The previous few years have featured just about only one dominant market theme: artificial intelligence (AI). Inventory market winners, financial development figures, and earnings expectations have been all constructed across the AI growth story.
2026 appears a bit completely different. The AI narrative remains to be hanging round, nevertheless it’s extra within the background now. The Iran warfare, inflation, and the potential for geopolitical tensions to proceed disrupting the worldwide provide chain are actually on the high of buyers’ minds.
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The truth that the S&P 500 (SNPINDEX: ^GSPC) index has already fallen 9% and rebounded 12% simply up to now couple of months demonstrates that buyers are nonetheless making an attempt to get a deal with on what to anticipate for the rest of the yr.
Whereas there’s a variety of uncertainty nonetheless hovering over the markets, there are a number of developments that I feel will probably be in place for the remainder of 2026 and past.
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March inflation got here in at 3.3% yr over yr, a lot above February’s 2.4%. It will complicate the Federal Reserve’s path towards price cuts.
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Midterm election years traditionally function the bottom returns of the four-year cycle.
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Inventory costs traditionally have rebounded strongly as soon as the midterm election has handed.
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The VIX briefly hit the 30s this yr, however volatility has since moderated. That would scale back some potential for above common returns from right here.
Earlier this yr, the markets priced in roughly one or two price cuts in 2026. It made sense on the time. The financial system was nonetheless rising at a wholesome clip and the unemployment price was nonetheless 4%-5%. However inflation was slowly coming again down towards 2%, and there was the potential for some coverage price normalization to replicate that.
Since then, the Iran warfare has turned inflation expectations the wrong way up. The March inflation price shot all the best way as much as 3.3%, and it’d go increased nonetheless in April. Even when the U.S. financial system begins slowing extra quickly, an inflation price within the 3%-4% vary goes to make it awfully tough for the Fed to do a lot, if any, price chopping.
Proper now, the futures market is pricing in a 1-in-3 likelihood of a lower this yr. If there is a swift decision within the Center East, it is potential we’ll see inflation come again down and open the door for cuts once more. However that is an enormous if. The Fed appears like it will be caught.
