The Most Likely Cause of a Stock Market Crash in 2026. (Hint: It's Not Related to Artificial Intelligence.)

Predicting the next stock market crash is nearly impossible, so I wouldn't recommend that retail investors attempt to time the market. However, that doesn't mean investors shouldn't, at the very least, try to understand the challenges that stocks face in the near future, in order to best position their portfolios and make informed near-term decisions.

The stock market has seemed invincible over the past three years, with nothing able to bring it down for more than a temporary amount of time. However, such a strong run has many investors on edge, despite no imminent signs of a market crash. Here's the most likely cause of a crash in 2026, in my opinion -- and no, it is not related to artificial intelligence (AI) stocks.

Worry about inflation and rising yields

While there are numerous factors that could harm the market, including the implosion of AI stocks or a sudden recession, I believe the most likely cause of a market crash will be higher inflation, which leads to higher bond yields.

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Since inflation surged in 2022, briefly peaking around 9%, the Federal Reserve has not been able to fully rein in consumer prices, despite making significant progress. The latest Consumer Price Index (CPI) report for November showed that inflation came in at around 2.7%, still materially above the Fed's preferred target of 2%. Many economists also believe the true number is likely higher, due to an incomplete CPI report resulting from the government shutdown.

It's also still unclear whether President Donald Trump's tariffs have been fully passed through to consumers. If you were to ask most consumers, I suspect many would say that prices still feel expensive, from food to housing. If inflation were to rise, that would be a problem for the Federal Reserve, especially with unemployment on the rise, since it potentially creates stagflation.

In this scenario, the Fed is put into a bind because interest rate moves would have conflicting results in the Fed's dual mandate of stable prices and maximum employment. If the Fed lowers rates, it may help the labor market, but risks increasing inflation. If it raises rates, it may put a lid on inflation but risks further harm by hurting the labor market and slowing the economy.

Higher inflation could also lead to higher bond yields. The U.S. 10-year Treasury bill currently yields around 4.12%, but investors have seen just how fragile the market can get when that yield approaches 4.5% or 5%. It would be equally concerning if yields suddenly surge while the Fed has been cutting rates.

Higher yields not only lead to higher borrowing costs for consumers and the government, but they also increase return thresholds for stocks because the cost of capital is higher. And many stocks already trade at elevated levels. Higher borrowing costs for the government also tend to spook bondholders, who worry that the government is losing control of its finances, especially with the country's current debt levels.

Prepare for some volatility in 2026

Some prominent Wall Street banks are expecting inflation to tick up in 2026. For instance, economists at JPMorgan Chase see inflation surpassing 3% in 2026 before falling to 2.4% by year's end. Economists at Bank of America also see inflation peaking at 3.1% and then coming back down to 2.8% by the end of 2026.

If inflation peaks and then shows clear signs of deceleration, then the market should be OK. However, inflation can be difficult to eliminate once it becomes high, as investors have seen in recent years. Consumers begin to get accustomed to high prices, and higher inflation can, to some extent, become a self-fulfilling prophecy.

Investors should also remember that when the rate of inflation slows, prices are still rising, and the cost of living can still feel insurmountable for most.

Nobody knows what inflation will do in 2026, so, again, don't try to time the market. However, I do think that if inflation rises and yields follow, and if the surge does not turn out to be transitory, that could be the straw that breaks the market's back in 2026.

Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.