Economic and Market Outlook for 2026 Part Two: The Market
February 24, 2026
By Robert Wiedemer
NOTE: Before reading this article please be sure to read Part One on the economy which was published on February 16. It’s available at www.bullbearpublishing.com
In my article on the economy, I predicted that economic growth would slow this year to 2%, but that will be more than enough to support the stock market. So, let’s take a look at other factors that might negatively or positively affect the market.
First, the negative factors. In the past few years, the biggest negatives to hit the market have been a tripling of interest rates in 2022 and massive increase in tariffs in 2025. Are we likely to see a repeat of either?
Repeat of Past Threats
A Tripling of Interest Rates
This was the biggest shock to hit the market in almost 15 years. That in itself says it is unlikely to occur again. Also, we were coming from a period of historically very low interest rates to a period of more normal interest rates. Hence, there is not as much support for raising rates today. In fact, there is a lot of support for lowering rates.
I don’t think lower rates are going to happen to any great degree because it would require an awful lot of money printing. However, as I said in my article on the economy, the big $40 billion/month increase in money printing the Fed started in December will keep rates around current levels for most of this year. Plus, we may see more printing later this year to try to lower mortgage rates before the election.
So, not only is a market-shocking tripling of interest rates unlikely, we likely won’t see any big interest rate increase and may even see a decrease. No repeat of the horrors of 2022.
A Massive Increase in Tariffs
The massive increase in tariffs hasn’t been a big win for President Trump politically. Hence, I don’t see a repeat this year. He is a political animal and very attentive to the political winds over time.
In fact, he is already decreasing some specific tariffs, and the recent Supreme Court ruling has further reduced tariffs. Yes, he is very angry at the Court’s ruling limiting his power and has retaliated by declaring a 15% global tariff on imports under a different statute. However, that type of tariff expires in 150 days. He will certainly try to impose more specific tariffs that avoid the Court’s ruling but those will likely not match the level of his current tariffs.
Bottom line: 70% of his current tariffs (the broader ones) have been declared illegal by the Supreme Court. Hence, it is unlikely tariffs will rise to the level of last year, much less increase from last year. Tariff chaos will continue, but there will be no repeat of the Tariff Terror of Spring 2025.
New Threats
Artificial Intelligence (AI)
Despite the volatility of the market in response to rumor scares regarding various potential impacts of AI, I see AI as a boost to the market in 2026. The market still generally sees AI as a new technology that will help boost economic growth.
Also, the Street likes to see big new technologies as it gives a strong rationale for stock market growth. A big new technology can add excitement to many stocks even if it might threaten some stocks. Usually, the winners’ gains far outweigh the losers’ losses. That has been true for most past technological changes.
I have a lot more to say about AI which I will write in an upcoming article, but it will be a plus for the market this year.
Recurring Threats
Always Threatening, but Never an Actual Threat: Geopolitics
Nothing is more dramatic and would seem to have a bigger impact on the market than a war. However, as we have seen in past wars, after a short period of time, they are simply overlooked. Whether it be the Kuwait war, the Iraq war, the Afghanistan war or even 9/11. The market either cheers or bounces back.
Sure, a war involving oil could have more impact, meaning a war with Iran, but a simple attack as we have done earlier, did not. A war with the largest producer of oil in the world outside of the US, Russia, also did not bother either the stock market or oil market in the long run. Such events are great for oil traders, but don’t make much difference for longer term stock market investors.
That said, the one war that could impact the market is a long war with Iran that affects the flow of oil out of the Persian Gulf. I will be on the alert for that but am not expecting it in 2026.
A Weak Dollar
The dollar is another issue that is talked about all the time but doesn’t seem to have that much effect on the market long term. That’s partly because the dollar rarely moves up or down rapidly. A move of just 10% in a year is pretty unusual. And it’s pretty rangebound. Again, it’s a great market for currency traders, but doesn’t make much difference for longer term stock investors.
The reality is that the dollar is relatively stable and has not been a source of fundamental downward pressure on the market. A good measure of its long-term stability is the Dollar Index (DXY), which tracks the strength of the dollar against a basket of major currencies. The Index is currently around 98. Ten years ago, it was around…98. Pretty stable.
Many market observers worry about or talk about a weak dollar much more than is warranted. I think that’s partly because they see the value of the dollar as a reflection of US prestige and power.
The reality is that the value of the dollar depends not so much on our prestige or military power but on the relative performance of our asset markets. If our asset markets are good, we will attract long-term investors in the dollar.
