Will US Stocks Face Headwinds in Late 2026? JPMorgan Warns of 4 Major Risks, Says Replicating First-Half Gains Will Be Difficult

U.S. investment bank JPMorgan (JPM-US) recently released a report stating that although the U.S. stock market delivered strong performance in the first half of this year despite multiple headwinds, the outlook for the second half of 2026 remains cautious due to several persistent risks. The bank expects stock returns for the remainder of 2026 to be weaker, urging investors to pay attention to at least four potential risks.

According to a report by Business Insider, JPMorgan’s strategy team, led by senior analyst Zahin Ov, forecasts that the S&P 500 index will maintain only a “moderate” outperformance relative to international markets in the second half of 2026.

The report states: “We expect the market still has room to rise from current levels, but investment returns through year-end may struggle to match the performance seen in the first half of 2026.”

The first half of the year saw intense market volatility, driven by geopolitical tensions, concerns over AI-driven industrial transformation, and ongoing rotation within AI investment themes.

Despite these pressures, U.S. equities posted solid gains, delivering positive returns over the first six months. So far, the S&P 500 has risen approximately 9% year-to-date and has rebounded over 18% from its April lows. Recent optimism surrounding a potential U.S.-Iran peace agreement has also provided support to equity markets.

JPMorgan highlights the following key factors that could influence market trends for the remainder of 2026:

Rising Risk of 'Market Failure' and Sustained High Volatility

The report cites research published in June by the Bank for International Settlements (BIS), noting that traditional government bond buyers are gradually exiting, while hedge funds, foreign investors, and private investors are increasingly becoming key players—creating a structural vulnerability in the global financial system.

Strategists noted: “The BIS points out that risk has shifted from traditional linkages between banks and governments to hedge funds acting as intermediaries across major sovereign bond markets, increasing the likelihood of market failure.”

Additionally, JPMorgan warns that future market swings could become even more severe than in the past.

The report states: “Structurally higher volatility is becoming the new market norm, and changes in market structure are amplifying daily fluctuations, forcing investment positions to adjust more rapidly.”

Inflation and High Interest Rates May Continue to Weigh on Equities

JPMorgan warns that a resurgence in inflationary pressure and prolonged high interest rates could pose significant headwinds for equities in the second half of 2026.

Although U.S. inflation data for June came in below market expectations, inflation has remained a key market driver this year due to cost pressures from tariff policies and rising energy prices fueled by U.S.-Iran tensions.

Data shows that U.S. consumer prices rose at an annualized rate of 3.5% in June, still far from the Federal Reserve’s (Fed) 2% inflation target.

Meanwhile, the yield on the benchmark U.S. 10-year Treasury note, a key indicator of market expectations for inflation and long-term interest rates, has risen to around 4.56%, surpassing the critical 4.5% threshold.

JPMorgan strategists further note that the equity risk premium—the gap between stock returns and bond yields—has fallen to its lowest level since the financial crisis, suggesting limited room for further yield increases. If bond yields continue to rise, they could begin exerting stronger downward pressure on stock markets.

High Retail Ownership Could Trigger a Negative Feedback Loop

JPMorgan highlights that U.S. retail investors are currently highly engaged in the stock market, amplifying the so-called “wealth effect”—where rising stock prices boost household paper wealth, leading to increased consumer spending.

However, this trend also increases the risk of a “downward feedback loop.” The bank warns that if the stock market experiences a sharp correction, the heightened linkage between household wealth and equities could lead to a faster decline in consumption and economic activity than in the past.

Currently, stock assets account for about one-third of total U.S. household wealth, a record high.

JPMorgan strategists state: “If the market undergoes a significant correction, the resulting wealth effect could be more severe than in the past. Compared to historical levels, retail trading activity in 2025 and so far in 2026 has remained near historic highs.”

AI Could Accelerate Labor Market Disruptions

Beyond market structural risks, JPMorgan also warns of the potential impact of artificial intelligence (AI) on the labor market.

The bank notes that if market focus shifts from AI’s productivity benefits to corporate layoffs and job displacement, AI could further destabilize employment.

According to the latest report from consultancy Challenger, Gray & Christmas, AI has been a key reason for corporate layoffs for four consecutive months this year, with over 100,000 job cuts announced to date.

Additionally, a YouGov poll shows that about 63% of Americans believe AI will continue to reduce job opportunities.

JPMorgan states in the report: “The labor market’s ‘new normal’ remains unclear, and young college graduates face particularly high risks.”