Why the stock market could easily get spooked

Nothing lasts forever in markets, especially feel-good vibes.

And if the market rally to kick off 2026 is to be tested this month, it’s likely to come from stocks being priced for perfection … and perfection not happening.

“The market is richly valued trading at a high multiple that presents a major risk if lofty earnings expectations fail to be delivered,” Sevens Report Research founder Tom Essaye said.

To Essaye’s point, the forward price-to-earnings ratio (PE) for the S&P 500 (^GSPC) is 22 times — well above the 10-year average of 18.7 times. Stocks are almost as richly valued as when they hit a peak in early January 2022. What followed was the start of a nine-month bear market — the benchmark index plunged about 19%.

Wall Street is pricing in a big year for corporate earnings on a view that mostly everything — from the economy to AI productivity to geopolitics — goes great.

S&P 500 earnings are estimated to increase by double-digit percentages in each quarter of 2026, according to FactSet data. Earnings growth is expected to be the strongest in the fourth quarter at 18.1%. For the year, earnings are being modeled to grow 15%.

Meanwhile, the bottom-up strategist price target on the S&P 500 is a lofty 8,010 — up about 18% from current levels.

So, what could spook the markets?

Pick your poison.

The jobs report for December showed a mere 50,000 jobs created, below consensus estimates for 70,000. A stretch of more reports like this could undercut the optimism on corporate earnings in the first half of 2026.

There is also no guarantee that the Fed cuts interest rates several times in the front part of the year as consensus expects, SlateStone Wealth chief markets strategist Kenny Polcari told me. That would be due in part to inflation cooling down, and it’s hard to justify more rate cuts with the stock market at a record.

There remains a good deal of uncertainty around the Trump administration’s tariffs, as the Supreme Court could rule as soon as today on their legality.

Arguments in November hinted that the high court was skeptical the president had the authority to impose the tariffs under a 1977 law that offers special powers in emergency situations.

“If the Supreme Court rules that some or all of the IEEPA tariffs are illegal, we expect the Trump administration to implement additional sectoral tariffs, which could offset some or all of the IEEPA tariffs,” the KeyBanc team explained.

Read more: Find out how the Supreme Court ruled on Trump’s tariffs

Meanwhile, geopolitical risks have been brought back into the equation following the Trump administration’s seizure of Venezuelan President Nicolás Maduro.

Investors have ignored said risks so far this year.

The S&P 500 is near a record. The Nasdaq Composite (^IXIC) is near a record. The Dow Jones Industrial Average (^DJI) is knocking on the door of breaking through 50,000 for the first time. The rally has broadened into areas beyond the often-favored “Magnificent Seven” names like Nvidia (NVDA).

But be on alert for a pickup in volatility and a test of the market rally soon, pros tell me.

“It is pretty remarkable if you look at the overall economy and just how resilient it has been. There are cracks beneath the surface. You see this in companies that reported last quarter. There’s a bifurcation in the consumer. I think that’s something to watch quite a bit,” Apollo Global Management co-head of equity David Sambur said in a new episode of Yahoo Finance’s Opening Bid Unfiltered podcast (listen in above). (Disclosure: Yahoo Finance is owned by Apollo Global Management.)

Sambur added, “Whatever moves the markets the most is gonna be something that we’re not talking about. It always is.”

Brian Sozzi is Yahoo Finance’s Executive Editor and a member of Yahoo Finance’s editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.

Click here for in-depth analysis of the latest stock market news and events moving stock prices

Read the latest financial and business news from Yahoo Finance