2026 Q1- 2026 Q2
March 1st 2026
Our quarterly S&P 500 forecast for 2026 Q1 (average price returns) is a 2 percent growth over the fourth quarter of 2025. For 2026 Q2, we expect only 0.3 percent growth over Q1. Our monthly forecast for March is lower than February’s average.
Volatility concerning frequent changes in tariff rates and timings, and geopolitical conflicts, cannot be captured in a forecast model. Thus, any uncertainty concerning these issues makes the 95 % confidence interval around the point forecast rather wide.
The end of the bullish rally
The US stock markets’ 2025 bullish rally, with gains reaching 16.4 %, extended to January 2026. Despite the geopolitical tensions involving Venezuela, Greenland, and Iran, the S&P 500 at some stage approached the 7000 mark.
Prevalent investor optimism in January was driven by muted inflation, low energy prices, high GDP growth in 2025 Q3, and the potential future productivity gains promised by the AI revolution. Above all, markets appeared to have adjusted to Trump’s tariff policy, taking the on/off tariff threats in their stride.
The picture appeared less rosy in February. Although inflation was still not a big concern owing to the low energy prices, new tariff worries, slowing GDP growth, and rising geopolitical tensions took their toll on the markets. At the end of February, the S&P index was down 0.9 % over the previous month.
The US Supreme Court ruled that the International Emergency Economic Powers Act, or IEEPA, cannot be used to impose tariffs, limiting Trump’s power to impose levies. As a response, Trump signed a proclamation that enabled him to bypass Congress and impose a 10% tax on most imports to the United States. The legal provision (Section 122 of the Trade Act of 1974) allows the president bypass Congress by imposing duties of up to 15% for 150 days, effective from February 24. The deadline is given to deal with the ” balance-of-payment issues.
The geopolitical tensions between the US and Iran also contributed to the lacklustre performance of stock markets in February. Looking forward, the new war in the Middle East is expected to put a damper on the stock market performance in March.
The U.S. economy slows sharply in Q4 2025
The US economy grew 1.4% in Q4 2025, sharply slower than Q3 (4.4%) and well below the market forecasts (2.9%) (Source: Bureau of Economic Analysis (BEA)). The government shutdown running from Oct. 1 to Nov. 12 clearly hurt growth in 2025 Q4. Government spending and investment slid 5.1%. However, the government shutdown was not the only reason for the slower growth. Personal consumption expenditures rose 2.4% in the quarter, down from the 3.5% gain in the prior period. Exports fell 0.9% after surging 9.6% in Q3. On a positive note, gross private domestic investment rose 3.8% after being flat in Q3.
Although US GDP growth in 2025 Q3 was very impressive, the immense scale of the AI investment in that quarter blurs the actual strength of the economy. One thing is clear: if the massive spending on data centers had been stripped away, the Q3 GDP growth would have looked more modest. Therefore, the latest slowdown in growth is not necessarily alarming for investors.
Consumer spending is related to job creation. January Nonfarm payrolls growth totaled a seasonally adjusted 130,000 for the month, much better than the market forecast of 70,000 and above the 48,000 recorded in December. The labor market’s resilience seems to recover despite the low-hire, low-fire rule. The unemployment rate dipped to 4.3%.
Retail sales remain unchanged, home sales fall again
Starting with the economic data, the retail sales remained unchanged in December. Home sales fell in January.
The advance estimate of U.S. retail and food services sales was steady in December and up 2.4 percent from December 2024. The January data were not released because of the backlog in data collection due to the past government shutdown.
The National Association of Realtors’ index of pending home sales fell 0.8% in January (m-o-m), after plummeting by 9.3% in December. The Pending Home Sales Index typically lags existing home sales by one to two months. Despite the rate cuts, the US housing sector still faces low buying activity.
‘Low hire, low fire’ trend continues
In the week ending February 21, the advance figure for seasonally adjusted initial claims was 212,000, an increase of 4,000 from the previous week’s revised level. The 4-week moving average was 220,250, an increase of 750 from the previous week’s revised average. The advance seasonally adjusted insured unemployment rate was 1.2 percent for the week ending February 14, unchanged from the previous week’s unrevised rate. (Source: US Department of Labor).
