Equity market outlook for 2025 and 2026

The investment outlook remains optimistic following the recent election, with a focus on a two-year target for the S&P 500 reaching 7,500 by year-end 2026. This optimism is driven by expectations of strong market performance in 2025, with an overweight position in stocks over bonds. Within equities, there is a preference for large-cap value and small-cap stocks, while maintaining modest exposure to large-cap growth. Internationally, the strategy favors emerging markets over developed ones in Europe and Japan.

The US economy is viewed as stable, with declining inflation and potential rate cuts by the Federal Reserve, which could support equity valuations. The Trump administration's pro-growth agenda, including lower corporate taxes and deregulation, is expected to boost economic productivity and corporate profits significantly. Trade policies are anticipated to enhance US investments and exports, further supporting GDP growth.

Valuations for the S&P 500 are projected to expand, with a forward earnings multiple of 21.5x considered achievable, particularly for mega-cap US growth companies. Despite potential market volatility due to geopolitical developments and policy implementations, the overall outlook remains positive, with a focus on sectors likely to benefit from market broadening, such as value, cyclicals, and small-cap stocks.

Emerging markets are expected to capitalize on cheap valuations and domestic stimulus measures, providing opportunities for growth. The strategic allocation includes a cash reserve to capitalize on market pullbacks, maintaining an overweight position in equities across balanced portfolios. This approach aims to navigate potential risks while leveraging growth opportunities in both domestic and international markets.