The S&P 500 faces negative returns in 2026, GMO warns

• GMO's Ben Inker predicts weak S&P 500 returns due to high AI stock concentration.
• Inker expects a market rotation from expensive AI stocks to cheaper sectors in 2026.
• He favors Japanese small-cap stocks and European value stocks over US growth stocks.

If you're familiar with GMO, the asset management house cofounded by value investing legend Jeremy Grantham, you know the firm tends to issue bearish forecasts for the broader market.

So you may not be surprised to hear that Ben Inker, its co-head of asset allocation, sees weak returns ahead for the S&P 500 amid high concentration in expensive AI stocks.

But Inker isn't calling for the kind of spectacular bust the firm has warned of in the past. Instead, he said it's likely that AI starts to underperform and investors start to move into other areas of the market, creating a drag on the overall index — a dynamic that has periodically started to play out over the last few months.

"Our best guess is that in 2026 the S&P is more likely to be down than up," Inker told Business Insider. "We are not forecasting a collapse, because we expect what we're going to see, to a significant degree, is a rotation — that the AI names will get hit, and they are of course a big part of the S&P."

He continued: "But there's plenty of other stocks that are really pretty cheap, and they may well rise. So we're guessing kind of single-digit percentage losses for the S&P."

One reason Inker isn't convinced we're in a mega bubble is because speculation seems to be contained within the AI trade.

"It's not as extreme as what we saw in 2000, and it hasn't infected everything. So one of the problems that can happen in bubbles is like in 2008, nothing was as expensive as internet stocks were in 2000, but every risk asset everywhere was overvalued: stocks were overvalued, credit was overvalued, real estate was overvalued, everything was overvalued," he said. "Today, the AI stocks are overvalued, growth stocks in the US are overvalued, but not really that much else."

While there are non-AI pockets of opportunity within the S&P 500, two of Inker's favorite investments right now are Japanese small-cap stocks and European value stocks.