Revitalised IPO market, policy tailwinds could drive STI past 5,000 by end-2026: analysts
Regional stocks also up, with Japan’s Nikkei index closing at all-time high of 52,518.08 points
[SINGAPORE] The Straits Times Index (STI) could breach the 5,000-point mark by the end of 2026, driven by policy tailwinds, recovering earnings and a revitalised initial public offering (IPO) market.
UOB Kay Hian (UOBKH) set a bullish target, citing support from the government’s Equity Market Development Programme and a return to earnings growth for key index heavyweights.
This projection builds on a stellar STI performance in 2025, during which the blue-chip gauge rallied 22.7 per cent to close the year at 4,646.21 points. It hit an all-time high on Tuesday (Jan 6), crossing the 4,700 mark for the first time, putting it on course for a ninth straight month of gains.
“Given the prevalence of large-cap blue-chip defensive stocks with strong Singapore dollar-based cashflow generation and relatively high dividend yields, the Singapore market will continue to attract fund flows,” said UOBKH analyst Adrian Loh, forecasting a 6.3 per cent year-on-year earnings growth for the broader market in 2026.
A blue-chip defensive stock refers to shares in a large, financially sound and well-established company that operates in an industry with consistent demand for its products or services despite any volatility.
The local bourse entered 2026 on its strongest footing in nearly two decades. By December, the STI logged eight consecutive months of gains, a winning streak last seen during the bull run of 2006 to 2007.
As a result, it could see a 7.6 per cent upside from its current levels based on UOBKH’s own target prices, said Loh, with a 2026 price-to-earnings forecast of 16 times. Using Bloomberg consensus target prices would result in an STI target of 4,800 points instead, he noted. However, not all analysts are as convinced. Macquarie Equity Research held a contrarian view, forecasting a year-end decline to 4,500 points. They warned that the banking sector, which makes up half of the STI, could become a drag on performance as falling interest rates pressure revenues, making 2026 a year for “stock pickers” rather than a broad market rally.
“Constructive” environment for 2026
OCBC head of equity research Carmen Lee described the environment for 2026 as “constructive”, characterised by a benign global economic outlook and stable regional trade flows.
Singapore’s gross domestic product growth is expected to moderate – OCBC Group Research estimated a drop from 4.8 per cent in 2025 to about 2 per cent in 2026, while UOB Global Economics & Markets Research forecast it to be 2.1 per cent.
Still, the equity market remains attractive relative to regional peers, said Lee. She pointed out that the STI currently trades at a price-to-earnings ratio of 13.5 times, which is expected to ease to 11.7 times by 2027, offering a dividend yield in the 5.1 to 5.2 per cent range.
Lee predicted that a potential revival in listings could further lift the financial sector. With a pipeline of more than 30 potential listings, capital market activities are expected to pick up, directly benefiting local lenders and the exchange.
The banking sector should remain a primary engine of growth, added the OCBC analyst.
“The general outlook for 2026 points to stable earnings for the banks, with expected compression in net interest margin, but supported by wealth flows surge and high return on equity,” she said.
Macquarie analysts instead argued that the banks may be “treading water” in 2026. They forecast the key Singapore Overnight Rate Average to drop below 1 per cent by mid-year, creating revenue headwinds that wealth management fees may not fully offset. Consequently, they advocated rotating away from banks and into interest-rate sensitive sectors such as Singapore real estate investment trusts (S-Reits).
Loh also predicts that S-Reits are tipped for a recovery, though he noted that their recovery stalled in 2025 as the iEdge S-Reit Index “underperformed other Singapore indices”.
The sector, which gained 11.3 per cent in 2025, is expected to see distributions rise as refinancing costs fall.
Top picks
Large-cap defensive stocks remain top picks across the board. UOBKH favoured CapitaLand Ascendas Reit , Keppel and OCBC , alongside tech giant Sea. Among small and mid-caps, the brokerage highlighted ASL Marine , Centurion , CSE Global , Food Empire and Valuetronics .
OCBC’s Lee also flagged CapitaLand Investment as a top buy with the highest potential upside. Her other picks included Nanofilm Technologies , Genting Singapore and Thai Beverage .
Despite the optimism, she cautioned that the market’s heavy concentration of value stocks means it could lag if global investors pivot sharply towards high-growth technology plays.
She also pointed out that achieving the double-digit gains seen in 2025 for global equities required sustained “strong demand” for artificial intelligence (AI).
This comes amid rising concern over an AI bubble with risks of over-stretched valuations and over-investments, even though AI adoption was a key growth driver in 2025.
On the other hand, Macquarie favoured restructuring plays that can unlock value regardless of market direction, naming Jardine Matheson , Keppel , CapitaLand Investment and ST Engineering as its top large-cap picks.
Geopolitical wildcards
As was the case last year, geopolitics also remain as a wildcard. Any economic slowdown in China could hit external demand, while instability in Venezuela could trigger oil price spikes, raising operating costs – though reactions have not been negative so far.
Furthermore, market sentiment later in the year could be tested by the US midterm elections and further shifts in US foreign policy, especially as US President Donald Trump sets his eyes on the annexation of Greenland and action in Colombia.
Despite that uncertainty, Asian markets have enjoyed a strong start to 2026, maintaining an upward momentum after overnight gains on Wall Street.
On Tuesday, the MSCI index of emerging Asia equities climbed 1.1 per cent to its highest level since mid-February 2021, while its broader index of global emerging market equities and broadest index of Asia-Pacific shares hit records, said Reuters.
Japan’s Nikkei 225 closed at an all-time high of 52,518.08 points, surpassing the previous record set last October. The broader Topix index also reached a new peak of 3,538.44 points.
Meanwhile, China’s CSI 300 index hit a four-year high at 4,790.69 points. South Korea’s Kospi crossed the 4,500 mark for the first time to end the day at 4,525.48 points, setting a record for the third day running.
Hong Kong’s Hang Seng Index was more modest in its gains, though it still hit 26,858.13 points, a seven-week high.
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