BMO raises S&P 500 target to 7,850: Strong earnings support bull market logic, inflation may become the biggest variable in 2026

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Better-than-expected profits provide upward momentum, but inflation risks are expected to emerge this fall.

BMO Capital Markets on Thursday raised its year-end 2026 target for the S&P 500 index to 7,850 points, implying about 8% upside from Wednesday’s closing price of 7,266.99 points. The bank's Chief Investment Strategist, Francois Trahan, attributes this optimistic forecast mainly to “unprecedented” corporate earnings growth, believing that strong earnings fundamentals are sufficient to drive the market higher from current levels.

Trahan also issued a warning: such rapid earnings growth usually comes with inflationary pressures. He expects inflation to become the core narrative for the 2026 market, potentially even surpassing the artificial intelligence theme at some point this year. He predicts that the S&P 500 may break through the 7,850-point target in the coming months, but as core inflation accelerates this fall, some of the gains may be given back.

Earnings Growth at Rare Historical Levels

In his report, Trahan pointed out that the current 29% forward earnings growth of the S&P 500 is extremely rare in history. Reviewing data since 1980, only two periods saw higher readings—one after the 2008 financial crisis when earnings recovered from the trough, and the other during the rebound after the COVID-19 pandemic shock ended.

“The crucial difference is, we didn't experience a recession in the previous cycle,” Trahan wrote. “This makes the current earnings momentum unusually strong even without low base effects, and the growth is broad-based.”

This earnings expansion isn’t limited to large-cap stocks. Mid-cap stocks show a forward earnings growth rate of 18%, and small caps reach as high as 24%, indicating widespread participation across market capitalizations. Trahan described this as “a rising tide lifting all boats,” part of which is attributed to ongoing effects of policy stimulus.

Near-term Concern: AI Cooling Sparks Market Volatility

Despite optimistic fundamentals, recent market action has been turbulent. The S&P 500 hit several record highs earlier in the year, driven by enthusiasm for artificial intelligence trades.However, in the past few days, the market’s excitement toward AI and the memory chip sector has cooled noticeably, causing tech stocks and the broader market to pull back.

Trahan acknowledges that American consumers are facing pressures from the cost-of-living crisis, which somewhat dims the U.S. economic growth story. But he believes that robust earnings performance is enough to offset this drag and provides “extremely strong support” for stock prices.

For sector allocation, Trahan maintains an overweight stance on cyclical sectors, believing they hold relative advantage under the current macro and earnings environment.

Inflation: Biggest Tail Risk in Second Half

Trahan clearly points out in his report that inflation is the variable most worth watching in the current bull market logic. He noted that when earnings grow this fast, inflation is often a by-product; the good news is that inflation pressures typically take time to show up in the main price indices.

“Inflation will become the core issue in 2026, that’s very clear to us,” Trahan wrote. “It may even overshadow the AI theme towards year-end. However, in the near term, investors will likely focus more on the earnings picture.”

He expects the timing for core inflation acceleration is most likely this fall. This means that even if the S&P 500 surpasses the 7,850-point target in the next few months, investors should watch for potential profit-taking at that time.

Risk Warning and DisclaimerThe market has risks; investors should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this content is at your own risk. ```