Are Stocks Expected to Rebound

This article examines whether stocks are expected to rebound over the next 12–18 months, focusing on US large-cap indices (S&P 500, Nasdaq), consensus views from major strategists, primary drivers ...

2025-12-24 16:00:00

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Are Stocks Expected to Rebound

Are stocks expected to rebound? This article examines that question for US large‑cap equities (S&P 500, Nasdaq) on a 12–18 month horizon. It synthesizes consensus views from major strategists, recent market context (through mid‑January 2026), the main drivers that could support a rebound, risks that could prevent one, technical and sentiment indicators to monitor, and practical steps investors may consider. Readers will gain a structured framework to assess whether a rebound is likely and what to watch next.

Definition and scope of the question

In market terms, a “rebound” can mean different things depending on context. For the purposes of this article, are stocks expected to rebound refers specifically to whether broad US equity markets (especially the S&P 500 and Nasdaq‑100) will recover from recent pullbacks and produce meaningful positive returns—potentially returning to new highs—over a 12–18 month outlook. That scope emphasizes:

US large‑cap and broad‑market indices (S&P 500, Nasdaq, Russell 1000/2000 for breadth).
A medium‑term window (roughly 12–18 months) rather than intraday or multi‑year secular forecasts.
Rebound outcomes ranging from a modest recovery (single‑digit to low‑double‑digit gains) to a stronger rally (mid‑double digits), and the scenarios under which a stalled or reversed market could occur.

This focused timeframe aligns with how major strategists publish 12‑month targets and with the cycle sensitivity of monetary policy and earnings revisions.

Recent market context (background)

Markets entered 2026 after a multi‑year bull run that began from the 2022 lows. Key features shaping the rebound debate include:

Concentration in mega‑cap tech: Much of the headline gains since 2023 have been driven by a handful of large technology names. That concentration raises questions about sustainability and the breadth of any rally.
Improved breadth in early 2026: As of January 15, 2026, the Russell 2000 small‑cap index was up roughly 7% year‑to‑date and had staged a streak of intraday record highs, signaling stronger small‑cap leadership and a broadening market participation (source: Benzinga; reported Jan 15, 2026).
Record ETF inflows and low cash allocations: Bloomberg reported that equity‑focused ETFs drew heavy inflows and that cash allocations were at historical lows in early 2026, boosting risk appetite (source: Bloomberg; reported Jan 2026).
Volatility and options markets: The VIX was trading at low percentiles relative to the five‑year range, suggesting low implied volatility and limited demand for downside protection (source: Bloomberg; Jan 2026 coverage).
Earnings momentum: Analysts raised estimates for several sectors entering Q4 2025 results, and FactSet consensus expected S&P 500 EPS growth in the mid‑single digits for the quarter (source: Yahoo Finance / FactSet notes summarized Jan 2026).

These dynamics—broadening breadth, strong flows, and still‑elevated concentration—create an environment where a rebound is plausible, but its durability depends on macro, earnings, and liquidity factors.

Primary drivers that could support a rebound

Monetary policy and interest rates

Fed policy is a central driver for equity returns. Historically, expectations of Fed easing or actual rate cuts reduce discount rates and often support higher equity valuations. In many strategist models a shift from a neutral/hawkish stance toward modest easing (even a couple of 25‑bp cuts) can be enough to lift risk assets.

Market pricing in early 2026 reflected growing odds of modest easing during the year, which strategists include in base‑case rallies.
Keep in mind the sequence: inflation prints and payrolls heavily influence near‑term Fed expectations; a durable easing path requires both confirmed disinflation and no sharp deterioration in labor markets.

Corporate earnings growth

Earnings (EPS) growth underpins sustainable stock gains. Analysts’ forward EPS forecasts and revision trends are a primary validation for higher index targets.

Wall Street consensus for Q4 2025 and early 2026 showed continuing, if moderated, EPS growth—FactSet and other trackers reported positive year‑over‑year EPS comparisons entering earnings season (source: Yahoo Finance summarizing FactSet, Jan 2026).
Several strategist forecasts that call for mid‑teens index gains assume earnings expand in the high single to low double digits over the 12‑month horizon; if EPS growth disappoints, valuations and indices can fall even with benign rates.