The U.S. unemployment rate dipped to 4.3 percent in January from 4.4 percent in December. The slight improvement in unemployment is due to the recovery from the US government shutdown. The initial jobless claims remain well below the 250,000 mark. New unemployment filings were lower at the end of 2025 than they were at the end of 2024. That said, most US companies are not creating enough jobs. The expression ‘low-hire, low-fire’ describes the current state of the US labor market. Despite the labor-saving AI technology, companies have been so far reluctant to lay off workers.
Both PMI and consumer confidence improve
The Chicago Purchasing Managers’ Index (PMI) rose to 57.7 percent in February from 54 percent in January 2025, above the market estimates of 52.8. This is the second time the index has been above the 50 mark since November 2023. The contraction in business activity has been a theme over the last two years. The latest data indicates a strong turnaround, with new orders surging to levels not seen since March 2022.
The Conference Board’s consumer confidence index increased by 2.2 points in February to 91.2 (1985=100), from an upwardly revised 89.0 in January. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—decreased by 1.8 points to 120.0 in February. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—rose by 4.8 points to 72.0. The Expectations Index has tracked below 80 for 13 consecutive months, normally indicating a recession ahead. Consumers are slightly less pessimistic about future job availability and business conditions than they were in January, when confidence fell sharply amid concerns over household income and job prospects.
Inflation remains steady
The annual inflation rate in the US came in at 2.4% in January 2025, the lowest level since May 2025, down from 2.7% in December. This was also below the market’s 2.5% forecast. Falling energy prices were the biggest contributor to cool inflation.
The personal consumption expenditures (PCE) index, a key barometer of inflation and consumer spending, rose at a 3% annual pace in December, compared with 2.8% in November. The market forecast was 2.9%.
Core PCE, which excludes the more volatile food and energy categories, grew 3% in December, up from 2.8% in November, in line with market forecasts. Both inflation indicators are above the Federal Reserve’s annual inflation target of 2%.
In January, the PPI, which measures the average change in prices that producers receive for their goods and services, was up 2.9% from a year ago. This is a potential indicator for future consumer prices as producers pass the impact of tariffs on to consumers.
In 2025, the Fed delivered three 25 bp rate cuts. The latest cut in December puts its key lending rate in a range of 3.5 % to 3.75%. The Fed held the rates unchanged in its January meeting. We believe that a rate cut is unlikely in the Fed’s March 17-18 meeting, given the persistence of inflation.
US corporate earnings look strong
The US corporate earnings with inventory valuation and capital consumption adjustments (domestic industries) were up 3.3 percent in 2025 Q3 from the previous quarter and up 6.9 percent over 2024 Q3.
Our consumer sentiment indicators are based on our ‘keyword’ algorithm related to ‘Google Trends’. Accordingly, these indicators are among the explanatory variables that predict US corporate profits. In 2025 Q4, we expect the company earnings to be 0.4 % lower than 2025 Q3 and 3.5 percent higher than 2024 Q4. US corporate earnings encompass a broader range of companies than the S&P 500. As a result, these earnings are not dominated by those of the ‘Magnificent 7’ and portray a more representative picture of the health of the US economy.
The historical data from February 28th 2025
The S&P 500 remains overvalued
According to Factset Insights from February 27, the forward 12-month P/E ratio for the S&P 500 is 21.6. This P/E ratio is above the 5-year average (20) and above the 10-year average (18.8).
FactSet reports that the blended (year-over-year) earnings growth rate for the S&P 500 is 14.2%. If 14.2% is the actual growth rate for the quarter, it will mark the 5th consecutive quarter of double-digit earnings growth. As 96% of the S&P companies have reported earnings for Q4, the majority (73%) reported a positive EPS and a positive revenue surprise.
Overall, the index remains overvalued, although slightly less than that of the previous month (22). Moreover, the latest forward 12-month P/E ratio is well below the P/E values before the dotcom bust (over 25). Our forecast of the S&P 500 indicates that the overvaluation by historical standards may extend to the second quarter of the new year.