In that respect, our stock, bond and real estate markets have held up very well in the past, compared to international markets, despite periodic problems. Going forward, our bond and real estate markets will weaken, but probably not enough to radically decrease the value of the dollar. Our stock market will likely be competitive with world markets for at least the next few years, even if there are periods of underperformance.
I don’t see a weak dollar being a major negative for the market in 2026.
High Stock Valuations
The stock market is highly valued. Join the crowd.
Valuations for almost every asset are high now. Is Bitcoin overvalued? Even now, after a huge recent collapse from $120,000 to $65,000 it is still valued at SIXTY times more than it was 10 years ago. Is that due to double digit earnings growth, like stocks? Don’t think so. It doesn’t even have earnings! So, a 6000% increase in 10 years seems to value it pretty highly.
Are bonds overvalued? Let’s see. If you buy a 10-year bond now, you get 4% interest. So, for that price you’re basically assuming inflation, currently at 2.4%, won’t rise much at all for the next TEN YEARS. You’re also assuming that interest rates won’t rise for the next TEN YEARS. Seems like a pretty high valuation for product that you have to assume will have no inflation and no increase in interest rates for the next TEN YEARS – priced for perfection I would say.
How about private stock markets which open to only the best venture and private equity investors with some of the best valuation analysts in the world? These experts are valuing AI companies that are not profitable, and may not be profitable for many years and are facing massive losses in the meantime, at half a TRILLION dollars. That seems like a pretty high valuation to me.
I could go on with this, but my point is that high valuations have to be looked at not just in a vacuum but on how the valuations compare to other assets that investors are considering purchasing. That’s the real world we are dealing with. It’s a high valuation world that investors are facing, and I don’t think they will see stocks increasing by double digits this year as being all that overvalued compared to other investments. Especially since the foundation of that valuation is earnings, which are expected to increase by double digits in 2026 as I’m about to discuss.
The Positives
Continued Double Digit Earnings Growth
FactSet, a highly respected forecaster of corporate earnings and revenues, is forecasting earnings for the S&P 500 to increase 15% in 2026. That’s a pretty damn big positive since stocks are essentially contracts that give you a right to share in a company’s earnings.
Are earnings overestimated at the beginning of the year by analysts? Always.
However, even if the exact number being forecasted is wrong, it is very likely we will see double digit earnings growth this year just like we did last year.
Tax Cuts
Tax cuts with no offsetting spending cuts are always a plus for economic growth. Unfortunately, I don’t yet have a good handle on exactly how much the tax cuts will amount to in 2026. So, erring on the side of caution I don’t expect it to be a big driver this year. Hope I’m wrong.
Less Concern Over the Big Hit to Bonds and Real Estate from Higher Forever Interest Rates
This won’t be discussed by any stock analysts, but it will be a fairly important driver of the market this year. Many financial analysts have been overly negative on the stock market compared to previous years because they are hoping that real estate and bonds will bounce back from one of the biggest poundings they have received in the last decade due to a tripling of interest rates.
Admittedly, a rebound in bonds and real estate would make a more balanced and sustainable investment environment, which many financial analysts would like to see. It also follows a bull market rule that assets always bounce back from a downturn. So, it’s understandable that financial analysts would be negative on the stock market soaring like it did in the past few years when bonds and real estate are hurting badly.
But now, three years after the tripling of interest rates in 2022, I think reality is setting in and financial analysts will adjust to the fact that bond and real estate markets aren’t going to bounce back. Interest rates aren’t going to fall back to where they were in 2021 or even close. It’s now time to move on and go back to cheering stocks rather than jeering stocks.
The Biggest Positive of All: No Big Negatives
The market post-Financial Crisis of 2008-9 has had a strong bias toward up. Up is good. Down is bad. So, unless there’s a big bad problem, such as a big increase in interest rates, the market tends to go up. Those animal spirits have been bolstered by strong and essential support from the government in the form of massive borrowing and money printing, which is continuing.
Hence, we’ve had a stock market that has only seen two big down years since the Financial Crisis. Assuming no big bad negatives this year, which I am, that streak will continue.
How Does it All Add Up?
The S&P 500 will grow 12.5% to 17.5% in 2026. That’s a little lower than I forecasted for last year, but still good. The slowing economy and lack of job growth may spook the market a bit. Also, high stock valuations make it easier for the market to be spooked by anything, especially AI. Otherwise, I think it’s clear sailing – at least for the next year.