By John Ian Lau

Contributing Editor

Almost one week into January 2026, the U.S. economy demonstrates remarkable resilience, with Goldman Sachs forecasting robust 2.6% real GDP growth for the year — well above the consensus estimate of around 2.0% — driven by tax cuts, easing tariff impacts, and supportive financial conditions. This optimism aligns with a broadening bull market, where Goldman Sachs targets the S&P 500 at 7,600 by year-end, implying roughly 11-12% total returns from current levels, fueled by 12%+ earnings growth and AI-driven productivity gains.

Morgan Stanley offers a more measured view, projecting 1.8% GDP growth in 2026 amid potential early-year softening from labor market dynamics, yet remains constructive on U.S. equities, with some strategists eyeing an S&P 500 path toward 7,800 in a bullish scenario supported by AI investments and policy tailwinds. Equities enter the year at elevated valuations — forward P/E around 22x — but earnings momentum and accommodative policy provide a solid foundation.

While a full-blown dislocation remains unlikely, the landscape features five key risks that could test this positive setup. We’ve consolidated the outlook to focus on these core threats, incorporating fresh forecasts from leading firms.

1. Equity Valuations and AI Selective Shakeout

The largest perceived risk centers on high valuations and the maturation of the AI investment cycle. With the U.S. AI market expanding rapidly and global hyperscaler capex potentially exceeding $500 billion, hype has propelled multiples. Yet 2026 will likely separate leaders from laggards: deployment costs and ROI scrutiny could pressure neophytes, while established players deliver outsized gains to drive index performance. Goldman Sachs emphasizes that AI “arms race” investments remain solid, with concerns over an imminent bubble overstated.

2. Economic Slowdown Narrative (Overstated)

Talk of U.S. deceleration appears misguided. Goldman Sachs sees 2.6% GDP growth accelerating from 2025, boosted by fiscal stimulus (including $100 billion in early-year tax refunds) and reduced tariff drag. Job growth moderates but stays positive, offset by productivity surges from tech efficiencies. Morgan Stanley flags potential first-half softness (unemployment possibly peaking at 4.7%), but anticipates reacceleration later via consumer/business spending and AI capex.

3. Inflation and Fed Policy Path

Persistent inflation fears above 3% are likely to prove unfounded again. Core measures trend lower, creating a bullish backdrop for bonds. The Fed, under a potential new Chair, is expected to ease further: Goldman Sachs projects 50 basis points of cuts in 2026, bringing the policy rate to 3-3.25%. This dovish stance supports loose financial conditions, as reflected in strong readings from the Goldman Sachs Financial Conditions Index.

4. Fiscal Deficits and Debt Dynamics

High deficits — projected around 5.5% of GDP — represent a genuine long-term concern but are unlikely to trigger a near-term funding crisis. U.S. Treasuries retain safe-haven status, with elevated borrowing manifesting as higher yields rather than instability. Action on sustainability is needed, but the issue currently props up rates without derailing growth.

5. Geopolitical and External Pressures

Tensions in Taiwan, Ukraine, Iran, Venezuela, and potentially Greenland could amplify volatility, while trade frictions — though less acute than feared — may disrupt supply chains. Two additional under-the-radar risks include cybersecurity vulnerabilities (attacks up significantly amid U.S.-China frictions) and lingering supply-chain fragilities (e.g., semiconductor dependencies). These could shave growth if escalated.

Black Swan Caution

Unforeseeable shocks — from novel pandemics to major cyber incidents or catastrophic events — remain the ultimate wildcard. These low-probability, high-impact occurrences underscore that markets price probabilities, not certainties.

My Take:

Stay bullish and maintain full allocation conviction. 2026 is positioned for strength, with private equity and credit rebounding after a pause — multiples in private markets lag the S&P 500 by about 40%, spurring activity.

This market exhibits classic hallmarks of positive momentum: double-digit earnings growth (projected 12%+ by Goldman Sachs), unemployment stabilizing near 4.5%, productivity boosts from AI adoption, dovish Fed easing (to 3-3.25%), broadening participation beyond megacaps into cyclicals and small-caps, and resilient consumer wealth at records. Stay invested in the US, diversify into Asia: HK and China markets. Don’t fight the tape — embrace the momentum; with an ever watchful eye in buying cheap protections.

Views are my own.