Will the Ongoing Market Rally Continue in 2026? ETFs in Focus

Though much of 2025 was clouded by tariff fears, geopolitical tensions and AI bubble concerns, the S&P 500 looks poised to end the year with solid double-digit growth. The broad market index is up 18% year to date and about 1.7% month to date, placing it on course for the eighth straight monthly gain, underscoring strong year-end momentum.

The ongoing Santa Claus rally raises expectations for continued strength in early 2026 and a favorable setup for stocks. Expectations that the Fed will continue to cut interest rates in 2026 are reinforcing bullish momentum in the market.

According to Yahoo Finance, Wall Street strategists expect the rally to extend into 2026. JPMorgan Chase and HSBC project the index at 7,500 by year-end, while Morgan Stanley and Deutsche Bank are even more optimistic, with targets of 7,800 and 8,000, respectively, implying upside of more than 12% from current levels.

Additionally, State Street Global Advisors strategists remain largely bullish on the U.S. economy heading into 2026, but flag high valuations and market capitalizations as potential risks, per the abovementioned article.

Per another Yahoo Finance article, according to UBS projections, the broad market index is forecasted to end 2026 at 7,700. Ed Yardeni shares the same target, pointing to tax incentives and the AI boom as catalysts.

Retail-Led Optimism Sets the Stage for 2026

Investor confidence is returning, pushing markets back toward risk-taking. Per analysts, according to Reuters, individual investors are poised to play a leading role in the market rally that is anticipated to continue in 2026, as retail inflows into U.S. stocks reach record levels in 2025, fueled by expectations of interest rate cuts.

According to analysts at JPMorgan, as quoted on the abovementioned Reuters article, cash inflows from retail investors in U.S. stocks have risen 53% from $197 billion last year and are 14% above the $270 billion peak of 2021. Per another data from JPMorgan, retail trades made up 20-25% of market activity in 2025 and hit a record 35% in April.

According to Jefferies strategist, Steven DeSanctis, as quoted on the Reuters article, retail investors are likely to remain an influential market presence through 2026.

Strategies to Play the Rally

With several top banks forecasting the S&P 500 to reach around 7,700 by the end of next year, long-term investors may be better off staying invested rather than reacting to short-term volatility. Investors may benefit from adopting a passive, long-term investment approach, and such a strategy can cushion against short-term market pullbacks while positioning investors for sustainable growth over time.

Adopting passive, long-term strategies helps create long-term momentum by ignoring short-term price fluctuations, supports wealth accumulation and minimizes the impact of emotional decision-making. By avoiding impulsive actions, such as panic selling during market dips or overbuying during sharp rallies, investors can remain focused on long-term goals.

ETFs to Explore

Below, we have highlighted a few funds that could benefit from a bullish economic outlook. Investors should have a long-term perspective and refrain from reacting to short-term market fluctuations.

S&P 500 ETFs

Over the long term, well-capitalized, stable large-cap funds are a smart, balanced choice for investors. Funds tracking the broad market index could offer attractive opportunities. Such investments also provide investors with essential diversification and help reduce concentration risk in specific sectors.

Investors can consider Vanguard S&P 500 ETF VOO, SPDR S&P 500 ETF Trust SPY, iShares Core S&P 500 ETF IVV and State Street SPDR Portfolio S&P 500 ETF SPYM.

Growth ETFs

Investors can also explore growth ETFs without the constraint of a low beta, taking on more risk to potentially benefit from a positive economic outlook. Growth funds typically excel during market uptrends, providing exposure to stocks with high growth potential.

Investors can consider Vanguard Growth ETF VUG, iShares Russell 1000 Growth ETF IWF and iShares S&P 500 Growth ETF IVW.

Equal-Weighted ETFs

For investors seeking exposure to a bullish economic outlook with a more balanced portfolio and comparatively lower risk profile, boosting allocations to equal-weighted index funds tracking the broad market may be a suitable approach.

These funds offer sector-level diversification by assigning equal weight to each constituent stock, regardless of market capitalization, reducing concentration risk. This makes them a relevant choice for investors seeking diversified exposure across sectors.

Invesco S&P 500 Equal Weight ETF RSP, ALPS Equal Sector Weight ETF EQL and Invesco S&P 100 Equal Weight ETF EQWL are some good options.

Small-Cap ETFs

Small-cap stocks tend to perform well following rate cuts by the Fed. Reduced rates also allow these companies to refinance existing debt at a cheaper rate, enabling them to invest in growth and expansion. As small-cap companies are more domestically tied, they are poised to outperform when the economy improves.

Investors can consider iShares Core S&P Small-Cap ETF IJR, iShares Russell 2000 ETF IWM, Vanguard Small Cap ETF VB and Schwab U.S. Small-Cap ETF SCHA.

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This article originally published on Zacks Investment Research (zacks.com).

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