BMO Capital initiated coverage of the S&P 500, assigning a 2026 year-end target of 7,380 and forecasting an "expected return of about 8% for U.S. equities" in the year. The projection and rationale are laid out in an outlook note authored by François Trahan.
Trahan frames the firm's outlook as "bullish, and even more so in select foreign markets," while emphasising that the backdrop for markets is unusually uncertain. He writes that "the current backdrop is still mired in risks," and highlights that policy visibility is weaker than in past decades.
Despite that uncertainty, BMO points to widespread monetary and fiscal measures as a stabilising force. In the note, the firm argues that "monetary and fiscal stimulus around the world provide solid support for equity prices." If market pricing continues to be dominated by macro considerations, Trahan says "we are looking at an ideal setup for Risk-On markets," with investors likely to favour cyclical assets in 2026.
The bank's central thesis rests on the belief that stimulus is ample enough "to revive the U.S. economy despite all the longer-term challenges it’s facing: deteriorating demographics, an affordability crisis, an unsustainable amount of debt, and the list goes on." That view informs BMO's sector positioning.
On the near-term focus of market participants, Trahan notes that "the stock market is mostly focused on what takes place in the next few quarters." That emphasis on short-term dynamics underpins the firm's overweight stance in sectors more sensitive to economic cycles.
At the same time, BMO highlights inflation as the principal cyclical risk ahead. Trahan states that "It seems clear that the inflation dynamic is different than it used to be," and cautions that shifting macro relationships "will alter the investment playbook as we know it."
Reflecting these views, BMO maintains overweight recommendations on industrials, materials, energy and financials. Conversely, the firm is underweight on consumer staples, health care, real estate and utilities.
Key takeaways:
- BMO sets a 2026 year-end S&P 500 target of 7,380 and expects roughly an 8% return for U.S. equities this year.
- The firm is bullish overall and particularly in selected foreign markets, but notes an unusually uncertain macro backdrop with weaker policy visibility.
- BMO prefers cyclical sectors - industrials, materials, energy and financials - while underweighting traditionally defensive sectors such as consumer staples, health care, real estate and utilities.
Risks and uncertainties highlighted:
- Inflation is identified as the primary cyclical risk, with BMO warning that the inflation dynamic has changed and could reshape investment strategies.
- Policy visibility is diminished relative to prior decades, a condition BMO says leaves markets exposed to macro risks.
- BMO acknowledges long-term structural challenges to U.S. growth - including deteriorating demographics, an affordability crisis and an "unsustainable amount of debt" - which temper the recovery thesis even as stimulus supports markets.