What I find most fascinating about the markets in general (mostly the headlines in the financial media) is the amount of certainty that can go into bullish or bearish calls. Whichever side of the fence a particular analyst or talking head finds themselves on, I feel as though a given position can become more entrenched over time.
For the better part of the past two decades, bulls have been correct in digging their heels in and calling recession calls “insane,” or at least unlikely. And while there are plenty of folks in the real economy who claim to be feeling recession-like symptoms (particularly those among the hundreds of thousands of layoffs we’ve seen proliferate of late) are already here, the more bullish take on equities overall has played out.
The question moving forward, of course, is whether 2026 will be a repeat of what we’ve seen the past three years (2022 was kind of an outlier), or if a 2020/2022 type situation is at hand.
Here are two reasons why I think the bulls could be correct in banking on another steady move higher, and two reasons why the bears may finally be right in their assessment that the economy is much weaker than it is.
Bad News First: The Bear Case
A roaring bear with a red stock chart in the background
I usually tend to start with the bad news first, or at least the more bearish perspective, as a starting point. Why? Well, because I’m probably more of a pessimistic person than the average reader.
Of course, the problem with being more conservative in my approach to looking at specific companies is that I’ve missed out on some of the biggest growth stocks this market has put forward for those who have been more risk-tolerant. Indeed, surging valuation multiples (and rising earnings) have driven moves that have been partly fundamentals-oriented, but mainly reflect the euphoria of investors more broadly.
Among the key risks I see for those who continue to hold such a bullish view of the market right now are inflation and tariff-related risks. The bond market specifically has had a very difficult time in discerning whether the interest rate cutting cycle spurred by the Federal Reserve will continue, given the inflationary pressures tariffs will likely have on the economy over time. Aside from the potential for price increases (which we’re already seeing flow through into some goods prices), the volatility and speed with which announcements have come have led to significant uncertainty for both consumers and businesses.
If businesses don’t know what their tariff outlook will be over the course of the next few months or years, they’re unlikely to hire more workers. That’s led to my second main concern for the economy heading into 2026, which is the labor market.
Weakening labor data, from jobless claims to overall job growth as well as the unemployment rate, signal we could be heading into a period of stagnating wages and slower job growth in 2026. If that’s the case, then perhaps more interest rate cuts could be on the horizon. But if enough people lose their jobs (whether it be due to AI or simply a weakening macro backdrop), earnings growth for companies could slow, leading to lower valuations across the board.
The question then will be how much of a help these so-called “insurance cuts” from the Fed will be, if a recession ultimately unfolds. For now, business uncertainty and weakness in the job market do appear to be pointing to the likelihood of a recession in 2026, but we won’t ultimately know if this is the case until year end.
Here’s the Good News: The Bull Case
Wall Street bull
There are a number of positives bulls can certainly point to as reasons why the aformentioned negative catalysts listed above won’t impact the markets (yet again) in 2026.
Indeed, the market has seemed to brush off most bad news as potentially good news lately, given that a weakening labor market increases the probability of interest rate cuts from the Federal Reserve. That’s the conundrum that appears to be driving volatility among bond investors – rate cuts are generally stimulative, and with QT ending, perhaps business investment and growth will continue at the corporate level.
Aside from the macro environment, though, I do think the recent tax and spending bill put forward by the Trump administration will likely be accretive for corporations heading into 2026. The full benefits of this legislation won’t be felt until next year, with lower taxes providing a little extra wiggle room for companies looking to deliver better margins and earnings. The hope is that they will pass these earnings along to investors in the form of dividends and share buybacks, with many in the market waiting earnestly to see how revenue and earnings growth may be juiced by these fiscal policies.
Then there’s always the AI super cycle we have to follow, particularly in the United States. It’s becoming clear that being the dominant global superpower in AI technology is a key goal of this administration. And if the U.S. is able to maintain this dominance over time, the productivity improvements we could see could drive even greater growth, and allow the country to grow out of its deficits (making future inflation concerns less of an issue).
We’ll see how everything plays out. There are strong arguments on both sides as to why we’re surely headed for a recession or another boom year. I simply don’t know at this juncture, but I’ll leave it up to readers to come to their own conclusions.
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