What goes up must come down, so the saying goes. And this axiom generally holds in financial markets, which are characterized by boom and bust cycles based on macroeconomic factors like the business cycle and interest rates.
On the surface, things generally look good for the U.S. economy. The Federal Reserve is lowering interest rates, gross domestic product (GDP) growth continues to rise, and new technologies like generative artificial intelligence (AI) promise to boost near-term productivity. That said, there are also some significant challenges that could shake investor confidence over the next 12 months.
Let's dig deeper into what could come next, including a look at two reasons why the market could decline in 2026.
Image source: Getty Images.
Tariff-related uncertainty still weighs on the economy
On so-called "Liberation Day" on April 2, President Donald Trump unveiled the most aggressive U.S. trade policy in recent memory, slapping a 10% tariff on practically all imports into the country as well as larger double-digit country-specific tariffs on many of America's trading partners.
At the time, economists boldly predicted that this would spark widespread inflation. The numbers from the government say different. As of November, the U.S. inflation rate declined to 2.7% as businesses absorb the extra costs to preserve market share (although the accuracy of the reported figure is being challenged because of methodology issues). And President Trump claims the U.S. government has collected $600 billion in revenue from the policy so far.
But while the market has managed to digest the business impacts of Trump's Liberation Day tariffs (so far), their potential removal will be much harder to ignore.
The first problem is that the extra tariff money goes a long way toward covering the quickly expanding U.S. deficit, which is estimated to hit $601 billion for the first three months of 2026. If the tariffs are reversed, the U.S. could have to pay back the money it has already collected, making its fiscal situation significantly worse and potentially spiking the yields on Treasury bonds.
Treasury bond yields represent the risk-free rate in the U.S. economy. When yields rise, it can indirectly raise the cost of borrowing throughout the economy, starving growing businesses of the capital they need to expand.
According to the Cato Institute, Trump could seek to reimplement his tariff policy through different legal means if the Supreme Court overturns the tariffs currently in place. However, this move could introduce even more problems. America's increasingly uncertain trade policy will make it difficult for multinational businesses to plan for the future or find the best locations to build their facilities, potentially leading to poor capital allocation and stalled business growth for the rest of Trump's term.
Federal Reserve independence
On Jan. 11, Federal Reserve Chair Jerome Powell issued a statement addressing a criminal investigation related to his role in overseeing a $2.5 billion headquarters renovation. Powell believes the investigation is politically motivated retaliation for his refusal to comply with President Trump's demands on interest rates. And it is sparking concerns that the Federal Reserve might be losing its political independence.
If successful, it is unclear how Trump's political pressure on the Fed will impact stock performance in the near term. After all, the president's desire for lower interest rates can actually benefit stock performance by making borrowing cheaper and boosting economic growth.
That said, artificially lower rates would only be hiding structural problems (such as the tariff uncertainty and unsustainable U.S. debt levels) instead of solving them, potentially leading to bigger problems down the road.
What's an investor to do?
The good news is that while political and macroeconomic headwinds can hurt stock performance in the short term, these challenges probably won't change the trajectory of an individual business with strong fundamentals and leadership. Despite the scary news headlines and increasing uncertainty, long-term investors should see corrections as an opportunity to buy great companies at a discount.
