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If last year was full of fireworks that ultimately resulted in another big gain for the stock market, 2026 appears set to be a dud.

Looking back at 2025, the fact that the S&P 500 index gained 16% feels like a small miracle. The Donald Trump experience has led to wild swings—who can forget the near bear-market in April after the president announced the first iteration of tariffs?—but also big profits. It didn’t hurt that the artificial-intelligence trade remained a strong, if uneven, theme during 2025, helping tech stocks lead the market higher once again.

It wasn’t quite what Wall Street expected, either. Strategists had been predicting a 7% rise in 2025, with a declining multiple forecast offsetting strong earnings. History, however, shows that the S&P 500 rarely gains 7%, so we took the over. We predicted another year with a gain of close to 20% following large advances in 2023 and 2024, driven by strong earnings, AI, deregulation, and fiscal spending. We also forecast a heaping dose of policy-provoked volatility. (We would have looked like geniuses, except for the fact that we later turned bearish at the height of April’s tariff scare.)

This year, Wall Street strategists expect the S&P 500 to gain about 9.6%, but that seems unlikely. Going back to 2015, the S&P 500 has gained about 9% just one, in 2016, when it rose 9.5%. Otherwise, the index had two bad years (it lost 0.7% in 2015 and 6.2% in 2018), one terrible year (a 19% decline in 2022), and a bunch when it rose more than 16%. For Dean Lyulkin, CEO of specialty finance firm Cardiff, one of two outcomes is most likely. “Either conditions deteriorate and returns disappoint, or risk premiums compress and returns exceed expectations,” he writes. “The clean, moderate outcome is often the least common.” He expects another great year in 2026.

We’re taking the under. The problem is that 2026 is a midterm election year. From a market perspective, we could care less who wins. What matters is that such years have historically been the worst of the presidential cycle, with the S&P 500 finishing the year higher just 53% of the time and with an average gain of just 4.6%, while the other three years finished up 78% of the time, with an average gain of 11%. Part of the issue is that much of the good that a president accomplishes occurs during the first year of a term—and is immediately priced in. That’s the pattern from Trump’s first term—the S&P 500 gained 19% in 2017 before its 2018 tumble—and is likely to happen again during Trump 2.0, even after the tax cuts and fiscal spending bill that became law last year.

While the fiscal largess may already be reflected in stocks, it should start showing up in the economy in 2026. That highlights the next big risk: not that the U.S. will sink into recession, but that growth will be stronger than the 1.8% that economists expect. They have already made a habit of underestimating economic strength—and finding reasons to explain it away—and they can be expected to follow that pattern again this year.

The markets would initially take that strength as good news, argues TS Lombard’s Dario Perkins—until inflation concerns take over. Then the question would turn to whether the Federal Reserve would have to start raising interest rates—the dreaded tightening cycle—or ignore it. “[In] the case of the Fed, if there is no appetite for policy tightening, investors will start to wonder about the central bank’s independence,” Perkins writes.

Don’t expect the AI trade to save the day. For three years, Big Tech has been able to cover up the flaws in the market, lifting the S&P 500 regardless of the headlines. Cracks started appearing in 2025—only Nvidia and Alphabet outperformed the benchmark last year—though strength in Broadcom and others helped make up for it. More worrisome were signs that investors were starting to worry about the money being spent on AI, punishing big borrowers like Oracle and CoreWeave over the last three months of the year.

That’s not to say that the AI trade is over—it will continue to be a big theme for years to come—but it’s getting more complicated, making stock selection far more important. The choke points are likely to be physical, and not every company will be rewarded equally. Consider: During the last two months of the year, companies on the receiving end of Google’s spending outperformed OpenAI beneficiaries, according to 22V Research’s Dennis DeBusschere.

We don’t expect a bad year—that would require something, well, bad, such as the bleak picture painted by Peter Berezin, chief global strategist at BCA Research, in a note that purports to look back on 2026 from the beginning of 2027. AI adoption starts to slow, companies cut spending on AI, stocks start to fall, and consumers cut spending because of a reverse wealth effect, causing global economies to sink into recession. The S&P 500 would finish the year at 5280, down 23%.

We’re more optimistic. But with stocks less correlated—and no big drop to act as a springboard for further gains, as occurred in 2023 and this past April—another high-teens gain seems unlikely. We’d expect a relatively flat year, with the S&P 500 finishing down about 2%.

At least it won’t be a bear market.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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