Stock Market 2026 - AI Projection
What does AI have to say about the stock market in 2026? In this series, I will break down all of the aspects of the stock market using quantitative analysis, then ask AI what to expect
It was another banner year for the stock market with some 38 new all-time highs printed for the S&P 500. Despite these milestones, a lot of investors are exhibiting doubt.
The economy ‘feels’ like it is slowing, and there have certainly been declines in employment. Affordability is at the core of a lot of concern, and consumer confidence is near all-time lows. Despite that segment of the economy, the ‘other’ portion of the economy, the AI economy, is booming. Yet, investors are fretful over a potential bubble. Valuations are high, but it is the lack of profits from all of the AI-driven investments that is most worrying. Valuations are pegged to ever-increasing expenditures, revenues, and profits. Those increases are looking like they may be out of reach, and some stocks have sold from this.
This begs to question what will happen next for the stock market in 2026.
Let’s Ask AI
With the new year, I am incorporating more AI into my analysis. AI is a tool that I believe will assist me in analyzing the entire economy while also broadening search results to information outside of my normal sphere of influence.
I use quantitative analysis to evaluate individual companies and the overall economy. What I plan on doing is also taking the results of the data, incorporate all economic data to query AI as to what it believes will happen next. This is a top-down approach using a broader macro-economic analysis.
Next, I will systematically work through all 500 of the S&P 500 stocks, building a Discounted Cash Flow Statement (DCF), then query AI on each individual company and have AI use that input within the bigger, broader scope of analysis—2 per day, 5x per week, 50 weeks = 500 stocks. This is more bottom-up, if you will.
Combining the two methods will likely yield more nuanced results.
Let’s see what AI has to say.
Follow Along
I am using abacus.ai, a super-assistant. Abacus.ai allows a user to access nearly all of the major AI LLMs. With abacus.ai, you can get Chat GPT 5.2, Claude 3.0, Gemini 3.0 Pro, Grok 4.1, Deepseek, image generators, video generators, and many, many more, all for just one low price of $10.00 / month … my referral link is below:
My Broader Economic & Investing Thesis
My economic theory is that the rate of growth on the money supply is one of the key beginning points of economic activity. If firms are expanding into new business ventures, and these firms are taking on debt to finance these ventures, in an economy based on fractional banking, the pace of growth of the money supply will increase. This also means that hiring will expand, and new hires will increase the aggregate demand of the economy, thereby pushing revenues for companies, and inducing firms to expand further—a feedback mechanism.
If you want to know what is going to happen within an economy, watch the money supply growth rate, personal income & personal expenditures growth rate, and median earnings growth rate of the S&P 500. These all work hand-in-hand, and if you watch all three, you will have a solid understanding of how the economy will perform in the coming months.
Don’t stop there, however, compare everything to anything. One data set does not tell you much without comparing it to other data sets.
What is happening now?
There are key bullet points that are the basis of where the economy is right now:
The economy has been grinding lower and AI feels this will continue.
AI has been the biggest stock market driver of late—what does AI believe will happen next?
The tariffs are a key factor in the economy and will continue to be so.
Within my input query to AI, I will encompass a lot of these as the focus.
Using AI - Goals & Limitations
The goals are to get a sense of what will happen with the stock market because of what is happening in the economy. Next, I also want to add in queries about short and medium-term price movements with the S&P 500 via SPY ETF.
AI has limitations, however: You basically have to back it into a corner so that it stays within a set framework. I want to see what AI has to say, but I also want to extrapolate each bullet point and get as much information from AI as I can.
This is the first simple query, and from here I will continually add into this query on a continuous basis:
My Query
I am an economist, and I use econometrics to analyze data that will give clues as to what will happen next in the stock market. There is a strong correlation between the rate of growth of the money supply versus the rate of growth of personal incomes and personal expenditures. Since the U.S. economy is primarily driven by consumer spending, analyzing the rate of growth of these data points will show some correlated moves in corporate revenues and profits, which would translate into stock market movements. There is also a strong correlation between personal incomes and personal expenditures, and the median earnings growth rate of the S&P 500 stocks since the U.S. economy is mostly driven by consumers and services. Can you describe the current growth rates of these components and how this might affect the stock market?
