Market Volatility in 2026: A Historical Lens on the Current Rebound

Markets are in a textbook post-pullback mood. After a volatile week that saw major U.S. indexes reverse a two-day losing streak on Thursday, futures pointed to another winning day Friday. Yet the broader weekly picture remains negative, with the S&P 500, Nasdaq, and Dow all on track to close lower. This is the classic pattern: a sharp relief rally that fails to reclaim the week's losses.

The spark was clear. Strong earnings from key AI chipmaker Taiwan Semiconductor Manufacturing (TSMC) eased fears that the AI investment boom was fading. The rally in chip and AI stocks that followed provided a broad-based lift. At the same time, a cooling of geopolitical tensions provided a second, crucial catalyst. President Donald Trump downplaying the chances of military action in Iran removed a major risk premium that had been weighing on sentiment and oil prices.

Viewed through a historical lens, this setup is familiar. When a major risk-whether a geopolitical flashpoint or a sector-specific earnings scare-is temporarily abated, markets often stage a quick, technical rebound. The move Thursday was a classic example of that dynamic. Yet the underlying forces that drove volatility in 2025 remain the primary story for 2026. The AI investment cycle and the persistent uncertainty around policy direction are the real drivers that will determine whether this rebound holds or proves fleeting.

Historical Analogies: Patterns from 2025 and the Presidential Cycle

This week's volatility and rebound fit a familiar script. The sharp selloff in the spring of 2025, which saw the S&P 500 drop more than 22% from its mid-February peak to an April low, was followed by an even more powerful rally. The index then surged nearly 39 percent on a total-return basis from that low through year-end. The current move, sparked by a single earnings report and a geopolitical de-escalation, echoes that pattern of a violent pullback followed by a relief-driven snapback. More broadly, this fits the historical rhythm of the U.S. presidential cycle. The second year is typically the most volatile, often followed by a phase of strong returns. With mid-term elections approaching in November, we are now in that high-turbulence window. The market's behavior this week-reacting sharply to a risk-off event and then just as quickly reversing on a perceived resolution-aligns with that established volatility pattern.

The resolution of volatility spikes by easing geopolitical or policy risks is another common feature. In 2025, the market's rally was powered by a series of tariff truces and trade deals that removed a major overhang. Similarly, the recent downplaying of Middle East military action by the White House removed a major risk premium that had been weighing on sentiment and oil prices. In both cases, the market's relief was immediate and broad-based, showing how quickly sentiment can shift when a specific fear is abated.

Forward Scenarios: What to Watch in the Post-Pullback Phase

The rebound this week is a classic technical bounce, but its sustainability hinges on a few key variables. The primary risk is a resurgence of the policy uncertainty that dominated 2025. Tariffs and government budget cutbacks were persistent headwinds that tested market resilience, and any renewed talk of trade friction could quickly reignite volatility. The market's swift relief on geopolitical news shows how sensitive it remains to these external shocks.

A more positive signal to watch is the strength of the investment banking pipeline. After a record $100 billion in global investment banking revenues in 2025, the pipeline remains active. Executives at major banks report accelerating deal flow in M&A and IPOs, with high-profile names like OpenAI and SpaceX on the horizon. This sustained deal activity is a proxy for corporate confidence and market liquidity. If the pipeline holds, it suggests underlying economic momentum can support valuations even if sentiment wobbles.

The next major volatility event is likely to be triggered by a sharp divergence between corporate earnings growth and the elevated valuations built up during the AI rally. The market has priced in a powerful AI investment cycle, but that optimism is fragile. Any stumble in the promised productivity gains or a slowdown in capital expenditure could force a painful reassessment. Historical patterns show volatility spikes often follow periods of complacency, where asset prices rise faster than fundamentals. The current setup-a relief rally on temporary news, with a strong deal pipeline but persistent policy risks-creates the conditions for such a divergence to become the next trigger.