Rare Streak Raises Questions: Can the Market Defy History in 2026?

The S&P 500 has delivered an extraordinary three-year winning streak, with annualized returns of 26%, 25%, and approximately 18% in 2023, 2024, and 2025 respectively. Yet as the market enters the fourth year of this rally, historical data from the Stocks, Bonds, Bills and Inflation (SBBI) dataset, cited by SimCorp's Melissa Brown, paints a sobering picture: only three times since 1926 has the market posted four consecutive years of returns exceeding 15%. The average return in the fourth year following a 20%+ three-year annualized return is a mere 3.9%—far below the long-term average of 11.8%.

Brown, managing director of investment decision research at SimCorp, suggests that 2026 is likely to see below-average returns, possibly in the single-digit range. The S&P 500 is up about 8% year-to-date as of late May, which aligns with her expectations. "I think that's probably what we would expect for the whole year," Brown told CNBC. "That doesn't necessarily mean a drawdown, but it does mean it would be extremely unusual to have a return of more than, say, 10% for the year."

A Potential Game-Changer: Iran Peace Deal

However, a major geopolitical development could alter this trajectory. President Donald Trump announced on May 23 that a peace deal with Iran is "largely negotiated" and will be announced shortly. The agreement would reopen the Strait of Hormuz, a critical chokepoint for global energy shipments, and could end a conflict that has pushed U.S. inflation to its highest level in years. The deal includes a memorandum of understanding as a first phase, with broader talks to follow within 30 to 60 days.

A resolution to the Iran conflict would likely reduce energy prices and ease inflationary pressures, potentially boosting consumer spending and corporate profits. Lower inflation could also give the Federal Reserve more room to cut interest rates, further supporting equity valuations. If the AI-driven rally continues alongside these macro tailwinds, the market might defy historical precedent.

AI Momentum: The Wild Card

Brown acknowledges that the AI boom could sustain the rally. "If stocks related to the artificial intelligence boom continue to drive the market higher, this year could follow suit," she said. However, she cautions that even if 2026 sees low-double-digit growth, the odds of another strong year diminish further. "Things just can't grow forever," she added. "We're clearly closer to the end of the rally than the beginning."

Investors face a critical juncture. While history warns of mean reversion, the confluence of a potential Iran deal and AI-driven earnings growth could create a unique environment. The next few months will reveal whether the market can break the mold or succumb to the weight of its own success.

Key Takeaways

1. Since 1926, only three instances of four consecutive years with >15% S&P 500 returns have occurred.
2. The average return in the fourth year after a 20%+ three-year streak is just 3.9%.
3. A potential US-Iran peace deal could reopen the Strait of Hormuz, lower inflation, and boost markets.
4. AI-related stocks remain a wild card that could extend the rally beyond historical norms.

Sources

Source 1: CNBC - Stock market returns are often subpar after a strong 3-year streak, history shows

Source 2: CNBC - US-Iran war talks