Prediction: This Is Where the S&P 500 Will Finish 2026

The S&P 500 (^GSPC +0.81%) is up over 14% this year, as it's on track for another above-average performance. Historically, its annual returns are typically around 10%. This would be the fourth consecutive year that it's outperformed its long-run average.

However, I think there will be some softness in the months ahead. By the end of the year, I predict it'll finish below 7,500. That would still be a near-10% gain from last year, when it finished at around 6,845. But I don't think that the conditions will remain this rosy for long. Here's why.

The remaining months of 2026 could add considerable adversity to the markets. There's the possibility that another rate hike will happen. And even if it doesn't, investors may price in the likelihood of another increase before the year is over. That's one factor that could weigh down the S&P 500.

There are also the upcoming midterm elections taking place in November. Odds are, the Democrats will win back control of at least the House or Senate. Historically, the losing party in the federal election does better in the midterms. If that happens and Democrats control at least one chamber of Congress, that would make it much more difficult for the president to pass bills, and thus create more uncertainty heading into 2027.

Lastly, I also don't believe the war in Iran will come to an end by the end of the year. That makes it likely that inflation will remain elevated and that expectations for rate hikes will remain high heading into the new year.

Combined, those factors could significantly weigh on the markets heading into the final months of the year, and could send the S&P 500 below 7,500, with the decline potentially extending into 2027 as well.

The stock market has been running hot for multiple years, and a pullback, potentially even an all-out crash, looks overdue. Many stocks could experience significant declines, but especially those that are priced at significant premiums could be vulnerable. This is why it can be a crucial time for investors to take a closer look at their portfolios and consider taking profits on high performers and shift money into safer investment options, including dividend stocks, value stocks, or simply tracking the market via index funds.

For investors to reduce their risk and exposure to a potential market downturn, it's crucial to consider stock valuations.