Generally, politics can cause short-term market movement, but doesn’t have a significant impact on long-term stock market performance. But to the extent that it does, the first year of Donald Trump’s second term has been a success, with the benchmark S&P 500 index up by 16.3% over the last 12 months — outpacing its average annual return of around 10%. The tech-heavy Nasdaq Composite has performed even better with a gain of 19%, driven by widespread optimism about new technologies like generative artificial intelligence (AI).
But while stocks are booming, the market faces some challenges that will be harder to ignore in 2026 and beyond. Let’s dig deeper into the three reasons the market could be on the verge of a substantial correction.
Image source: Official White House Flickr account.
Consumer spending represents around 70% of U.S. GDP, which means this economy runs on people spending money and buying things — sometimes on credit. According to data from the Federal Reserve Bank of Boston, aggregate spending remained strong in 2025. But this was driven by the highest-income consumers in the country. In contrast, spending by middle-income and lower-income consumers has stagnated.
Moody’s reports that the top 10% of earners are now responsible for almost half of U.S. consumer spending. This alarming stat suggests that the overall economy is not nearly as strong as the topline data makes it look. Furthermore, car repossessions and foreclosures have already begun to spike, which could be a sign of an impending recession.
This would be bad news for stocks, especially those tied to businesses focusing on discretionary items like cars, dining, and experiences.
The Trump administration has flummoxed the naysayers who criticized its sweeping tariffs, which now average around 18% on imports from the rest of the world. Critics who expected these levees to supercharge inflation are confused by the relatively smaller rise, and some will admit that businesses are absorbing much of the new costs instead of passing them on to consumers. The U.S. inflation rate actually dipped to 2.7% in November (although some economists questioned the data’s accuracy due to disruptions from a recent government shutdown).
That said, now the uncertainty is about whether the tariffs will even last. In 2026, the Supreme Court will decide whether the White House even had the authority to enact these policies. If they rule against Trump, the U.S. could be forced to refund hundreds of billions in collected levies — potentially causing investors to reevaluate its fiscal condition.
If the U.S. looks less solvent, that could mean higher interest rates on U.S. Treasuries, which would lead to higher capital costs throughout the economy. Higher capital costs would impose a substantial burden on growth stocks that often rely on debt to fund their expansions.
The last and potentially most significant risk for the stock market in 2026 has very little to do with the Trump administration and everything to do with generative AI. Harvard economist Jason Furman calculated that U.S. GDP growth in the first half of 2025 was almost entirely driven by data center spending, as big tech companies hoard high-end graphics processing units (GPUs) made by companies like Nvidia.
The problem is that the high levels of AI spending aren’t necessarily leading to profits for the companies buying the hardware. For example, ChatGPT creator OpenAI expects to burn through about $17 billion in cash in 2026. And the company continues to rely on outside capital, which may involve an initial public offering (IPO) this year.
If OpenAI goes public, investors will get a closer look at the arguably poor economics behind the generative AI industry. And that could be the pin that pops what many believe is a trillion-dollar bubble. With so many technology companies exposed to the AI industry, a souring of sentiment could lead to a widespread correction in the stock market.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
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