BMO's 2026 Market Outlook: Solid Growth Expected Amid Credit Card Rate Cap Policy Uncertainty

The U.S. equity markets demonstrated notable divergence on January 15-16, 2026, with the S&P 500 declining 0.36% and the NASDAQ dropping 0.69% during the most recent trading session [0]. However, this short-term weakness obscures a more constructive longer-term trend. The Russell 2000 small-cap index has delivered exceptional performance, gaining 7.75% over the past month, significantly outperforming the larger indices [0]. This rotation aligns with BMO’s observation that market breadth has been expanding, with the “Magnificent 7” mega-cap technology stocks declining while the equal-weighted S&P 500 has gained nearly 2% in early 2026 trading [2][3].

The sector performance data for January 16 reveals a defensive rotation pattern, with Utilities (+1.45%), Energy (+1.02%), and Industrials (+0.56%) leading gains [0]. Conversely, Healthcare (-1.12%), Technology (-1.01%), Communication Services (-1.01%), and Financial Services (-0.79%) faced pressure [0]. This sector rotation reflects investor uncertainty surrounding the new administration’s policy initiatives, particularly the credit card rate cap proposal, combined with broader concerns about interest rate trajectories and their implications for various industry sectors.

The Dow Jones Industrial Average has posted solid gains of +3.91% over the past month, while the S&P 500 has advanced +1.94% and the NASDAQ +1.54% [0]. These moderate gains, while respectable, represent a potential slowdown from the robust returns of previous years, with BMO noting that the S&P 500 has achieved 17%+ annual gains for three consecutive years, raising valuation considerations for forward returns [3].

The Q4 2025 earnings season has demonstrated remarkable resilience, marking what BMO characterizes as the tenth consecutive quarter of earnings expansion [4][5]. S&P 500 earnings growth is expected to reach 8.3%, with total Q4 2025 earnings projected to increase +8.5% on +8.2% higher revenues [5]. This sustained earnings momentum provides fundamental support for BMO’s constructive 2026 outlook despite near-term market volatility.

Bank earnings have been a focal point of the reporting season. Goldman Sachs reported earnings per share of $14.01, beating analyst estimates and demonstrating strong performance in its trading and investment banking businesses [6][7]. JPMorgan Chase and Bank of America released mixed but generally solid results, though both stocks faced selling pressure following their releases—JPMorgan declined 4.13% and Bank of America dropped 1.32% on January 13 [5]. This “sell-the-news” reaction appears to reflect profit-taking following recent outperformance rather than fundamentally negative results, with Zacks analysis indicating that management commentary has been reassuring regarding consumer spending trends and credit quality [5].

The banking sector’s performance remains closely tied to policy developments, particularly the proposed credit card rate cap. Despite near-term stock weakness, the underlying earnings trend suggests continued resilience in consumer finance and commercial banking activities, supporting BMO’s expectation that double-digit earnings growth will continue into 2026 [2][3].

President Trump’s proposal to implement a one-year cap on credit card interest rates at 10%, effective January 20, 2026, has emerged as a significant source of uncertainty for financial services stocks [8][9]. The proposal, announced via Truth Social, has prompted substantial pushback from major banking executives who warn of potential negative consequences for consumers and the broader economy.

JPMorgan CEO Jamie Dimon has been particularly vocal in opposing the measure, warning that the impact “would be dramatic on subprime customers” [10]. Citigroup CFO Mark Mason explicitly stated that “An interest rate cap is not something that we would or could support” [10]. Bank executives have emphasized their alignment with efforts to help consumers while opposing mandatory rate caps, suggesting they are “aligned with trying to find solutions to help as many as we can” [10].

The proposal raises several structural concerns. Banks may respond to mandated rate caps by tightening credit availability for higher-risk borrowers, potentially reducing access to credit for subprime consumers who need it most. Additionally, credit card rewards programs could face significant reduction or elimination as banks seek to maintain profitability under constrained interest rate environments. The estimated consumer savings of approximately $800 monthly on a $6,000 balance at 24% APR [9] could be offset by reduced credit access and diminished rewards benefits, creating a complex trade-off that policymakers must carefully consider.

The Financial Services sector’s 0.79% decline on January 16 reflects investor concerns about potential profitability impacts [0]. However, the practical implementation of the proposal remains unclear, as enforcing a 10% rate cap without legislation presents significant legal and operational challenges that could affect the proposal’s ultimate impact on the banking industry.

The rotation from mega-cap technology stocks toward broader market participation represents a significant structural shift in equity market dynamics. BMO’s 2026 outlook emphasizes this breadth expansion as a positive development for sustained market health [2][3]. When market gains are concentrated in a narrow group of mega-cap stocks, the rally can become fragile and vulnerable to disruption. The current rotation suggests more sustainable participation across market segments, with small-caps, value stocks, and equal-weighted indices showing relative strength.

This market breadth improvement aligns with BMO’s expectation that AI-related themes will continue dominating investment discourse, potentially including large initial public offerings from “hectocorns”—private companies valued at $100 billion or more [3]. The combination of expanding market participation and continued enthusiasm for transformative technologies suggests a constructive environment for equity returns, provided policy developments do not disrupt the fundamental earnings momentum.

