MW History shows investors are right to worry about 2026 being a bad year for U.S. stocks

By Christine Idzelis

Three factors have been largely responsible for driving previous large calendar-year declines in the S&P 500, according to DataTrek

The S&P 500 is on track for its worst month since March 2025.

As investors face down tremendous uncertainty surrounding the outcome of the conflict in Iran, one Wall Street analyst decided to take a look at the factors that have driven previous bad years for the U.S. stock market.

He found that all three of the major culprits are present in 2026 - so investors are right to be worried about the market right now.

"Bad years for the S&P 500 are due to very specific factors, not just bad luck or arbitrary changes in investor sentiment," said Nicholas Colas, co-founder of DataTrek, in commentary shared with MarketWatch on Tuesday.

Colas focused his analysis on years where the S&P 500 SPX lost at least 10% on a total-return basis, which factors in earnings from reinvested dividends. He found 12 years that met this criteria going back to 1928.

During those years, recession, military conflict and unexpected shifts in the Federal Reserve's monetary policy were largely responsible for the pain in the market, Colas said. Recession was the most frequent culprit, responsible for driving losses of 10% or greater in eight of the 12 examples.

DATATREK RESEARCH

"Equity markets are rightfully skittish just now, because all three factors are in play," said Colas.

Colas pointed to the jump in crude-oil prices (CL00) (BRN00) amid fighting in the Middle East that has no clear end in sight, warning that "higher oil prices could cause a recession." Elevated oil prices also raise worries about inflation, putting the Fed in a more difficult position. "The longer this continues, the more likely it is that the Fed may have to raise rates, and it is unclear by how much," said Colas.

Recessions "can hit hard," Colas added, citing an average loss of around 25% in the "bad years" for the S&P 500.

"Equity valuations are the most notable difference when it comes to explaining why some recessions have hit U.S. stocks harder than others," he said. "If stocks are statistically 'cheap,' a recession is less likely to cause them to decline" by more than 10%, Colas found.

Even though valuations have come down over the past few months, stocks are still looking expensive these days, he said, and that could easily become a problem. The S&P 500's Shiller price-to-earnings ratio, which compares the price of the index with companies' inflation-adjusted earnings over the course of a 10-year cycle, currently stands at 37.5, Colas noted. By comparison, at the start of years when the S&P 500 saw major double-digit declines due to a recession, the average Shiller P/E ratio stood at 21.3.

The U.S. stock market has struggled in March, falling in the wake of U.S. and Israel airstrikes on Iran at the end of February. The S&P 500 has dropped 4.3% so far this month - on track for its biggest monthly loss since March 2025, according to FactSet data, at last check. The index is also on track for a quarterly decline, which would be its first since the first quarter of 2025. As of midday trading Tuesday, the index was down 3.8% year to date.

Despite all of this, Colas has a more optimistic outlook for the U.S. market this year. "There is still time to avoid a double-digit loss in 2026, but the clock is ticking," he said.

But the outcome could hinge on a swift de-escalation of Mideast tensions, leading to a drop in crude-oil prices. "We remain bullish because we expect these to occur," he added.

For investors who disagree, or "simply want to hedge an adverse outcome," only gold (GC00) has a strong track record of weathering further stress in U.S. stocks, according to Colas. However, the yellow metal has been hit pretty hard since the start of the Iran conflict, recently falling into bear-market territory - defined as a drop of 20% or more from a recent high.

The U.S. stock market was trading mixed on Tuesday afternoon, with the S&P 500 flat, the Dow Jones Industrial Average DJIA gaining 0.2% and the technology-heavy Nasdaq Composite COMP falling 0.5%, according to FactSet data, at last check.

-Christine Idzelis

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 24, 2026 12:53 ET (16:53 GMT)

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