3 Market Trends That Could Shape the Rest of 2026

The past few years have featured pretty much just one dominant market theme: artificial intelligence (AI). Stock market winners, economic growth figures, and earnings expectations were all built around the AI development story.

2026 looks a little different. The AI narrative is still hanging around, but it's more in the background now. The Iran war, inflation, and the potential for geopolitical tensions to continue disrupting the global supply chain are now at the top of investors' minds.

The fact that the S&P 500 (SNPINDEX: ^GSPC) index has already fallen 9% and rebounded 12% just in the past couple of months demonstrates that investors are still trying to get a handle on what to expect for the remainder of the year.

While there's a lot of uncertainty still hovering over the markets, there are a few trends that I think will likely be in place for the rest of 2026 and beyond.

Source: Getty Images.

Key takeaways

• March inflation came in at 3.3% year over year, much above February's 2.4%. This will complicate the Federal Reserve's path toward rate cuts.
• Midterm election years historically feature the lowest returns of the four-year cycle.
• Stock prices historically have rebounded strongly once the midterm election has passed.
• The VIX briefly hit the 30s this year, but volatility has since moderated. That could reduce some potential for above average returns from here.

Sticky inflation keeps the Fed handcuffed

Earlier this year, the markets priced in roughly one or two rate cuts in 2026. It made sense at the time. The economy was still growing at a healthy clip and the unemployment rate was still 4%-5%. But inflation was slowly coming back down toward 2%, and there was the potential for some policy rate normalization to reflect that.

Since then, the Iran war has turned inflation expectations upside down. The March inflation rate shot all the way up to 3.3%, and it might go higher still in April. Even if the U.S. economy begins slowing more rapidly, an inflation rate in the 3%-4% range is going to make it awfully difficult for the Fed to do much, if any, rate cutting.

Right now, the futures market is pricing in a 1-in-3 chance of a cut this year. If there's a swift resolution in the Middle East, it's possible we'll see inflation come back down and open the door for cuts again. But that's a big if. The Fed looks like it's going to be stuck.

Midterm election uncertainty creates a temporary headwind

Midterm election years automatically have an air of uncertainty to them. Whichever party gains control of the House and Senate could have a radically different economic agenda than the one currently in place. A lot of investors don't feel like getting too bullish until they get a sense of where things are going.

Historically, midterm election years produce the lowest returns of the four-year cycle, about 4.6% on average since 1950. The S&P 500 is already up around 3% on the year, so there's a distinct possibility that there's limited upside still available.

But once the election is done, investors tend to become more bullish. In midterm years, the S&P 500 averages a rally of more than 30% 12 months out from the intrayear low. We're currently 12% above the March low, so we're almost halfway there, but that does suggest a potential postelection rally.

Reduced volatility could limit the potential for above-average returns

The best time to buy stocks is usually when volatility is high. Such an environment, of course, tends to highly correlate with market corrections. We saw that in March when the S&P 500 fell by 9% and the VIX was above 30. Since then, volatility has normalized, and the recent correction has been completely recovered.

March's correction was an opportunity missed by many, and further upside depends heavily on the current economic trajectory as opposed to a potential bounce off the lows. If volatility returns and stocks head lower, consider that a longer-term buying opportunity, not a reason to run. The March/April window has closed, but there's enough uncertainty that a new one could emerge later this year.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.