BMO’s Capital Markets Assumptions for 2026 highlight three interconnected structural themes that will influence market performance [3]. First, “The Global Pivot” encompasses ongoing supply chain restructuring and trade relationship renegotiations that continue to reshape corporate operational strategies. Second, “Industrial Revolution 4.0” reflects automation trends that BMO believes can offset margin pressures from potential tariff implementations. Third, “Policy Divergence” among central banks creates currency and capital flow implications that affect asset valuations across regions and sectors.

These structural themes suggest that while BMO maintains optimism about 2026 growth prospects, investors must remain attentive to how policy developments—both domestic and international—affect corporate earnings trajectories and market valuations. The interaction between U.S. policy initiatives, including the credit card rate cap proposal, and global economic dynamics creates a complex environment requiring careful analysis of sector-specific and macroeconomic factors.

The continued strength of corporate earnings, now marking ten consecutive quarters of expansion [4][5], provides a foundation for BMO’s constructive market outlook. Companies have demonstrated focus on productivity enhancement and margin improvement, with AI-related investments beginning to deliver measurable returns. This earnings resilience suggests that the economy possesses underlying strength capable of withstanding near-term policy uncertainty and potential disruption.

However, several factors could test this earnings momentum. Tariff-related cost increases have not yet fully materialized in corporate results, and the ultimate impact on margins remains uncertain. Similarly, the credit card rate cap proposal could affect consumer lending profitability and potentially influence consumer spending patterns if credit availability contracts. Investors should monitor these developments carefully as they unfold in the coming weeks and months.

: The credit card rate cap proposal introduces significant regulatory uncertainty for financial services companies. While implementation details remain unclear, the potential for mandatory rate caps could fundamentally alter consumer lending economics. Banks have indicated they would respond by tightening credit standards, which could reduce lending volumes and profitability while potentially limiting credit access for higher-risk consumers [10].

: The proposed policy could paradoxically harm the consumers it aims to protect by reducing credit availability for subprime borrowers. JPMorgan’s warning that the impact “would be dramatic on subprime customers” [10] highlights the potential for unintended consequences that could outweigh consumer benefits from reduced interest rates.

: After three consecutive years of 17%+ S&P 500 gains, current valuations may limit upside potential for forward returns [3]. Investors should be cognizant of valuation compression risk, particularly if earnings growth slows or interest rates rise more than expected.

: Bro geopolitical and trade policy developments, including tariff implementations and their effects on corporate margins, create uncertainty that could disrupt growth expectations. The interaction between domestic policy initiatives and international trade relationships requires careful monitoring.

: The rotation toward small-caps and equal-weighted indices creates opportunities for investors to benefit from broader market participation. The Russell 2000’s 7.75% monthly gain [0] demonstrates the potential for outperformance in market segments that have historically lagged mega-cap technology.

: BMO’s expectation of double-digit earnings growth continuing into 2026 [2][3] provides fundamental support for equity valuations. Companies demonstrating productivity improvements and AI-driven efficiency gains may offer particular opportunities for investors seeking exposure to structural growth trends.

: The rotation towardUtilities, Energy, and Industrials [0] suggests opportunities in sectors traditionally considered defensive or tied to economic infrastructure. These sectors may offer relative stability amid policy uncertainty while participating in broader economic growth.

The analysis presented in this report integrates multiple data sources to provide a comprehensive assessment of BMO’s 2026 market outlook and the implications of policy developments for financial services. Carol Schleif’s January 16, 2026 appearance on CNBC’s ‘Squawk Box’ [1] articulated BMO’s constructive view: solid economic growth combined with reduced inflation represents the baseline scenario for 2026. This optimism is supported by Q4 2025 earnings season results demonstrating continued corporate resilience, with the S&P 500 experiencing its tenth consecutive quarter of earnings expansion [4][5].

Market technical indicators reveal a constructive rotation pattern, with the Russell 2000 small-cap index significantly outperforming larger indices and market breadth expanding beyond mega-cap technology concentrations [0][2]. This breadth expansion suggests more sustainable market dynamics compared to periods of narrow, concentration-driven gains.

However, significant uncertainties require monitoring. President Trump’s proposed 10% credit card interest rate cap [8][9] has generated substantial pushback from major banks, including JPMorgan and Citigroup, who warn of dramatic impacts on subprime customers and potential credit availability reductions [10]. The Financial Services sector’s decline of 0.79% on January 16 [0] reflects investor concern about potential profitability impacts, though the practical implementation and enforcement mechanisms for the proposed cap remain unclear.

The fundamental earnings backdrop remains constructive, with Goldman Sachs beating estimates [6][7] and management commentary from major banks generally reassuring regarding consumer spending trends and credit quality. BMO’s 2026 outlook emphasizes continued double-digit earnings growth, market breadth expansion, and productivity improvements from AI adoption as key drivers of potential returns [2][3]. Investors should remain attentive to how policy developments unfold and their implications for sector performance and broader market dynamics.