I approach 2026 with a bit of skepticism, mainly because the margin for error is becoming increasingly narrow. I don’t see a downturn as inevitable, but many of the forces supporting markets over the past few years are showing signs of fragility, and the issues beneath the surface look more pressing than valuations imply.
US Debt
The most crucial issue is U.S. debt. Borrowing has continued at an aggressive pace, but what’s most concerning is the cost of carrying that debt. In fiscal year 2025, the federal government spent roughly $970 billion just on interest payments, making it the third-largest expenditure behind Social Security and Medicare. Net interest alone accounted for nearly 20 percent of all federal revenues, a share that is projected to rise an estimated 76 percent over the decade and is growing faster than any other major budgetary category. As interest payments continue to hit higher levels, the market’s assumption that debt can grow indefinitely without consequence becomes harder to defend.
Dollars spent on interest are dollars not available for infrastructure, research and development, defense, healthcare, or any future growth avenue. The result is a budget increasingly hindered by obligation rather than focusing on expansion... a constraint that markets have not yet priced in.
AI Boom Payoff Will be Delayed
At the same time, the AI-driven investment boom may be entering a more mature phase. The market has and will continue to move past blanket optimism toward anything branded “AI,” and will begin to demand proof that it translates into real revenue. I see this skepticism strengthening in 2026.
Capital expenditures on data centers and infrastructure have surged, yet the economic payoff from those investments is still projected to arrive later in the decade. As we move through 2026, questions about whether returns justify the scale of spending will grow louder.
I am personally very bullish on AI, and most of my holdings are tied to it. However, I see investors becoming increasingly impatient and anxious with the payoff timeline in 2026. News of high capex projects have not landed well thus far, and I think it may take a bit for people to come around on the longer-term agenda for the AI trade.
Market History
Finally, there’s the simple reality of market history. We’ve just experienced three exceptionally strong years for risk assets. That alone doesn’t at all mean a fourth is impossible, but it does mean expectations are elevated. Since its inception in 1928, the S&P 500 index has averaged an 8.55% annual return. Since 2023, the S&P 500 has averaged around an 18% return, about double the mean. Reversion to the mean doesn’t operate on a schedule, but it is one of the most reliable forces in markets over time. When returns compound well above average for extended periods, future gains become harder to sustain without rapidly expanding fundamentals. Though this expansion is seen with the AI boom, the above concerns give me reason to believe that 2026 could be a year where the markets return to balance the mean.
Conclusion
Rising debt and interest costs, delayed payoffs from AI investments, and historically elevated returns all signal that optimism will likely be tested. Time will tell if the market begins to price in risks that have quietly been building beneath the surface or if it continues on its upward trajectory.
Cover picture courtesy of SeekingAlpha