chain.
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In terms of speculation, the diagnosis was relatively positive: “Euphoria is growing, but it would have to reach much higher levels before making us more cautious.”
And finally, on the difference between valuations and cash flows, wealth management highlighted that in the dot-com era, companies went public without any revenue, but now “AI companies generate their returns entirely through earnings growth.”
JPM concluded: “It seems clear that the ingredients for a market bubble are present. That said, we think the risk of a bubble forming in the future is greater than the risk of us already being at the height of one now.”
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The macro front: “precarious”
The year 2026 looks like “anything but boring,” according to Deutsche Bank’s global outlook. Domestic political fragmentation will be a headwind in Europe, economists Jim Reid and Peter Sidorov wrote, while US-China rivalry could return with a vengeance in November when the current year-long trade truce expires.
The chances of recession “are somewhat high, given the precarious nature of the job market”, they added.
In recent months, the U.S. economy has seen modest job creation, although the unemployment rate has remained relatively stable as the labor force shrinks.
As Macquarie’s head of economics, David Doyle, explained to Fortune earlier this year: “We’re in that balance, but if layoffs pick up a little bit, that could break the balance, and unemployment starts to rise. The flip side of that is, once we get past this short-term weakness, it’s possible that things could go in the opposite direction and unemployment could fall.”
He was joined by Goldman Sachs, whose chief economist, Jan Hatzius, wrote in his projection that the US economy’s main vulnerability is the labor market, with possible weakness pushing the country into recessionary territory.
While Goldman is optimistic that this will be avoided, Hatzius said it is still “too early to rule out” the possibility.
Labor discussions have also been the main force shaping the Fed’s path in recent months, allowing cuts despite the other side of the issue — inflation — remaining stubbornly above the 2% target. In fact, some analysts don’t expect it to come close to the target for a few years.
In their outlook for 2026, Bank of America senior economist Aditya Bhave and his team wrote that they believe core inflation will still be at 2.8% at the end of 2026 and 2.4% at the end of 2027. In the short term, this will come from tariff pressure, as well as a one-off price level adjustment due to the men’s World Cup.
If such price hikes actually happen, it could interrupt the easing cycle that many analysts expect from the Fed in the coming years — even if the central bank has a more lenient president at the helm.
The consumer issue
Since the end of the pandemic, Wall Street has been repeatedly surprised by the remarkable resilience of American consumers.
What has emerged at the end of 2025, however, is that not all consumers share the same fate: instead, the so-called “K-shaped” economy has emerged.
As the chief economist at Moody’s Analytics, Mark Zandi, previously told Fortune, while the richest remain calm, approximately half of Americans are, in practice, in recession: low-income families are “financially holding on to a tightrope,” he said.
But despite concerns about the conflicts that the American economy needs to go through to succeed, the general outlook remains optimistic.
Vanguard, for example, highlighted the fact that 2025 was a positive year against all odds, noting: “Despite major headwinds in 2025, such as rising tariffs, sudden stabilization of labor supply, and slowing growth, economies held firm.”
Deutsche Bank concluded: “While our global economists and strategists are largely positive for 2026, don’t expect volatility and swings in sentiment to be easy.”
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