Equity market sell-offs severe enough to force changes in U.S. policy may be less pronounced in 2026, as the Trump administration turns its focus to the pivotal midterm elections in November, according to analysts at BCA Research.
In a note to clients, the team led by Matt Gertken noted that a 20% bear-market drop in the benchmark S&P 500 last year — combined with rising bond yields and a weakening dollar — was sufficient to prompt President Donald Trump to step back from his broad “Liberation Day” tariff plans.
However, as Trump seeks to shore up support for the Republican Party ahead of the midterms, the analysts argued that “[t]he political pain point is lower this year.”
As a result, they said, the “biggest tail risks” — rare but potentially severe shocks — facing equity markets may originate elsewhere.
One potential “black swan,” according to BCA, could be a global oil supply shock triggered by a combination of economic strain and a succession crisis in Iran. The country has already seen deadly crackdowns on protests earlier this year, with Trump initially floating — and later dialing back — the possibility of a U.S. response. The unrest has raised questions over the stability of Iranian crude exports, given the country’s role as a major oil producer.
The analysts warned that a significant loss of Iranian output could effectively eliminate around 4 million barrels per day of spare capacity from Russia and the OPEC producer group, driving oil prices higher, at least during the first half of the year.
Another potential shock could stem from China achieving a major technological breakthrough, particularly in artificial intelligence. BCA pointed to the market turbulence seen in early 2025 after the launch of a low-cost AI model by Chinese startup DeepSeek, which briefly caused investors “to question whether Western companies remained indispensable” and whether elevated valuations were sustainable.
“This episode could happen again,” the analysts cautioned.
They added that if China were to become independent of foreign suppliers in areas such as semiconductors, lithography equipment or chipmaking chemicals, the consequences could extend beyond markets into geopolitics. Advances that render China “self-sufficient” could lead Beijing to conclude it no longer needs to maintain “good relations with its neighbors for economic development.”
Any large-scale military action by China against Taiwan, a long-standing flashpoint, could disrupt global electronics supply chains and affect roughly one-fifth of U.S. economic output, the analysts estimated.
Elsewhere, a Russian move to seize territory from a NATO member could force the United States to “snap back” into defending its allies. At the same time, the analysts warned that the U.S. could choose to abandon NATO altogether, and “not just flirt with the idea.”
Against this backdrop, BCA Research recommends investors remain overweight U.S. equities and emerging-market stocks excluding China “until some hurdles are cleared.”
They also advised investors to “wait for signs that China will stimulate its economy before further diversifying away from the United States.”