AI Output
AI did not hold back—this will be a massive rabbit hole. It will take me days, weeks, if not the entire year to fully understand what all of the key points are from the query output, and what to expect next.
That being said, here are the key bullet points that I will be continually researching over the following days & weeks:
Here’s a concise, data‑driven view of where those components stand (using the latest 2025 data available as of Jan 2026) and what they imply for equities, framed in the way you’re thinking about macro–earnings–equity linkages.
1. Money supply growth vs. income and spending
M2 money supply (YoY)
Level: M2 around $22.3T in Nov 2025, up slightly from Oct [FRED M2].
YoY growth: ~4.3% in Nov 2025, down a bit from ~4.6% in Oct; broadly running in a 4.0–4.6% YoY band through 2025, up from ~3.5% in late 2024 [YCharts M2 YoY].
Qualitative takeaway:
After the post‑COVID contraction/flatlining, money growth is now moderate and positive, but nowhere near the double‑digit surges of 2020–21.
It’s consistent with a “normal-ish” expansion, not an outright liquidity boom and not a sharp monetary squeeze either.
Personal income growth
Latest comprehensive BEA snapshot: Sept 2025
Personal income: +0.4% MoM (SAAR) [BEA, Personal Income & Outlays, Sept 2025].
Real disposable personal income: +0.1% MoM.
Wages/salaries YoY: roughly around +5% YoY (various series; BEA + wage trackers like TradingEconomics).
Savings rate: ~4.7% [BEA].
This puts nominal personal income growth a bit above nominal GDP growth, and real disposable incomes still grinding higher, but modestly.
Personal Consumption Expenditures (PCE)
• Sept 2025:
Nominal PCE: +0.3% MoM; services drove the increase [FRED PCE, BEA Sept 2025].
Real PCE: 0.0% MoM – flat in real terms for that month.
PCE price index: +0.3% MoM, +2.8% YoY; core PCE also +2.8% YoY [BEA].
• Over Q3 2025, PCE prices were rising at about a 2.8% annualized pace [BEA GDP Q3 2025].
Macro alignment with your framework
Money supply growth (~4% YoY) is roughly in the same ballpark as nominal consumption and income growth (call it mid‑single‑digit, combining modest real growth with ~3% inflation).
There isn’t a major divergence where money is contracting sharply while incomes and spending still rise, or vice versa; that argues for continuity rather than a regime break, at least near‑term.
2. Income–expenditure dynamics and corporate revenues
From a consumption‑driven GDP perspective:
Incomes > spending at the margin in Sept 2025:
Nominal income +0.4% vs. spending +0.3% MoM.
Real incomes slightly positive, real spending flat.
Savings rate stabilizing around mid‑4% — low by historical standards, but not collapsing.
Implications for corporate top‑line:
With:
nominal incomes growing ~5% ish YoY,
inflation ~2.5–3% (PCE),
real spending trending slightly positive but choppy,
You’d expect nominal revenue growth for broad consumer‑facing corporates in the mid‑single digits, absent large share shifts or price/mix effects.
Services spending is doing more of the work than goods, which favors service‑heavy sectors (travel, leisure, some financials, software/IT services) more than traditional goods producers.
In your econometric language, the current configuration looks like:
Money growth: moderate, positive, not explosive.
Personal income: somewhat faster than real consumption (small decompression of balance sheets / slight rise in saving).
PCE: still expanding nominally, flat to slightly positive in real terms.
That tends to be supportive but not booming for forward revenue growth.
3. Earnings growth: S&P 500 vs. “median” stock
Data availability is better for aggregate EPS than true median growth:
S&P 500 aggregate EPS growth (consensus):
CY 2025: ~10–12% expected EPS growth (FactSet has ~12.1%) [FactSet Earnings Insight].
CY 2026: ~14–15% EPS growth outlook [FactSet, Investing.com summary].
These aggregates are heavily skewed by mega‑cap tech / “Mag 7”, with expected high‑teens to >20% EPS growth for that cohort.
If you’re looking for something closer to a median growth rate:
Various breakdowns of “S&P 493” (S&P 500 ex‑Mag 7) show expected growth in the high single to low double digits (roughly ~9–12.5% in 2025/26), more in line with what you’d predict from mid‑single-digit nominal demand plus some margin normalization and buybacks.
