Will the bullish market continue for American stocks in 2026, or will there be a bubble collapse?

Question

American stocks have risen significantly for three consecutive years, with the S&P 500 soaring by over 78% and the Nasdaq skyrocketing by 126.7%. In 2026, will this tech-led market really continue?

Institutional Investor Bullish Scenario Morgan Stanley has positioned 2026 as the “Year of Risk Reboot” and raised its year-end target for the S&P 500 to 7,800 points (up 15% from now). In addition to a rare combination of policies including tax cuts, a 50bp rate cut by the Federal Reserve, and deregulation, the fact that less than 20% of the $3 trillion investment related to data centers has been executed serves as a tailwind. The outlook is that the AI investment cycle will continue for some time.

However, bubble warnings are also sounding simultaneously MAG7 accounts for more than 30% of the market capitalization of the S&P 500 and contributes about half of the market expansion. The current PER is historically high, and the leverage trading balance has surpassed that of the dot-com bubble period in 2000. Dongwu Securities warns that 2026 may be the year when the AI bubble is pricked. If the FRB lowers interest rates too much causing inflation to return, or if it does not lower rates as much as the market expects, the tech bubble may reach its final chapter.

Signs of Style Transformation In the first half of the year, easing policies will likely continue, but the growth potential is limited. Once rate cuts end, the rise in tech stocks will slow down, and a chance will come for cyclical stocks (such as consumer goods, industrials, and real estate) to benefit.

The increase in capital expenditures for MAG7 has significantly slowed down, and the subsequent market may rely on large-scale deployment of AI applications or technological innovations. If small tech stocks are only supported by liquidity, they are likely to face adjustment pressures.

Investor Advice The year 2026 will see opportunities and risks coexisting. The dual engines of policy and AI are major advantages, but high valuations, the pace of policy implementation, and the risks of a tech bubble remain potential concerns. Focus should be on large tech stocks with profit realization capabilities, while simultaneously positioning in cyclical stocks first, and preparing for market fluctuations with a diversified allocation.

What do you think about the American stock market in 2026?