Analysts are downgrading the equity outlook for 2026

US stocks are rallying once again on Tuesday after the Wall Street Journal reported that US President Donald Trump has been telling aides that he might exit the conflict without attempting to “reopen” the Strait of Hormuz to US allies.

The market sees this as a sign that the US might walk away from one of its strategic goals in the month-old war against Iran, making it easier for the Americans to wind down the conflict and return to something emulating a weakened status quo. In this scenario, it would be left up to regional allies, Israel and the Gulf states, to work out a ceasefire on their own.

The NASDAQ Composite (IXIC) rose 2% on the news, while the less volatile S&P 500 (SPX) and Dow Jones Industrial Average (DJIA) also gained over 1%.

The outlook remains bearish

But even if a ceasefire arrives in April, much of the damage will remain intact for the US equity market through the end of the calendar year.

Two main patterns on Wall Street hold the key to this dour outlook. The first is the lowering of S&P 500 year-end estimates among bullish analysts. The second is the Walmart Recession Signal (WRS).

Veteran stock analyst Jim Paulsen points to the latter as a clear case for holding onto poor expectations for the remainder of 2026. The WRS is a measure of the Walmart (WMT) share price against the S&P Global Luxury Index (SPGLGUN). The ratio tends to rise during periods of economic trouble, and right now it’s sitting at its highest level since the 2008 financial crisis.

This is because Walmart sells consumer staples to the masses even during periods of turmoil, allowing it to weather recessions, whereas as luxury brands witness a major drop-off in consumption during downturns.

“The WRS is increasingly advising caution about the US economy since retail purchasing is trending toward discounters suggesting pressures may be building among lower- and middle-income consumers,” writes Paulsen. “My guess is the economy avoids a recession this year, but I am becoming more convinced that a significant US economic slowdown is unfolding that will ultimately require additional economic policy accommodation and lower interest rates to arrest.”

Then there’s the once-bullish prognostications falling by the wayside. Wells Fargo is the latest bank to do so, issuing a client note on Tuesday calling for the S&P 500 to end the year at 7,300 instead of the 7,800 level it presented at the start of the year. This would mean a 6% gain in the broad index rather than the 14% it originally prophesied.

That negative sentiment follows JPMorgan, which lowered its similar outlook on the index from 7,500 to 7,200.

Any type of ceasefire could bode well for equity prices, but high Oil prices are likely to continue for some time since about one-third of oil and gas infrastructure in the Gulf has been damaged by the war that the US and Israel launched on February 28.