U.S. equities could be headed for a difficult year in 2026, according to asset management firm GMO, which has warned that the S&P 500 is likely to deliver negative real returns as elevated valuations collide with slowing growth and tightening financial conditions.
In its latest long-term asset class forecasts, GMO said U.S. large-cap stocks are among the most overvalued assets globally, leaving little room for upside and increasing the risk of a meaningful correction. The firm’s seven-year outlook projects annualized real returns for the S&P 500 deep in negative territory, a view that implies particular vulnerability over the near to medium term.
GMO’s assessment is anchored on stretched price-to-earnings multiples, profit margins that remain well above historical norms, and expectations that earnings growth will normalize after years of exceptional performance driven by post-pandemic stimulus and technology-led optimism. The firm cautioned that investor enthusiasm around artificial intelligence and mega-cap stocks may be masking broader market fragilities.
Rising interest rates and higher-for-longer monetary policy are also central to the bearish outlook. GMO noted that tighter financial conditions increase discount rates applied to future earnings, which tends to weigh heavily on richly valued equities. At the same time, any economic slowdown could pressure corporate profits, further undermining returns.
While GMO does not predict the exact timing of market declines, it stressed that current conditions resemble previous periods that preceded weak or negative equity performance. The firm advised investors to temper expectations for U.S. stocks and consider diversification into assets with more attractive long-term valuations, including select international equities and real assets.
The warning contrasts with the prevailing optimism on Wall Street, where many strategists still expect U.S. equities to remain resilient. However, GMO’s stance reinforces a growing debate over whether the strong gains of recent years have pulled forward returns, leaving markets exposed as economic and policy tailwinds fade.
U.S. stocks end higher as Dow and S&P 500 hit record highs in Christmas Eve session
