Market's Clouded by 2 Big Obstacles as We Head Toward 2026

The markets remain impressively resilient. Over the past two weeks, escalating trade tensions between the U.S. and China sent equities spiraling downward in their worse daily sell-off since the first half of April earlier this year. Investors quickly bought that dip only to be hit by some further concerns around the credit markets following fallout from the recent unexpected bankruptcies of Tricolor Holdings and First Brands as well as new loan losses disclosed at a pair of regional banks last week. The government shutdown is also about to enter its fourth week with no resolution in sight.

And yet here we are, right back with all the major indexes trading near all-time highs. Third quarter results have been more than solid to this point. Enthusiasm remains firm for the AI narrative, even as more and more analysts are warning around an AI bubble forming in the markets. I could easily see equities close out the year on a positive note, even as valuations remain more than stretched viewed from a historical perspective.

Seveal obstacles still need to be navigated, however, and could worsen as we commence the New Year. One of the main concerns I have right now is around the faltering jobs market. Job growth stalled out this summer. After revisions, job growth averaged less than 30,000 positions monthly from June through August. The September ADP jobs report showed 32,000 jobs lost during the month. Investors did not receive the September BLS job reading due to the government shutdown.

Mass layoffs have largely been rare so far. However, it is clear that the hiring market is largely frozen. Recent college graduates have had an increasingly challenging time finding employment. Part of this is due to AI starting to impact entry level jobs in myriad professions. Given growing AI capabilities, one has to wonder what the ramifications of AI on the jobs markets in 2026 will be. I imagine most corporate managements are tasked to further integrate AI into their operational processes in the coming year to increase margins and increase efficiency. Reduction in force or retirement income funds could increasingly become part of the zeitgeist in 2026. Not exactly the elixir needed to boost consumer confidence or spending.

Then we have the increasingly dire state of the U.S. residential real estate market, the biggest asset class in the world. Home prices should fall in 2026 as mortgage rates remain over 6%, despite a one percentage point cut to the Fed Funds rate since September of 2024. Home affordability levels remain near historical lows and rents are starting to fall on average overall in the country. In Miami, average rents recently fell nearly 7% year-over-year.

Quantitative easing and mortgage rates under 3% for the first time in American history, ignited a massive housing boom following the pandemic. That bubble is now starting to pop in many metro regions in the country, particularly in the Sun Belt, which saw a massive surge of intrastate migration in the immediate aftermath of the pandemic.

Several cities like Austin, Texas have already seen average home prices fall more than 20% since their peaks. Many others like Phoenix, Las Vegas, Tampa, Dallas and Nashville will likely see the same scenario play out in the quarters and years ahead. And the combination of worsening job prospects and falling home prices should be toxic for consumer sentiment, which already is in the dumps from a historical basis.

So, while the AI narrative continues to power the markets higher right now, looking out into 2026, I have substantial doubts this will continue into the New Year.

At the time of publication, Jensen had no position in any security mentioned.