AI investment and capital expenditures

Artificial intelligence adoption and related capital expenditures—data‑center buildouts, semiconductors, cloud services—are cited by many strategists as a structural earnings catalyst.

Industry reports in January 2026 showed strong demand for chips and AI‑related services. For example, TSMC reported outsized demand and projected substantial revenue growth for 2026 driven by AI customers (source: Reuters, Jan 15, 2026).
Strategists point to AI capex driving not only large tech revenues but also cyclical suppliers (semis, industrials) and software services, potentially broadening the rally if spending accelerates.

Fiscal and macro tailwinds

Fiscal policy moves, tax changes, or above‑trend GDP growth can provide additional lift to equities.

Early 2026 saw a mix of policy headlines that markets mostly shrugged off; when fiscal support or corporate‑friendly policy is credible, stocks often re‑rate.
Strong GDP prints or acceleration in business investment—if sustained—can improve forward earnings outlooks and support cyclical sectors.

Market breadth and sector rotation

A rebound that spreads beyond mega‑cap tech into cyclicals, financials, industrials and materials is more durable.

Early 2026 flows favored equal‑weight indices and small caps in some sessions (Benzinga/Bloomberg coverage, Jan 2026), an encouraging sign that rising prices are reaching more names.
Strategists highlight that rotation into cyclicals and financials tends to validate a macro‑driven expansion rather than a narrow multiple expansion concentrated in a few names.

Views from major strategists and research (selected surveys & reports)

Note: strategist views are summaries of published research as of mid‑January 2026 and reflect 12‑month targets commonly used by sell‑side and asset‑management research teams.

Goldman Sachs Research

Goldman’s research teams have published 12‑month S&P 500 targets that incorporate expected earnings growth and a path of modest Fed easing. Goldman analysts in their early‑2026 notes suggested upside potential in the low‑to‑mid double digits for the index, with a commonly cited figure near a ~12% rally for 2026 in some client briefs. Goldman also warned about elevated valuations and concentration risks in mega‑cap names, noting that narrow leadership increases vulnerability to sector‑specific shocks (source: Goldman Sachs research summaries cited by media, Jan 2026).

Morgan Stanley

Morgan Stanley’s macro/strategies desks published outlooks that favored US equities in the near term, with 12‑month S&P upside in the mid‑teens under a base case of continued earnings growth and several modest Fed cuts. Morgan Stanley emphasized selectivity—preferring sectors that benefit from a macro/micro mix of earnings momentum and valuation support (source: Morgan Stanley research highlights, Jan 2026).

Fidelity, Vanguard, BlackRock and other institutional outlooks

Large asset managers generally expressed cautious optimism early in 2026:

Fidelity and BlackRock commentary noted that the bull market remains intact but flagged risks from valuation concentration and the need for broadened leadership.
These firms emphasized diversification and active risk management rather than blanket equity exposure increases.
BlackRock reported record assets under management and strong ETF activity, signaling continued investor demand for equities (source: BlackRock results reported Jan 14, 2026).

Wall Street strategist surveys (CNBC, others)

Surveys of Wall Street strategists collected by outlets like CNBC and market data providers commonly showed 12‑month S&P 500 median targets in the low‑to‑mid double digits. Differences across forecasters reflect varying assumptions about Fed timing, earnings growth, and valuation multiples.

Media and independent outlets

Coverage in Barron’s, Bloomberg, Yahoo Finance and independent newsletters synthesized similar themes: a base‑case rebound is plausible if earnings and Fed expectations align, but risks around policy, valuations, and geopolitical shocks could derail momentum (sources: Bloomberg, Yahoo Finance, Barron’s coverage Jan 2026).

Major risks and counterarguments to a rebound

Valuation and market concentration

High price/earnings multiples—especially concentrated in a few mega‑cap tech stocks—make indices vulnerable. If leadership narrows further, a correction in those names can pull headline indices down even when many stocks remain flat.