In other words:
Index‑level EPS ≈ 10–15% (cap‑weighted, skewed by mega‑caps).
Distribution center/median likely closer to high‑single/low‑double digits, consistent with your income–expenditure–earnings correlation story.
4. How this configuration might affect the stock market
Putting your macro–earnings link into an equity narrative:
a) Directional bias: modestly positive fundamental backdrop
Money growth is not restrictive:
YoY M2 > 0 and comfortably positive.
This reduces odds of a deep liquidity‑driven demand downturn in the near term.
Income and consumption are growing slowly but positively in real terms:
That supports continued revenue growth, especially in services.
Consensus EPS projections of 10–15%:
If your models show similar growth from personal incomes/expenditures, the macro–earnings alignment is relatively tight.
Net effect: baseline case is continued, moderate earnings expansion rather than an imminent earnings recession. That’s usually supportive of equities, particularly if the Fed is perceived as at or past peak tightness.
b) Valuation vs. growth: key tension
With mid‑single‑digit nominal macro growth but double‑digit EPS expectations, you’re implicitly relying on:
margin stability or expansion,
buybacks and financial engineering,
sector‑specific growth (AI, tech, communication services) well above the macro trend.
For the broad market, this means:
If your econometric models on income + consumption start pointing to slower nominal demand than currently priced into 2025–26 EPS, there is downside risk to earnings expectations and thus to index levels.
If they confirm or exceed current consensus growth, current valuations could be “justified but rich” rather than fundamentally stretched.
c) Sector implications, given the current mix
Given that:
Services spending is driving PCE gains, and
Real goods spending is flattish
You’d expect:
Relatively stronger tailwinds for:
Service‑oriented sectors (consumer services, travel/leisure, health care services, IT/services).
Firms with pricing power and exposure to nominal growth rather than volume alone.
Weaker tailwinds or more cyclicality for:
Goods‑focused cyclicals tied to durable goods, housing‑related spending, and discretionary big‑ticket items, especially if real spending on goods does not re‑accelerate.
d) Money–income wedge: what to watch going forward
Given your focus on the relative growth of money vs. incomes vs. expenditures:
If M2 growth accelerates faster than income and PCE growth:
Historically associated with periods of multiple expansion, credit easing, and potential speculative behavior.
Would be a signal for a more pro‑risk stance if inflation expectations remain anchored.
If M2 growth slows while income and PCE keep rising:
That usually presages tighter financial conditions and can lead your models to flag a future deceleration in corporate revenues and profits.
In that scenario, it would be a warning for multiple compression or an earnings disappointment down the line.
Right now, we’re in a middle regime: moderate, roughly aligned growth in money, incomes, and spending, with earnings expectations running somewhat ahead of macro aggregates due to sector mix and margins.
5. How you might incorporate this into your econometric work
Since you’re already working with these correlations, a few practical ideas:
Use:
YoY real PCE and real disposable income,
M2 YoY,
and some measure of consumer credit growth
as predictors in a panel or distributed‑lag model for S&P sector revenues.
Compare:
model‑implied median EPS growth vs.
current bottom‑up median/“S&P 493” growth expectations
to identify where the Street is optimistic or pessimistic relative to the macro.
If you’d like, tell me which exact series (FRED/BEA tickers) and frequency you prefer (monthly vs. quarterly), and I can help you sketch a specific empirical specification (e.g., ADL/VAR) to tie M2, PI, PCE into sectoral earnings or S&P median EPS growth.
My Take
The was a lot—AI did not hold back.
I will be reading this, and rereading this, and rereading it over a very long period of time. Mostly, I completely understand all of this, but linking everything will be the challenge, along with breaking down and linking everything to all that was stated here.
Mostly, the read I get is that the economy is slowly grinding lower, but AI does not necessarily see a recession at this point. The tariffs have had an effect on consumption, and this is going to lower economic output, which will translate to lower revenue growth and profits for companies.
Then there is AI, which that portion of the economy is still driving the stock market. I will touch on AI soon as that is a whole different topic for discussion.