What the S&P 500's Rocky Start to 2026 Actually Means for Your Portfolio

The S&P 500 (SNPINDEX: ^GSPC) started the year steady enough. And then the wild ride began.

In January and February, the index mostly traded in a narrow range between unchanged and up about 2%. Tensions in the Middle East flared, and the S&P 500 fell 8%. But in April, optimism for a resolution to the Iran war emerged, and the S&P 500 set an all-time high.

To me, the stagnant market early in the year was justified, as was the correction during the Iran conflict. The big rebound that took place in April? I'm not so sure.

I think there's still a lot of risk, given that there's no firm timeline or resolution in sight to the war in the Middle East. Gross domestic product (GDP) growth for Q4 rose just 1%. Inflation remains higher than the Federal Reserve's 2% target. There are many wild cards at play that create a lot of downside risk for equities.

Image source: Getty Images.

Key takeaways

• The S&P 500 posted its worst Q1 since the bear market of 2022, falling 5.1%, primarily due to the Iran war.
• GDP and jobs numbers show a U.S. economy that's slowing, but not yet at risk of contraction.
• Midterm election years tend to produce the lowest returns of the four-year cycle.
• Strong earnings for the S&P 500 could push stock prices higher despite some of these macro headwinds.

Mid-term election years tend to disappoint

Outside of macro, geopolitical, and earnings factors, investors live with a lot of uncertainty around midterm election years. In general, forward-looking policy and economic conditions could head down drastically different paths, depending on which party gains control of the House and Senate. Investors tend not to want to get too far ahead themselves, which is why midterm election years historically have delivered the lowest returns of the four-year cycle.

Since 1950, the S&P 500 has risen roughly 5% in midterm years. That's enough to be cautious about expectations for what the rest of 2026 might look like, but not enough to think that a correction is imminent.

But one thing that also tends to feature more prominently in midterm election years is a strong post-low bounce. According to a Carson Wealth study, the S&P 500 is up on average more than 30% in the year after its low in a midterm year.

If late March did mark the low for the S&P 500, the index is already up more than 12% from that point. If history is a guide, a good chunk of the upside may be in the past, but there's plenty of potential still ahead.

What could the rest of 2026 look like?

There's some challenge in balancing the hope of a post-election bounce with the reality that several economic measures are trending in the wrong direction.

So far, U.S. GDP growth is definitely slowing, but not to the point where recession is an imminent risk. Job growth is stagnant, but we have yet to see sustained losses. Inflation jumped in March, but there's the possibility that some of it reverses once a resolution is reached in Iran. In other words, there are plenty of warnings but no outright red flags just yet.

History would suggest there's more upside for the S&P 500 here, but it's a risky bet. Stocks have already fully recovered from the tumble at the outset of the Iran war, which has yet to come to a conclusion. If the latest economic numbers continue trending in the wrong direction, stocks could move sharply lower and quickly.

Given that the S&P 500 earnings outlook for 2026 is still solid, I believe that will carry stock prices higher later this year. It's by no means a guarantee, but there's enough support in place to make it happen.

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.