AI disappointment or capex shortfalls

The AI growth narrative supports many bullish forecasts. However, if AI capex disappoints or productivity gains take longer than expected, revenue and earnings upside may be limited. Strategists warn that part of the rally is priced for a strong AI payoff; failure to realize that could trigger sector and market setbacks.

Monetary policy surprises and inflation persistence

A large downside risk is a hawkish surprise from the Fed if inflation reaccelerates. Elevated inflation or sticky wage data could force higher terminal rates, increasing discount rates and pressuring high‑multiple growth names.

Macroeconomic slowdown or recession

A recession scenario—driven by credit stress, sharp slowdown in consumer demand, or a global shock—would likely stall or reverse any rebound. Markets often price in growth, so a sudden negative macro revision can produce quick mark‑downs in equities.

Geopolitical and exogenous shocks

Geopolitical events, large supply‑chain disruptions, or systemic financial shocks (banking stress, liquidity squeezes) can create sharp drawdowns. Even in a generally bullish environment, such shocks can trigger broad risk‑off behavior.

Technical, market‑structure and sentiment indicators to watch

Breadth measures and equal‑weight vs cap‑weight performance

Compare equal‑weight S&P 500 returns to cap‑weighted S&P 500: outperformance of equal‑weight suggests a broad rally; lagging equal‑weight indicates narrow leadership.
Watch the Russell 2000 and small‑cap indices: strong small‑cap performance typically signals confidence in domestic economic breadth (as seen in early 2026; source: Benzinga reporting Jan 15, 2026).

Yield curve and Treasury yields

Movements in the 10‑year Treasury yield influence equity discount rates; falling yields often support higher P/E multiples, while rising yields can compress valuations.
The shape of the yield curve (inversion vs steepening) provides a macro signal—steepening often accompanies growth acceleration, while inversion has historically signaled recession risk.

Earnings season guidance and revision trends

Track the net percentage of companies raising vs lowering forward guidance and analyst EPS revisions. Positive revision breadth is a strong fundamental confirm for a durable rebound.
Earnings‑season transcripts and management commentary on demand, pricing, and capex intentions are early leading indicators.

Volatility (VIX), flows, and liquidity

VIX levels and the skew/premia in options markets indicate how much investors pay for downside protection. Low VIX and low put demand may signal complacency.
ETF and mutual fund flows into equities vs outflows give real‑time evidence of investor positioning. Heavy inflows into leveraged‑long funds can amplify moves both up and down (Bloomberg reported large inflows in early 2026).

Macro prints (inflation, jobs, GDP, PCE)

Key economic releases that move Fed expectations include PCE inflation, CPI, payrolls, and GDP. Surprising readings in either direction can quickly change the odds of rate cuts or hikes, and thereby swing equities.

Scenario outlooks and possible timelines

Base case (moderate rebound)

Scenario: Continued modest EPS growth (mid‑single digits to low double digits), two modest Fed cuts over 12 months, and improving breadth.
Outcome: S&P 500 posts low‑double‑digit to mid‑teens gains within 12 months—consistent with many sell‑side base forecasts.

Bull case (strong rebound)

Scenario: Faster‑than‑expected acceleration in AI capex, strong GDP growth, and rapid Fed easing as inflation cools.
Outcome: Stronger multiple expansion and earnings growth combine for mid‑ to high‑teens or higher index returns within 12 months.

Bear case (reversal or stalled rebound)

Scenario: Inflation reaccelerates or earnings disappoint; Fed holds rates higher for longer; geopolitical shock triggers risk‑off.
Outcome: The rebound stalls or reverses, with the potential for double‑digit drawdowns in headline indices.

Timelines depend on incoming data: macro prints and earnings reports in each quarter can shift probabilities meaningfully.

Practical implications for investors

Asset allocation and diversification

Consider balancing exposure between growth and cyclical sectors to capture both AI‑led upside and macro‑driven rotation.
Avoid single‑name concentration; broad diversification or exposure to equal‑weight strategies can reduce the risk of headline index drag from a few large stocks.
International and small‑cap exposures can offer complementary returns if domestic leadership narrows.

