The two most influential research departments on Wall Street are aligned in their bullish outlook for 2026, with both Goldman Sachs and Morgan Stanley projecting the S&P 500 will reach new record highs. But beneath the headline targets lies a more nuanced story about where the real opportunities may be hiding.

The Bull Case for 2026

Goldman Sachs Research sees the S&P 500 reaching 7,600 by year-end, representing approximately 10% upside from current levels. Morgan Stanley is even more optimistic, projecting 7,800—a potential 14% gain that would mark another exceptional year for equity investors.

Both firms cite similar drivers for their bullish forecasts:

  • Earnings growth — Goldman expects S&P 500 earnings per share to rise 12% to $305, with 7% revenue growth and 70 basis points of margin expansion
  • Federal Reserve rate cuts — Both firms expect additional monetary easing to support valuations
  • AI productivity gains — Corporate adoption of artificial intelligence is expected to boost efficiency
  • Tax policy tailwinds — Potential corporate tax cuts under the new administration

"We remain constructive on equities for 2026 as earnings continue to grow, but forecast lower index returns than in 2025, amid a broadening bull market."

— Goldman Sachs Research

The Small-Cap Rotation

Perhaps the most significant call from both banks involves small-cap stocks. Morgan Stanley favors small caps over large caps for the first time since March 2021, arguing that early cycle broadening in earnings combined with a more accommodative Fed provides the backdrop they've been waiting for.

Goldman Sachs analysts echo this sentiment, noting that U.S. small caps have historically outperformed the S&P 500 by an average of roughly 12% following the end of Fed rate-cutting cycles.

Why Small Caps Now?

Several factors support the rotation thesis:

  • Valuation gap — Small caps trade at historically wide discounts to large caps
  • Interest rate sensitivity — Smaller companies benefit more from lower borrowing costs
  • Domestic focus — Less exposed to trade policy uncertainty than multinationals
  • M&A activity — Rising deal activity creates acquisition premiums for smaller targets

The Russell 2000 has already shown signs of life, posting strong gains in early 2026 as the "January Effect" takes hold. Historically, small caps outperform in January as investors rebalance portfolios and tax-loss selling pressure subsides.

Market Breadth Finally Improving

One of the most persistent concerns about the 2024-2025 rally was its narrow leadership. The "Magnificent Seven" mega-cap tech stocks drove the bulk of index returns, leaving most stocks underperforming the benchmark.

That dynamic appears to be shifting. Market breadth indicators are improving, with a larger percentage of stocks participating in the advance. This broadening is a healthy sign for bull market durability—rallies supported by wide participation historically last longer than those driven by a handful of stocks.

Risks to the Forecast

Both Goldman and Morgan Stanley acknowledge risks to their bullish outlooks:

  • Valuation concerns — The S&P 500 trades above historical averages on most metrics
  • Geopolitical uncertainty — Trade policy, international conflicts could disrupt markets
  • Inflation resurgence — Sticky inflation could force the Fed to pause rate cuts
  • Credit stress — Rising defaults in commercial real estate and consumer credit

Morgan Stanley explicitly forecasts volatility, noting that while the bull market remains intact, investors should expect periods of turbulence as markets digest policy changes and economic data.

Investment Banking Outlook

Beyond their market forecasts, both Goldman Sachs and Morgan Stanley are positioned to benefit from the trends they're projecting. Goldman's investment banking division advised on more than $1 trillion in announced M&A volumes in 2025, and management projects an even stronger environment in 2026.

The Zacks Consensus Estimate for Morgan Stanley's 2026 earnings per share is $10.41, implying a 5.4% year-over-year increase. Goldman Sachs stock recently hit an all-time high of $920, reflecting confidence in the bank's ability to capitalize on rising deal activity.

Positioning for 2026

For individual investors, the Wall Street consensus offers several actionable insights:

Consider Small-Cap Exposure

If the small-cap rotation materializes, funds tracking the Russell 2000 or actively managed small-cap strategies could outperform. Look for quality small caps with strong balance sheets and positive earnings momentum.

Don't Abandon Large Caps

Both firms remain constructive on large-cap equities, particularly companies benefiting from AI adoption. The broadening thesis doesn't mean abandoning winners—it means adding to areas that have lagged.

Stay Diversified

With volatility expected, diversification across asset classes and sectors remains important. The optimistic forecasts assume no major negative surprises, which history suggests is rarely the case.

The Bottom Line

Wall Street's biggest banks see continued upside for U.S. equities in 2026, with the S&P 500 potentially reaching new highs. But the more interesting opportunity may be in the broadening of market leadership, as small caps and value stocks finally get their turn to shine.

For investors who remained concentrated in mega-cap tech, this could be the year to revisit portfolio construction. The bull market appears intact, but its character is evolving—and portfolios may need to evolve with it.