Raymond James' 2026 Framework: A "Show Me" Phase for Fundamentals

The bull market is entering its fourth year, and the playbook is changing. Raymond James Chief Investment Officer Larry Adam has laid out a clear framework for 2026, defining a new era where the easy gains of the past are behind us. The market has entered a "show me" phase, where elevated valuations demand proof from corporate fundamentals rather than broad sector leadership. This shift is the core of the firm's outlook.

The explicit target underscores the new, more modest path. Raymond James forecasts the S&P 500 to finish the year at 7,250. From recent levels, that implies a return of approximately 4-5% for the year. This is a significant step down from the double-digit gains of the last three years and sets a clear benchmark for a fundamental-driven approach.

The "show me" phase is characterized by a lack of general market broadening. As the firm notes, don't expect a general broadening of the stock market. Instead, investors should watch for increased dispersion of returns. This means the market will reward specific companies that can demonstrate sustained earnings growth, while others face pressure. The setup is clear: with valuations stretched and the AI-driven rally having lifted only a select few, the focus must now be on identifying the winners that can justify their premiums.

The Earnings Imperative: Tech's Legacy and the Need for Broader Contributions

The market's recent strength has a clear source, but that source is also its vulnerability. For the last two quarters, technology has been the engine of S&P 500 earnings growth, with mega-cap tech names projected to outpace the broader market by over 15 percentage points each quarter. This dominance is not a sustainable long-term model for the entire market. It leaves the index exposed to the fortunes of a narrow group, creating a fundamental imbalance that the "show me" phase cannot ignore.

For 2026, the market needs to see growth contributions from other sectors become more visible to support valuations at the 98th percentile. The current setup is one of stark bifurcation: four sectors are expected to post negative earnings growth, and three more are barely positive. This widespread weakness is being masked entirely by tech's outperformance. The path to the S&P 500's target of 7,250 requires a broader base of corporate health. Investors must look past the headline numbers to see which companies beyond the AI leaders can demonstrate the kind of earnings expansion that justifies premium prices.

The backdrop for earnings is improving, providing a more favorable environment for that broader contribution. Tariff comparisons will ease, and productivity gains are accelerating, offering a tailwind for margins and profitability. This creates a window of opportunity for sectors like consumer discretionary, which Raymond James has upgraded to overweight on the expectation of a rebound in earnings growth. The firm's view is that with the right catalysts, these groups can step up.

The bottom line is that tech's legacy of driving earnings cannot be the plan for the entire year. The market's elevated valuation demands proof that the entire economy is contributing to the growth story. In 2026, the "show me" phase will be judged on the visibility of that broader contribution.

Sector Strategy and Structural Tailwinds

The "show me" phase demands more than just a focus on fundamentals; it requires identifying the specific sectors and structural forces that can provide a durable anchor. Raymond James sees a clear path forward, anchored by a resilient economy and a defense of the AI narrative, while also highlighting pockets of potential where skepticism may be misplaced.

The macroeconomic foundation is constructive. The firm forecasts the US economy to grow at 2.2% in 2026, a slight uptick from 2025. This growth is supported by a combination of tailwinds, including tax cuts and the full effect of the One Big Beautiful Bill Act (OBBBA). This provides a favorable backdrop for corporate earnings, reducing the risk of a near-term recession that could derail the market's elevated valuation. However, the path is not without friction. The Federal Reserve is expected to be cautious, with only one rate cut in 2026 anticipated, leaving the window for monetary easing narrow.

Against this backdrop, the AI narrative is defended as fundamentally different from past bubbles. The firm argues that today's leaders are not speculative hype machines but profitable and growing companies delivering real earnings. Since the bull market began, the mega-cap tech proxy known as MAGMAN has increased earnings by 137%, a stark contrast to the broader market's 11% growth. This profitability, coupled with diversified revenue streams and massive capital spending-projected to reach $460 billion in 2026-provides a durable foundation. The bottom line is that AI is seen as a transformative force reshaping economies, not a passing fad, offering a long-term growth anchor for the market.

Within this framework, the firm points to specific sectors that could offer a counter-narrative to broader sector skepticism. Healthcare is cited as a potential standout, with the expectation that it could surpass earnings expectations. This positions healthcare as a potential source of earnings growth that could help broaden the market's base, alleviating some of the pressure currently resting solely on tech. The firm's upgrade to overweight in consumer discretionary further underscores the search for these broader contributors.

The bottom line is that navigating the "show me" phase requires a dual focus. Investors must look past the headline AI story to find the real, profit-generating engines within the sector, while also identifying sectors like healthcare that can demonstrate resilience. The structural tailwinds of a growing economy and sustained AI investment provide the fuel, but the winners will be those that can prove their earnings power in a more discerning market.

Catalysts, Scenarios, and What to Watch

The "show me" phase is now live, and the first major test arrives with the start of the fourth-quarter earnings season. The immediate catalyst is the wave of reports beginning early next week with the major banks. These results will provide the first concrete data on whether the projected double-digit S&P 500 earnings growth can be sustained. With the index trading at historically lofty valuations, the bar is high. The firm notes that in the third quarter, companies that missed expectations underperformed the market by about 5% in the days that followed-the steepest gap since at least 2017. This sets a clear tone: for the market to hold its ground, the earnings narrative must hold up.

The key metric to watch is return dispersion. As the bull market enters this new phase, the firm explicitly advises not to expect a general broadening of the stock market but to watch for increased dispersion of returns. This is the hallmark of a market separating winners from losers. The setup is clear: with four sectors expected to post negative earnings growth and tech doing the heavy lifting, the coming quarters will reveal which companies can demonstrate durable earnings power beyond the AI leaders. This isn't about a broad rally; it's about identifying the specific names that can justify their premium prices.

The primary risk to the entire thesis is that earnings growth fails to materialize. The market's current 98th percentile valuation is premised on continued strong corporate profits. If the projected double-digit growth stalls or reverses, it would force a re-rating from these lofty levels. The firm's own data shows that historically, negative earnings forecast revisions have preceded the burst of valuation bubbles. While consensus for 2026 is still calling for double-digit growth, the upcoming earnings season is the first real-world test of that assumption. A failure to meet or exceed expectations could quickly shift the market's focus from selective growth to fundamental vulnerability.

In this environment, the path forward is defined by selective opportunity. The structural tailwinds of a growing economy and sustained AI investment provide a favorable backdrop, but they are not a guarantee of returns. The catalysts are here, the scenarios are clear, and the metrics are set. For investors, the task is to navigate the volatility of a market that will no longer reward passive exposure, but instead demands a sharp focus on the fundamentals that can prove their worth.