Risk management and position sizing

Use position sizing, rebalancing, and, where appropriate, hedges to manage drawdown risk.
For tactical traders, set defined stop‑loss rules and monitor volatility spikes; for longer‑term investors, consider gradual rebalancing rather than market‑timing moves.

Investment horizon and strategy types

Short‑term traders should follow technical indicators, option flows, and macro prints closely. Volatility can create both opportunity and risk.
Long‑term investors should focus on fundamentals: earnings growth, valuation paid, and the diversification of their portfolios.

Note: This section is descriptive and does not constitute investment advice.

Historical precedents and empirical evidence

Empirical studies and historical market behavior show that:

Equity markets often respond positively to sustained Fed easing, though the timing between easing and peak equity performance varies.
Earnings acceleration tends to precede market rallies; positive EPS revision breadth has been a reliable confirmation of fundamental support.
Narrow market leadership can produce fragile rallies that are prone to pullbacks if the leading sectors falter.

Past performance does not guarantee future results; historical relationships are useful context but not deterministic predictors.

Methodology and limits of forecasts

Strategist outlooks combine macro forecasts, earnings models, and valuation frameworks (P/E multiples, discounted cash flow scenarios). Limitations include:

Forecast uncertainty: Macro surprises, policy shifts, and exogenous shocks create wide outcome ranges.
Model assumptions on Fed policy, inflation, and corporate margins materially change target outcomes.
Market psychology and positioning (flows, derivatives) can amplify moves beyond fundamental drivers.

Recognize that published targets are conditional scenarios, not guarantees.

Frequently asked questions (FAQ)

Q: If strategists say a rebound is likely, should I buy now? A: Strategist consensus is one input among many. Timing depends on your horizon and risk tolerance. Consider diversification, position sizing, and monitoring the indicators listed above. This is informational, not investment advice.

Q: How important is AI to the outlook? A: AI investment is a major thematic driver cited by many strategists. It can lift both technology earnings and suppliers (semiconductors, cloud). However, the market has priced in some AI optimism—real‑world capex and revenue outcomes will determine how much more upside is available.

Q: What time horizon do these projections cover? A: Most strategist published targets referenced here are 12‑month horizons; this article focuses on a 12–18 month outlook.

Q: Which single indicator should I watch most closely? A: There is no single best indicator. Many investors follow a combination: EPS revision trends, the 10‑year yield trajectory, and breadth measures (equal‑weight vs cap‑weight performance).

References and further reading

(Selected sources cited in this article; summaries indicate what each contributed to the synthesis. All dates are reporting dates.)

Bloomberg (January 2026): Coverage on record equity ETF inflows, low cash allocations, and low VIX percentile—context on liquidity and sentiment that supported a rebound thesis.
Benzinga (Jan 15, 2026): Reporting on Russell 2000 early‑2026 performance and small‑cap breadth; used to illustrate broadening market participation.
Reuters (Jan 15, 2026): TSMC earnings and management commentary on AI demand and 2026 revenue outlook—used to show capex/AI tailwinds in the semiconductor supply chain.
Yahoo Finance / FactSet summaries (Jan 2026): Earnings season previews and consensus EPS growth estimates entering Q4 2025 results—used in the earnings‑growth discussion.
crypto.news (Jan 16, 2026): Report on Coinbase performance and headwinds—used as an example of sector‑specific divergence (crypto exchange underperformance vs broad market strength).
Goldman Sachs Research (Jan 2026 research notes): Summarized for 12‑month S&P targets and valuation caveats.
Morgan Stanley research and commentaries (Jan 2026): Summarized for U.S. equity preference and return assumptions.
BlackRock results reporting (Jan 14, 2026): Used to demonstrate investor asset allocation trends and ETF inflows.
Additional media outlets (Barron’s, CNBC, Wall Street strategist surveys Jan 2026): Used for consensus themes and survey medians on 12‑month targets.

As of January 16, 2026, these sources formed the basis for the views summarized above.