Stocks have powered through 2025 with surprising strength, but that momentum may not carry cleanly into the new year. JPMorgan is signaling a far more complicated backdrop for 2026, and investors who have grown comfortable with record-high indices may need to prepare for sharper volatility, policy uncertainty, and geopolitical friction.
The S&P 500 has gained about 14 percent year to date and recently touched fresh all-time highs, driven largely by enthusiasm around artificial intelligence spending. But cracks began to appear in the last several weeks as traders questioned the sky-high valuations across the AI complex. JPMorgan believes that pressure could intensify as multiple macro and policy risks collide.
Joyce Chang, JPMorgan’s head of research, laid out the biggest threats that could shape returns next year following insights gathered at a macroeconomic conference the bank hosted in New York.
“Investors remain constructive on the outlook for the U.S. economy and markets, and see higher capex, AI validation and deregulation as tailwinds that should support market performance going into 2026,” Chang wrote. “Yet risks abound, including the possibility of a durable shock to the supply side from the cyclical weakening of the labor market as well as the ongoing need to address cost of living, affordability concerns and inflation.”
Here is a deeper look at the risks JPMorgan says could reshape markets in 2026, along with added context for investors assessing their exposure.
Tariff Revenue and Supreme Court Uncertainty
One of the most consequential risks is tied directly to the Supreme Court, which is weighing the legality of key Trump administration tariffs tied to emergency economic powers. The ruling could materially affect federal revenue and trade policy at a moment when deficits are already large.
Chang noted that “there remains significant uncertainty on the outcome of the Supreme Court case that will decide whether the congressional statute, IEEPA, authorizes the Trump administration’s imposition of reciprocal and fentanyl-related tariffs under emergency powers. Predictions from legal analysts were split, with one speaker noting that oral arguments suggest a possible path to upholding the tariffs … but strong constitutional arguments persist against delegation of tariff authority from Congress.”
If the Court rolls back any portion of the tariff structure, the financial implications could be significant. “This suggests downside risk to the $350bn in annualized tariff revenue that is assumed in our US economics base case scenario, which is currently forecasting a 6.2 percent of GDP deficit for FY2026,” Chang added.
What this means for investors:
A tariff reversal would ripple through industrials, exporters, retailers, and U.S. manufacturers that benefited from current trade barriers. It could also shift inflation forecasts if supply chains adjust again or if imports from China grow. Investors who rely on tariff-driven earnings tailwinds should monitor this ruling closely.
The U.S. China Relationship Remains Fragile
Tensions between Washington and Beijing remain one of the most consistent sources of uncertainty, and JPMorgan sees no evidence that the rivalry will ease meaningfully in 2026.
Chang wrote that “following the Xi-Trump summit in Korea, President Trump appears to be leaning into a G2 framing of the relationship between the U.S. and China, avoiding escalation triggers, with each side seeking incremental advantages through chokepoints that stop short of outright confrontation.”
China’s ability to weaponize key exports continues to worry strategists. “China’s demonstration of its leverage through targeted controls on magnets and critical minerals that touch everything from missiles to car seats has exposed how dependent the world is on Chinese chokepoints,” she added.
Additional context for readers:
• China controls large percentages of global rare earth processing, lithium refining, and critical battery materials.
• Any new restrictions could drive up costs for electric vehicles, aerospace manufacturers, and defense companies.
• Investors may want to evaluate exposure to supply chains that rely heavily on Chinese inputs.
A Volatile Political Landscape Ahead of the 2026 Midterms
JPMorgan is also warning that domestic politics could become a major market driver. With the House narrowly divided, small swings in voter sentiment could flip control back to Democrats.
Chang noted that “the margin of victory by Democrats makes it clear that the House is in play for the midterm elections. As of today, Democrats need to win three seats to flip the House. Should Democrats reclaim a chamber of Congress in 2026, increased legislative-executive conflict is likely, intensifying inter-branch feuding beyond the already contentious recent shutdowns.”
Why this matters:
Divided government is historically positive for markets, but not when it leads to shutdown threats, budget standoffs, or stalled policy clarity on taxes, energy, trade, and regulation. Investors should expect noisy political headlines and potentially sharper intraday market swings as the election cycle accelerates.
Additional Risks Noted by Analysts
Beyond JPMorgan’s list, several other factors could complicate 2026:
1. Labor Market Softening
Wage growth has moderated and job openings have declined in several industries. A sudden labor market downturn would pressure consumer spending, which has supported corporate earnings throughout 2025.
2. Corporate Earnings Depend Heavily on AI Optimism
Companies with high valuations tied to generative AI adoption will face tougher year-over-year comparisons. If enterprise adoption slows or costs rise, these stocks could see sharp multiple compression.
3. Interest Rates Could Remain Higher Than Expected
If inflation proves sticky, the Federal Reserve may delay or slow rate cuts. That would keep borrowing costs elevated for households and businesses.
4. Global Flashpoints
Events involving Russia, the Middle East, Taiwan, or global shipping routes remain unpredictable and could spark temporary market corrections.
Bottom Line for Investors
The strong performance of 2025 set a high bar, and the road to 2026 looks far less straightforward. JPMorgan is not calling for a crash, but it is making the case that investors should be selective, realistic about valuations, and ready for a more volatile market environment.
About Author
