S&P 500 closed Friday at 6,827 points, within striking distance of its December 11 Wednesday's record close of 6,901. But the 2.5% distance to the 7,000 milestone hasn't dampened Wall Street's enthusiasm.
Beneath the optimism, however, lurks an uncomfortable question: are the companies fueling this rally borrowing their way into a corner?
*Source: Investing.com
**Data as of US Markets Close on Dec. 12, 2025
Key Insights
- Three-year winning streak continues: The S&P 500 has seen an upside of 17.5% (so far) in 2025, following gains of 23% in 2024 and 24% in 2023. The index now sits 2.5% away from the 7,000 milestone.
- AI creates a double-edged sword: Companies mentioning "AI" on earnings calls have outperformed peers by 2-3x, but heavy borrowing for AI infrastructure is creating leverage risks that could derail the S&P 500 rally.
- Expensive but potentially justified: Trading at 23-24x forward earnings with consensus targets of 7,500 by end-2026; valuations hinge entirely on delivering projected 13-15% EPS growth.
- Fed hawkishness puts a cap: Only one rate cut signaled for 2026 versus two expected, while global central bank divergence limits liquidity-driven upside. Future gains must come from earnings execution.
A Market Firing on All Cylinders, Almost
If we take a look at the US indices, the YTD price performance hasn't been uniform.
The Nasdaq 100 leads the charge with year-to-date gains of 20.1%, powered by the relentless momentum of artificial intelligence and technology stocks. The S&P 500's 16.3% rise suggests healthy participation beyond the usual tech suspects, while the Russell 2000 has climbed 14.3% after recovering from a mid-year slump. The Dow Jones Industrial Average is up a still-respectable 14.3%, backed by its industrial and financial-heavy composition.
US Indices YTD Performance
*Source: TradingView
**Data as of US Markets Close on Dec. 12, 2025
This divergence is actually good news. It signals that market leadership is broadening beyond a handful of mega-cap stocks. The question is no longer just about which stocks are leading, but whether their balance sheets can support their ambitions.
Central Banks: Not Rowing in the Same Direction
The Federal Reserve's decision last Wednesday to cut rates by a quarter point, bringing the benchmark rate to 3.50%-3.75%, marked the third cut of 2025.
But the celebration was short-lived. The Fed's updated dot plot signaled only one additional cut in 2026, falling short of the market's expectation for two.
Updated Fed Dot Plot:
*Source: Federal Open Market Committee
**Data as of Dec. 10, 2025
Elsewhere, the Reserve Bank of Australia (RBA), Bank of Canada (BoC) and Swiss National Bank (SNB) held their interest rates steady. This week, European Central Bank is expected to hold rates while Bank of England is projected to cut rates by 25 basis points (bps).
However, stealing the limelight is Bank of Japan, widely expected to raise rates by 25 basis points this week. This global policy divergence creates a tricky environment for equities.
There could be enough accommodation to support valuations, but not enough liquidity to fuel another liquidity-driven melt-up. Future gains will need to come from actual earnings growth, not just multiple expansion.
Worth noting: the S&P 500 experienced a sharp sell-off following the BoJ's rate hike announcement in August 2024. Historically, tighter global liquidity and rising borrowing costs could cap the upside potential.
The AI Paradox: Innovation Fueled by Debt
Here's where things get interesting AND concerning.
Enterprise AI adoption is translating into measurable productivity gains. According to FactSet, S&P 500 companies that mentioned "AI" on their Q3 earnings calls have significantly outperformed those that didn't: 13.9% price appreciation versus 5.7% since December 31, 8.1% versus 3.9% since June 30, and 1.0% versus 0.3% since September 30.
Mentions of “AI” in S&P 500 Earnings Calls Over the Past 10 Years
*Source: FactSet
**Data as of Dec. 05, 2025
The market is rewarding AI believers and punishing skeptics. But there's a catch. Oracle's recent earnings report revealed the hidden cost of this AI revolution: companies are borrowing heavily to build the data centers and infrastructure required to capitalize on AI's promise.
While these investments position firms for long-term margin expansion and productivity improvements, they're also creating a leverage overhang that could become problematic if growth disappoints.
This is the AI paradox: the very investments needed to capture AI's benefits are simultaneously creating financial vulnerabilities. Companies are betting that future productivity gains will more than justify today's borrowing binge. They might be right; but the margin for error is shrinking.
Valuation Check: Expensive, But Justified?
The S&P 500 currently trades at nearly 23-24 times forward earnings, well above historical averages. On the surface, this looks expensive. But context matters.
Projections of EPS growth of 13-15% in 2026 are underpinned by robust margins; particularly in technology and enterprise software sectors where AI continues to drive efficiency improvements. If these projections hold, broader analyst consensus points to the S&P 500 reaching 7,500 by the end of 2026, with some estimates as high as 8,100.
Current valuations, while elevated, are supported by two key factors: margin expansion and technological innovation. The multiple might be high, but it's not entirely unjustified if AI delivers its productivity promises. The word "if" is doing a lot of heavy lifting here.
How to Position for 2026?
For investors looking to capitalize on or protect against the S&P 500's trajectory, several factors warrant consideration: time horizon, risk tolerance, available capital, and whether the goal is long-term accumulation or active trading.
MultiBank Group offers competitive trading conditions for those looking to participate in the price movements in the S&P 500, including tight spreads, leverage of up to 100:1, and zero commission. Note that leverage carries risk as it amplifies both: potential gains and potential losses.
Risks That Keep Analysts on the Edge
While the base case remains optimistic, several headwinds could derail the rally:
- Earnings execution is paramount. The market has priced in strong growth; any significant misses could trigger rapid multiple compression.
- Inflation and unemployment dynamics will determine whether the Fed delivers that anticipated rate cut early in 2026 or whether policy remains tighter for longer, constraining liquidity.
- Geopolitical and fiscal pressures from tariffs to energy shocks remain ever-present sources of potential volatility.
But the elephant in the room is AI-debt concentration. The rapid expansion of AI infrastructure has been fueled by aggressive borrowing.
While this supports long-term growth prospects, elevated leverage creates vulnerability. If AI adoption slows, or if profitability proves elusive, highly leveraged companies could find themselves in a painful squeeze, and the S&P 500 would likely feel the pressure.
The Verdict
The S&P 500's path to 7,500 or higher in 2026 isn't a foregone conclusion. It hinges on whether the AI-driven productivity gains can outpace the financial risks created by the debt required to build that AI-powered future.
For now, the market is voting yes. The real test comes when those infrastructure investments need to translate into actual earnings, not just promises and projections.
The next twelve months will reveal whether we're witnessing the foundation of a new productivity era, or an expensive experiment in optimism.
Disclaimer: This article is for informational purposes only. Trading involves risk and may not be suitable for all investors. Before deciding to trade, you should carefully consider your investment objectives, level of experience, and risk appetite. Past performance is not indicative of future results.