Solid fundamentals in economic growth and earnings, alongside easing monetary and fiscal policy are setting the conditions for a fairly optimistic outlook for equity markets in 2026. Still, investors will need a deft hand when it comes to assessing valuations and the risks in the market.

That’s the context for episode three of Beyond the Portfolio, part of BMO’s ongoing Outlook Series. In this instalment, Michael Miranda, President, BMO Family Office and Head of Investments, BMO Private Wealth, breaks down the 2026 outlook for equity markets with Dan Phillips, Chief Investment Officer. Wealth Management, Brent Joyce, Chief Investment Strategist, BMO Private Wealth and Carol Schleif, Chief Market Strategist, BMO Private Wealth.

Here are the highlights from their discussion.

Dan Phillips opened the discussion, noting an expectation for continued U.S. economic expansion, continuing the 2% to 2.5% growth seen in 2025. Easing by the U.S. Federal Reserve will contribute to that trend, with the expectation of three (and maybe four) rate cuts over the course of the year, provided inflation continues to move in the right direction.

While the rate cuts will be positive for the market, how the Fed messages its policy changes will be key, he says. “We do think that the expansion can continue,” he says. “It’ll be somewhat modest, but we believe the U.S. economy can outpace the current 2% consensus expectation.”

He expects earnings growth to do most of the work for equities this year. Markets followed a similar pattern last year, with gains largely tracking earnings rather than expanding valuations. Based on that backdrop, he sees equity returns landing in the high single digits, using the S&P 500 as a proxy.

Although concerns around the health of the U.S. consumer amid a slowing job market could weigh on this outlook, he says some of that pressure could be alleviated come tax season when the U.S. is expected to dole out a record amount in tax refunds due to provisions in the newest tax bill.

Brent Joyce offered up a fairly rosy outlook for Canadian equities, which will benefit from solid earnings growth and more moderate valuation pressure. He projects earnings growth on the S&P/TSX to be close to 16%, which will help see the index rise to 34,000 – a projected gain of about 8% on the year.

Beyond price appreciation, Joyce notes that income plays a larger role in Canada’s equity market. Dividend yields sit around 2.6%, roughly double the S&P 500’s yield, which adds to total return expectations. He’s also bullish on the Canadian dollar, which could temper U.S. equity returns for Canadian investors once they’re converted back into local currency.

With tech stocks contributing to much of the gains on the market over the past 12 months, led by interest in artificial intelligence, investors are wondering if there are parallels to the late-1990s tech boom. While Carol Schleif acknowledges the interest around artificial intelligence, she does not see the same underlying conditions at work. She described the late-1990s period as one driven largely by speculation rather than fundamentals. By contrast, many of today’s largest companies are profitable, cash-generating businesses.

She also warned against focusing too narrowly on short-term market moves. In her view, the greater risk comes from reacting to volatility or headlines without keeping the longer-term picture in mind. “When you hear a headline that might make your heart skip a beat, it’s important to take a breath, take a step back and think through what’s really going on,” she says. “It’s often a bigger, broader story than the media can convey.”

While the panel laid out a fairly optimistic case for equity markets, there are several issues that could weigh on markets in the year ahead. Joyce focused on bond yields, noting that rates can rise even when economic growth does not improve, often because of supply factors and global market conditions.

Policy uncertainty is another concern. Phillips said markets remain sensitive to how rate decisions are made and communicated, particularly when expectations around cuts are finely balanced. Questions around the future leadership of the Fed could add to that uncertainty.

Schleif focused on investor behaviour, warning that volatility itself can become a problem if sharp market moves undermine confidence. “The concerning thing would be if that volatility strikes early in the year and it scares people enough that they’re sitting on the sidelines and don’t have the opportunity to stay invested,” she says.