Since 1957, the S&P 500 (^GSPC 0.21%) has returned an average of 184% during bull markets. But the index has only returned 54% since the current bull market began on Oct. 12, 2022, and I doubt it will come anywhere close to the average.
In fact, I think the bull market will end in 2026 due to a combination of policy uncertainty surrounding midterm elections, tariffs imposed by President Trump, and high valuations. Here are the important details.
Image source: Official White House Photo.
Stocks often decline sharply during midterm election years
Midterm elections make investors nervous. The political party in the White House tends to lose seats in Congress, and the losses are usually substantial. In fact, in midterm elections since 1958, the political party in charge has lost an average of 24 House seats and three Senate seats.
That creates uncertainty. Investors don’t know if the president’s political party will retain a sufficient number of seats to keep fiscal, trade, and regulatory policies moving forward. So, investors often pull money out of the stock market until midterm elections are done and the uncertainty dissipates.
Not surprisingly, the S&P 500 tends to perform very poorly around midterm elections. Since 1958, the index has fallen by a median of 19% at some point during midterm election years. In other words, history says there is a 50-50 chance the S&P 500 declines at least 19% at some point in 2026.
Tariffs and rising oil prices threaten to slow economic growth
A study conducted by economics professors Gita Gopinath (Harvard) and Brent Neiman (Chicago Booth) found that U.S. companies and consumers paid 94% of President Trump’s tariffs in 2025. A study published by the Federal Reserve Bank of New York arrived at a similar conclusion, as did a study from the Kiel Institute.
So what? President Trump has often claimed foreign exporters are paying tariffs. But each dollar in tariff revenue the government siphons away from U.S. companies and consumers is one that could have been spent to support the domestic economy.
That explains why the U.S. economy slowed last year, at least to some extent. GDP climbed 2.2% in 2025, the slowest growth since the pandemic in 2020.
More recently, conflict in the Middle East has damaged oil infrastructure and closed transit routes. Brent crude (an international benchmark for oil prices) briefly exceeded $110 per barrel early Monday, the highest level since 2022, before falling back to $90 per barrel after President Trump said the war could end swiftly. But the current price is still more than 30% higher than the average price in the past year.
Here’s the big picture: Tariffs are a headwind to economic growth, and elevated oil prices could make the problem worse by further reducing household consumption. That means corporate earnings could grow more slowly than anticipated, which could cause the stock market to fall.
The stock market is very expensive by historical standards
The S&P 500 currently trades at one of its most expensive valuations in history. The index had a cyclically adjusted price-to-earnings (CAPE) ratio of 39.2 in February, marking the fifth consecutive monthly reading above 39.
So what? The S&P 500 has not been that expensive since the dot-com bubble, a period in the late 1990s when the index’s CAPE ratio went as high as 44 because investors were irrationally optimistic about internet companies. When the dot-com bubble burst, the S&P 500 fell into a bear market that erased 49% of its value
Of course, rich valuations do not necessarily mean a bear market is imminent. In fact, valuations are usually a poor predictor of near-term returns because the market can remain irrational for long periods. Instead, elevated valuations are like a tinderbox. They leave the stock market vulnerable, but something else typically sparks the drawdown.
In this scenario, I think the policy uncertainty surrounding midterm elections, coupled with the economic drag created by tariffs and rising oil prices, will provide a spark sufficient to end the bull market at some point this year. Put differently, I think the S&P 500 will fall at least 20% from its record high in 2026, at which point the index would enter a bear market.
I hope my prediction is wildly inaccurate, but investors should exercise caution in the current environment.
