So far this year, the Dow (+15.24%), S&P 500 (+17.69%), and NASDAQ (+20.53%) have done quite well. In fact, annual stock returns have been above average since 2023. Will stocks continue to climb higher or is a correction looming?
Even though we’ve experienced a strong period for returns, things could change rapidly depending on a few factors. These include the Iran war, inflation, tariffs, government spending and debt, and the U.S. economy. Are stocks poised to decline? Here’s what you need to know about each.
Iran War
If the conflict continues or expands, the price of oil and gasoline could move higher. West Texas Intermediate (WTI) is above $96 a barrel and Brent Crude is over $100 a barrel. Gasoline has a strong relationship with the price of oil, and as such, would eventually move higher as well. Currently, the national average for regular gasoline is $4.23 a gallon, mid-grade is $4.81, and premium is $5.42. California has the highest average at $5.88 for regular, $6.11 for mid-grade, and $6.30 for premium. Indiana has the lowest average at $3.48, $4.07, and $4.60 respectively. If the Trump administration fails to negotiate a deal with Iran to open the Straight of Hormuz and allow for the free transport of oil, then higher prices are likely. Diesel fuel is quite a bit higher than gasoline. The national average for diesel is $5.94. California has the highest average at $7.87 per gallon. The high cost of diesel fuel will push inflation higher as it increases the cost of transporting goods in the U.S.
Inflation
The Federal Reserve has long touted its 2.0% inflation target. Currently, inflation is around 3.30%. However, the Fed is fighting a losing battle with inflation, not due to its own policies, but due to fiscal policy in Washington. You see, inflation is a function of demand versus supply. If demand outpaces supply, prices tend to rise and vice versa. Historically, the Fed has raised its short-term interest rate and reduced the money supply to slow demand. This is called demand destruction. However, fiscal policy has a great deal to do with the rate of inflation, and many times, politicians are not in sync with the Fed. As the federal government continues to spend excessively, demand is strengthened, and inflation will have difficulty moving lower. Politicians have a different value than the Fed. Politicians spend to remain in power while the Fed has no such agenda. Therefore, with the midterms fast approaching, the Trump administration will do everything it can to win in November, which includes increased spending to stimulate demand. The bottom line? Inflation is not excessively high but remains above the Fed’s target.
Tariffs
Tariff uncertainty is causing problems with U.S. corporate planning. It’s been said that as long as corporations know the rules they can plan accordingly. With tariffs in place one day, then absent another, corporations are caught in the uncertainty of it all.
Historically, tariffs do not cause inflation on a macro level but do raise the price of specific goods. Moreover, tariffs tend to slow economic growth rather than stimulate it. As the U.S. implements tariffs, other countries are reciprocating. U.S. tariff policy is also pushing our trading partners into the arms of other countries as they seek other trade opportunities.
National Debt
The national debt has surpassed $40 trillion. As the federal government continues to spend more than it collects, the deficit is added to the debt. Currently, the deficit is around $1.8 trillion. By 2030, the national debt is projected to be around $45 trillion. Treasury Secretary Bessent suggests we can grow our way out of the debt. In short, he says the U.S. can pay down the debt by growing the economy. Experts believe it will take significant spending cuts along with economic growth to pay down the debt.
U.S. Economy
Stock prices are closely related to corporate profits, and corporate profits are closely aligned with the U.S. economy. Therefore, if the economy is doing well, profits are good and stocks often trend higher. Though it’s not quite that simple, the state of the economy is an important indicator. Currently, the economy is strong with unemployment at 4.1%. GDP or the rate of economic expansion for the 12 months ending June 30, 2026, was 6.56%. Both numbers are good.
However, there are some signs of weakening. According to CNBC, the average rate for a 30-year mortgage rose to 6.79%, the highest rate this year. The average rate for the past 10 years is 4.96%. Housing starts have fallen by about 10% this year. Housing makes up about 17% of the U.S. economy and a slow down could cause GDP to decline. Retail sales are another key. In August, retail sales declined by about 0.80%, but are still up about 5% for the previous 12 months. Job growth is still strong as U.S. nonfarm payrolls rose by 162,000 in August. As always, there are mixed signals.
Will stocks continue to move higher? With the Trump administration at the helm and the midterms approaching, stocks could experience more strong returns as the government continues to spend. However, in the long run, all this spending could bring a day of reckoning. Even if the Fed hikes interest rates this year, will it be enough to offset the fiscal spending juggernaut in Washington? Clearly Congress didn’t get the message that one day, America will have to pay the piper for its excessive debt burden. In the meantime, I expect stocks will continue trending higher, but not without a correction here and there.
This article was written by Mike Patton from Forbes and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.