Wall Street investment banks ignore the fire and inflation, firmly optimistic about the US stock market's upward trend this year

In the first two months of this year, the S&P 500 index has made no progress. But given the shocks the market has faced, from geopolitical turmoil to the disruptive threats posed by artificial intelligence, U.S. stocks can be said to have shown resilience.

However, that is far from what Wall Street bulls expected for this benchmark index’s performance by the end of 2026. Even with many potential headwinds, the S&P 500’s average target price at the December close was still 10% higher than the current level, in line with expectations at the start of the year. According to Bank of America’s sell-side sentiment indicator, strategists have also kept their asset-allocation weights unchanged.

Their optimism stems from expectations of U.S. economic growth above the average level and growth in corporate earnings. And although it’s still too early to draw final conclusions, since the U.S. launched the war in the Middle East, institutions that track every strategist have not grown more cautious. The war has currently pushed up energy prices.

Sameer Samana, global equities and real assets head at the Wells Fargo Investment Institute, said: “The key is the fundamentals of the macro economy and corporate earnings, and so far, geopolitics doesn’t seem to have affected them. The conflict involving Iran is different from other conflicts—if oil prices stay at high levels for several months or even a few quarters, it could threaten global economic growth and corporate earnings.”

The war between the U.S. and Iran is just the latest blow this year to investor confidence: persistent inflation and constantly changing tariff policies are making it difficult for companies to plan, AI applications could disrupt multiple industries, private credit firms are struggling under the weight of bad loans, and Trump’s ambitious foreign policy has unsettled both U.S. allies and adversaries.

On Monday, analysts advised clients that any market pullbacks related to Iran would be a good opportunity to buy the dip. From Morgan Stanley to Piper Sandler&Co. and others, firms have reiterated their optimistic views on the stock market, citing examples from past periods of geopolitical turmoil to point out that such upheavals usually don’t last long.

On Monday, the S&P 500 index closed nearly flat, erasing an early-session decline of 1.2%. Some people think that this optimism is misplaced.

Matt Maley, chief market strategist at Miller Tabak+Co LLC, said: “This complacency has gotten to an unbelievable level. We’ve reached the point where investors will keep buying the dip until this strategy stops working. The problem is that when the inevitable pullback finally comes, many investors will suffer catastrophic losses.”

According to Savita Subramanian, head of Bank of America’s stocks and quantitative strategies, even though changes have occurred within the market—“previously thriving growth areas have been sharply downgraded”—stock market sentiment has “remained steadfastly optimistic” this year.

Despite all kinds of near-term concerns, strategists’ bullish view is still based on the premise that U.S. companies’ profit engine is sufficient to keep driving stocks higher. However, in the most recent earnings season, strong financial data—profits growth of 13% for S&P 500 index constituent companies, nearly 6 percentage points above expectations—was not enough to boost investors’ confidence. From JPMorgan Chase kicking off earnings to Walmart reporting results, the S&P 500 fell 1.7%.

And another dangerous signal has emerged in the market. Alternative investment manager Blue Owl Capital recently paused redemption requests for one of its funds and began selling loans to raise cash. The company warned that mounting pressure on borrowers, rising interest costs, and the leverage effects left over from the low-interest-rate era are starting to put pressure on parts of the private credit market. For stocks, that means credit tightening and potential defaults could spill over into corporate earnings, especially in industries with higher leverage.

Maley said: “Everyone thinks that whether it’s the Fed’s policy shift or Trump’s policy shift, it can stop even the slightest decline—that’s a big mistake. Sooner or later, any one of these issues will cause earnings expectations to start falling, and that will create serious panic among investors.”