Financial markets often experience short-term fluctuations related to political shifts, but enduring impacts on long-term market performance are generally limited. In the current term of President Donald Trump, the U.S. stock markets have demonstrated notable strength. Over the past year, the S&P 500 index has risen by 16.3%, surpassing its historical average return which typically hovers around 10% annually. Meanwhile, the Nasdaq Composite, which is heavily weighted in technology stocks, has advanced even further with a 19% increase, buoyed by strong enthusiasm for innovative technologies like generative artificial intelligence (AI).
While these figures portray a buoyant market scenario, several structural challenges are emerging that could precipitate significant market corrections in 2026 and in subsequent periods. A detailed exploration of three primary factors reveals potential sources of financial volatility.
Consumer Spending Disparities Present Economic Risk
Consumer expenditure is a fundamental driver of the U.S. economy, accounting for approximately 70% of gross domestic product (GDP). Essentially, economic prosperity heavily depends on people’s willingness and ability to purchase goods and services, often facilitated by credit availability. Data from the Federal Reserve Bank of Boston indicates that overall consumer spending remained strong throughout 2025; however, this momentum was largely fueled by the highest-income segments of the population.
In contrast, spending levels among middle- and lower-income consumers have stabilized without notable growth, highlighting a bifurcation in consumer behavior. Moody's analysis reflects this disparity, revealing that the wealthiest 10% of earners are now responsible for nearly half of all consumer spending nationwide. This concentration suggests that aggregate economic resilience may be overstated when viewed only through broad spending metrics.
Compounding concerns are increasing rates of automobile repossessions and housing foreclosures, signaling financial strain among average consumers. Such indicators often precede periods of economic downturn. The ramifications for the stock market could be severe, especially for industries and businesses dependent on discretionary spending, including sectors like automotive sales, leisure dining, and experiential services.
Tariff Policy: Legal Challenges and Economic Consequences
The Trump administration's imposition of broad tariffs averaging around 18% on imported goods has challenged initial expectations. Critics predicted these tariffs would drive substantial inflationary pressure, yet the observed increase in inflation has been more moderate than anticipated. Some of this moderation can be attributed to companies absorbing higher costs rather than transferring them to consumers, contributing to a measured inflation rate that dropped to 2.7% as of November.
However, these tariffs face a potential legal hurdle as the Supreme Court is set to review the administration's authority to enforce such trade policies in 2026. An adverse ruling could necessitate the repayment of hundreds of billions in collected tariffs. The fiscal implications of this outcome might prompt investors to reassess the United States' financial standing.
Should such a scenario lead to perceptions of reduced fiscal solvency, it could drive interest rates on U.S. Treasury securities higher. In turn, escalating borrowing costs would increase capital expenditures for companies, particularly impacting growth-oriented firms that depend heavily on debt financing to fuel expansion. This dynamic presents a material risk to sectors central to future economic growth.
Generative Artificial Intelligence Spending: A Double-Edged Sword
One of the most prominent drivers of stock market enthusiasm is the rapid advancement and commercialization of generative AI technologies. As calculated by Harvard economist Jason Furman, the surge in U.S. economic growth during the first half of 2025 was largely attributed to increased data center investments, primarily involving high-performance graphics processing units (GPUs) supplied by companies such as Nvidia.
Despite significant capital allocation to AI infrastructure, the profitability for companies deploying such technology remains uncertain. For instance, OpenAI, the creator of ChatGPT, projects that its cash burn will reach approximately $17 billion in 2026. Sustaining operational expenditures at this scale necessitates reliance on external funding, which could culminate in an initial public offering (IPO) within the year.
An IPO for OpenAI would provide investors with greater insight into the economic viability of the generative AI sector. Should the reveal underscore weak financial fundamentals, it could act as a catalyst undermining prevailing market optimism. Given the extensive exposure of technology firms to the AI industry, diminished investor confidence may precipitate a broad-based correction in equity valuations.
In summary, the combination of consumer spending concentration risks, uncertainty surrounding the continuation of tariff policies, and questions about the economic sustainability of rapid AI investments coalesce to paint a complex picture for the U.S. stock market as it approaches 2026. Market participants would be prudent to monitor these evolving factors closely as potential triggers for market volatility.