3 Market Trends That Could Shape the Rest of 2026

Investors who were expecting a repeat of 2025 coming into this year have been in for a rude surprise. Among the factors that investors have had to face in 2026 so far:

• A market rotation that featured a big move away from tech and toward value, international, and small-cap stocks.
• An unexpected war in Iran that sharply increased volatility in March and April.
• The return of high inflation that complicates the outlook for the Federal Reserve.

That's been a lot for the market to consider in just a few months. And now that market rotation we saw in the first quarter looks like it's rotating back again.

Given what we know right now, here are three trends that I believe will play out for the rest of 2026.

Image source: Getty Images.

1. The "higher for longer" rate regime changes market leadership

The market rotation that happened at the beginning of the year seemed entirely justified. Tech stocks had been running for the better part of three straight years. The Fed was preparing to cut rates multiple times this year. And when interest rates fall, it provides a more optimal environment for cyclicals, value, and other rate-sensitive issues, such as small caps.

But then the Iran war happened and the outlook changed. Oil-induced inflation has shot much higher and rate cuts are pretty much off the table until well into 2027. If rate cuts look unlikely, outperformance from those equity groups looks more unlikely as well. What probably ends up filling the void (as long as the economy keeps expanding) is previous leaders, including tech.

We saw that play out in April. The State Street Technology Select Sector SPDR ETF was up 20% for the month, only the second time that's happened in the 2000s. With no end to the Iran war in sight and inflation looking like it will accelerate from here, not slow down, it appears that the tech trade is back on.

2. AI spending will drive the real economic cycle

The Q1 earnings season for most of the "Magnificent Seven" stocks is in the books. The results were mixed, but one thing was clear. Tech companies are still investing heavily in AI development and that's unlikely to change anytime soon.

The tech sector is expected to deliver 39% year-over-year earnings growth and 24% year-over-year revenue growth in 2026. That trend will most likely carry forward into 2027 and beyond. Given how influential the megacap tech companies and the AI boom are to the U.S. economy, all of this spending driving the revenue and earnings growth for the sector (and, by extension, the S&P 500) will fuel the economic cycle for the foreseeable future.

At some point, ROIs will probably start shrinking, but it doesn't look like that will impact financial results for at least the next two years.

3. The bond market will flash a subtle warning

There's no question that bonds have been a subpar investment since the Federal Reserve began its aggressive rate hiking cycle a few years ago. With inflation back on the rise, it doesn't look like the environment will improve anytime soon.

But there have been moments in 2026 where Treasury yields have moved sharply lower. In February, the 10-year yield dropped from 4.3% to 3.95% over the course of a few weeks. From late March to mid-April, it dropped a more modest 20 basis points but coincided with rising uncertainty surrounding the Iran conflict.

Bonds haven't proven to be a firm flight-to-safety trade, but they have signaled that investors are looking for ways to tame portfolio volatility from time to time. In isolation, the current inflationary environment and expectations for a steady Fed probably mean that Treasury yields should remain relatively level. If long-term yields start moving meaningfully lower again despite this, it could signal a broader demand for safe havens that pulls equity prices lower.

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.