Why the stock market might be easily rattled

Market Optimism Faces Uncertainty

Positive momentum in the markets rarely endures indefinitely. As we move into 2026, the current rally may soon face challenges, particularly if stocks that are priced for flawless performance fall short of expectations.

Tom Essaye, founder of Sevens Report Research, notes, "The market is trading at elevated valuations, which could pose significant risks if companies fail to meet ambitious earnings forecasts."

Currently, the S&P 500 () is trading at a forward price-to-earnings ratio of 22, considerably higher than the 10-year average of 18.7. This level of valuation is reminiscent of the early January 2022 peak, which was followed by a nine-month bear market and a roughly 19% drop in the index.

Wall Street is betting on a strong year for corporate profits, assuming favorable conditions across the economy, technological advancements like AI, and stable geopolitical developments.

According to FactSet, S&P 500 earnings are projected to grow by double digits each quarter in 2026, with the fourth quarter expected to see an 18.1% increase. For the full year, earnings growth is estimated at 15%.

Strategists have set an ambitious year-end target for the S&P 500 at 8,010, which would represent an 18% gain from current levels.

Potential Risks to the Rally

What could disrupt this optimistic outlook?

• The December jobs report showed only 50,000 new positions, falling short of the anticipated 70,000. A series of similar reports could dampen confidence in corporate earnings for the first half of 2026.
• Kenny Polcari, chief markets strategist at SlateStone Wealth, points out that there is no certainty the Federal Reserve will implement multiple rate cuts early in the year, especially if inflation continues to moderate and the stock market remains at record highs.
• Uncertainty also surrounds the Trump administration's tariffs, as the Supreme Court may soon rule on their legality. Arguments last November suggested skepticism about the President's authority to impose such tariffs under a 1977 emergency powers law.
• The Keybanc team suggests that if the Supreme Court deems some or all of the IEEPA tariffs illegal, the administration may introduce new sector-specific tariffs to compensate.
• Geopolitical tensions have resurfaced following the Trump administration's actions regarding Venezuelan president Nicolás Maduro.

Market Resilience and Caution

Despite these risks, investors have largely shrugged them off so far this year.

The S&P 500 is approaching record highs, the Nasdaq Composite () is also near its peak, and the Dow Jones Industrial Average () is on the verge of surpassing 50,000 for the first time. The rally has expanded beyond the usual tech giants like Nvidia ().

However, experts warn that increased volatility and a test of the rally could be on the horizon.

"The overall economy has shown impressive resilience, but there are underlying weaknesses. Recent earnings reports reveal a split among consumers, which is worth monitoring," said David Sambur, co-head of equity at Apollo Global Management, on a recent episode of Yahoo Finance's Opening Bid Unfiltered podcast.

He added, "The biggest market-moving event is often something no one is discussing. That's always the case."

Disclosure: Yahoo is part of the portfolio of funds managed by affiliates of Apollo Global Management.

About the Author

Brian Sozzi serves as Executive Editor at Yahoo Finance and is a member of the editorial leadership team.