Bank of America flags unusual 2026 setup in stock market

Bank of America’s Savita Subramanian just threw cold water on the idea that the popular AI trade will continue defying gravity next year.

She argues that 2026’s biggest market story could be a valuation reset, not a downturn, but a warning to investors still paying steep premiums for AI-linked businesses.

Earnings growth should hold up, but the market’s clearly raced ahead of fundamentals, as investors are still “buying the dream” on AI infrastructure.

Subramanian’s analysis feeds into Bank of America’s recent surprise stock-market forecast, one of the more restrained long-term calls on Wall Street.

BofA has the S&P 500 reaching 7,100 for year-end 2026, offering barely 4% to 5% upside, even as its competition pitches 7,500 to 8,000 or more. 

Too much capital has effectively been rushed into AI infrastructure plays, she argues, while the payoff is still stuck behind power shortages, deployment delays, and a sluggish adoption cycle. 

Bank of America says 2026 is the “reset year”

Subramanian feels that investors continue to pay peak-ish multiples for growth stocks, with virtually no clarity on how AI monetization actually unfolds.

“We’re paying a high multiple for growth stocks, but we don’t exactly know how this all plays out,” she said, arguing that the mammoth AI infrastructure spending may not show up until 2026.

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 Nevertheless, she forecasts nearly 14% earnings growth next year to nearly $310 per share, but says stronger returns may not follow.

At this point, she’s steering investors toward staples and discounters. Subramanian explains that the low-income consumer could potentially gain strength, with tax refunds and inflation becoming a political priority ahead of the midterms.

A handful of stocks are carrying the entire market

The market’s current structure adds to the tension. 

Only a handful of AI winners continue to throw their weight in the S&P 500, while they’re spending at a pace that leaves virtually zero margin for error.

Here’s the setup that worries Subramanian:

• Alphabet and Nvidia alone account for a third of the S&P 500’s gains this year. Strip those gains away, and the index looks remarkably less impressive, underscoring the narrowness of the AI trade.
• The Magnificent 7 swelled to over 30% of the S&P 500’s total value, Reuters reported. That intense level of concentration has already prompted multiple UK pension funds to trim their U.S. exposure due to concerns about the AI bubble. 
• AI capex by S&P tech names has surged past $400 billion annually, with a substantial amount being invested in GPUs, hyperscale data centers, and power infrastructure. 
• Earnings quality and valuations are stretched thin, with the "Big Short" Michael Burry sounding the alarm on the lengthening server-life assumptions, inflating profits by pushing real costs into future years. At the same time, pockets of tech trade remain at triple-digit forward P/Es; for instance, Tesla stock is near 239x compared to somewhere between 20x to 25x for the S&P 500.

Veteran strategist Ed Yardeni sounds off on the Magnificent 7

In a Dec. 7 note, Yardeni Research Chief Investment Strategist Ed Yardeni just threw a flag on the Mag 7, warning that the tech giants’ era of runaway earnings dominance is finally catching up.

Yardeni argues that strong competitive pressures are piling up across cloud, chips, advertising, and AI.

“We see more competitors coming for the juicy profit margins of the Magnificent Seven,” he wrote, arguing that the productivity gains driven by AI and software are likely to spread across the entire corporate landscape. 

In a sharp take, he says that “every company is evolving into a technology company,” which means Big Tech doesn’t have that field to itself.

That’s exactly why Yardeni’s "overweighting" the Information Technology and Communication Services sector, preferring market weight for both sectors, while shifting extra chips toward financials, industrials, and an overweight in health care. 

For perspective, the Mag 7 skyrocketed over 600% since 2019, compared to nearly 113% for the S&P 500, as investors poured into big-name AI winners.

Related: Nvidia update gives it bigger edge over rivals