Equity Market Outlook Coming into the New Year

Why Fundamentals Will Matter More

By: Brandon Chi

Jan. 2, 2026

With the new year coming in, and after everything that happened in 2025, markets feel like they’re entering a different chapter. 2025 ended up being another strong year for equities, with the S&P 500 rising 16% in 2025, and the Nasdaq climbing over 20%. Most notably, investors poured nearly $17 billion into U.S. equity funds in the final week of the year amid optimism about AI, and earnings growth.

That strength wasn’t purely because of fundamentals and ultimately carried on narratives. Big bets on AI’s potential, expectation for Fed rate cuts, and the beliefs that earnings would catch up to valuations. These major themes carried prices higher, but can go the other way.

This environment lifted valuations and rewarded conviction, but it also raised the bar for what to expect next. In 2026, fundamentals will matter more; not because narratives won’t matter all, but because narratives alone cannot sustain elevated valuations without economic, revenue, and profit growth driving these stories.

Narratives to Verification

One of the defining characteristics of the equity markets in 2025 was the willingness to pay for growth well ahead of proof. Companies with compelling stories and exposure to long-term themes were rewarded even when profitability lagged. Capital remained available for all, and expectations stayed optimistic. But optimism has a shelf life, especially when valuations are higher, and assumptions are within prices. The tolerance for disappointment has narrowed. In 2026, execution matters more than imagination.

Where Markets Stand for the New Year

Analysts are expecting the S&P 500 to deliver roughly 15% earnings growth in 2026, following expectations of approximately 13% growth in 2025. On paper, the outlook supports further gains, and historically, markets can perform well when profits grow at that pace.

However, optimism is already priced in on valuations. Forward multiples imply that earnings growth will arrive largely on schedule. This is where fundamentals will come back more into focus, with earnings growth driven by real demand, and improving margins. Investments and debt financing can sustain elevated valuations, but with expectations alone it cannot.

ASML and the Difference Between Belief and Proof

A useful example of this distinction can be seen within ASML Holding, the Dutch semiconductor equipment company central to the global AI buildout. ASML is the sole producer of extreme ultraviolet (EUV) lithography machines, which are required to manufacture the most advanced chips. The performance the company has is directly tied to actual capital spending decisions across the semiconductor industry.

On January 2nd, ASML received a double upgrade from Aletheia Capital, which raised its rating from a sell to buy and doubled its price target from $750 to $1,500, increasing the security by 8.78% in one day. The upgrade was driven by expectations of accelerating AI-related demand, particularly for ASML’s Low EUV systems. Analysts now estimate that this EUV revenue could grow by roughly one-third in fiscal 2026, with further acceleration in the later years.

What is important is that optimism is supported by numbers. ASML posted approximately 23% revenue growth YoY, reflecting real orders and backlog expansion. The market’s reaction to the upgrade highlights a broader theme for 2026; that narratives carry more weight when they are tied to observable cash flows and demand.

The broader market is moving towards the same filter, with growth stories no longer being treated equally. Companies with exposure to long-term themes like AI, and automation are still attracting capital, but investors are increasingly asking where exposure shows up in financial statements. Fixed income as well reinforces this dynamic, with policy that eases modestly, capital will be no longer free and changing financing behavior.

Artificial intelligence, infrastructure investment, and technological productivity remain powerful forces. What is changing is how those themes are priced. Markets are shifting to confirmation, and the stories that endure will be the ones that are traced back to the fundamentals. That is why 2026 might feel like a year where companies can show how today’s investment leads to earnings in the future, and how patience is thin.