Stock Markets in 2026: Fed Rate Cuts or Bust?

Macro Money - Year End Review & 2026 Outlook

Key Concepts:

• ISM PMIs: Institute for Supply Management Purchasing Managers' Index – indicators of economic activity, with 50 representing neutral, above indicating expansion, and below indicating contraction.
• Non-Farm Payrolls (NFP): A measure of the net change in the number of jobs added or lost in the US economy, excluding farm employment.
• CPI: Consumer Price Index – a measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Basis Points (bps): A unit of measurement used in finance to describe the percentage change in an interest rate or yield (1 bps = 0.01%).
• Trade Policy Uncertainty Index: A metric developed by Federal Reserve economists to gauge uncertainty surrounding trade policy based on news reporting and mentions of the trade environment.
• Dovish/Hawkish: Terms used to describe central bank stances. Dovish implies a willingness to lower interest rates to stimulate the economy, while hawkish suggests a preference for raising rates to control inflation.
• Put Vertical: An options strategy involving buying a put option and selling another put option with a higher strike price, limiting potential profit but also limiting potential loss.

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I. Market Performance – 2025 Close & Initial 2026 Outlook

The year 2025 concluded with a mixed performance. Gold and broadly metals experienced a sharp selloff, down 4.8%, while stocks saw a modest decline (S&P down 1.2%, NASDAQ down 1.6%). Bond yields remained relatively stable over the past two weeks (10-year up 0.8%, 2-year down 0.2%). Crude oil, the dollar, and Bitcoin exhibited oscillating behavior. The lack of a significant “Santa Claus rally” suggests a potentially subdued start to January, though this is not definitive.

II. Gold Selloff & Margin Increases

A key event of the week was the 4.8% decline in gold prices, attributed to increased margin requirements from the CME (Chicago Mercantile Exchange). This increase, likely prompted by “jumpy markets,” aimed to buffer capital positions and potentially squeeze out speculative traders. The CME’s action was a response to activity in the spot market (over-the-counter instruments) which isn’t subject to the same regulations as futures trading. Ian Spivac notes the potential for “funny business” in thin liquidity conditions over the holiday period. The initial selloff was triggered by the first CME margin rise last Friday.

III. Upcoming Economic Data – A Critical Week

The first week of January will be heavily influenced by a significant release of US economic data, now available due to the resolution of the government shutdown. Key reports include:

• ISM PMIs: Expectations point to a cooling service sector and continued contraction in manufacturing. A composite index estimate suggests a slowdown to 50.8 (down from 51.3 in November), still indicating growth, albeit the weakest in three months. Manufacturing is estimated to account for 30% of the economy, with services representing 70%.
• Non-Farm Payrolls: Forecasts predict a modest increase of 12,000 jobs, with the unemployment rate rising to 4.7%. Applying Jerome Powell’s stated adjustment of approximately 40,000 to the headline number suggests potential job losses.
• Consumer Confidence Report: Sentiment is expected to remain relatively unchanged, failing to recover despite five months of cooling inflation expectations – a departure from historical patterns where consumer sentiment closely tracked inflation.

IV. Fed Policy & Market Expectations – A Divergence

The Federal Reserve’s latest projections (December’s Summary of Economic Projections) indicate expectations for one rate cut in 2026 and another in 2027. However, market expectations are more aggressive, anticipating 56 basis points of cuts in 2026 and minimal cuts in 2027 – effectively doubling the Fed’s outlook for the next year. This discrepancy is crucial, as market expectations have largely anchored around the outlook for interest rates since mid-year.

V. The Stalled S&P 500 & Policy Conviction

The S&P 500 has stalled since October, when the Fed signaled it wasn’t on “autopilot” with its monetary policy. The index has struggled to break through resistance levels, suggesting a lack of conviction in risk sentiment unless there’s a significant shift in policy expectations. The relationship between dovishness (expectations of rate cuts) and stock performance has been strong, but has stalled recently.

VI. Economic Resilience & Underlying Weakness

Despite soggy consumer confidence, the Q3 GDP report showed a rebound in consumption (approximately 68% of GDP). However, preliminary data from S&P Global PMIs indicates a slowdown in US economic activity entering Q4. Employment figures are also showing signs of weakness, with the pace of hiring declining since the pandemic-era labor shortages. This creates a scenario of a relatively solid economy with underlying labor market softness and cooling inflation – a situation seemingly supportive of the Fed’s current approach.

VII. Inflation Dynamics & the Tariff Impact

Service sector inflation is cooling, as expected, while goods inflation has plateaued. The Fed believes that the impact of tariffs is transitory and will eventually subside in year-on-year calculations (around April). CPI data supports this view, with the Fed’s assumptions largely holding true.

VIII. Market Positioning & Uncertainty – The Trade Policy Factor

Market expectations currently price in a less than 15% probability of a rate hike in January, with the first cut anticipated in April. However, a key driver of market behavior is uncertainty, particularly surrounding trade policy. The Trade Policy Uncertainty Index, constructed by Fed economists, has become highly volatile, mirroring the tariff scare earlier in the year. This uncertainty has contributed to a 13.3% year-on-year decline in global trading volumes – a larger drop than during the COVID-19 pandemic.

IX. Tech Sector Dominance & Supply Chain Vulnerability

The tech sector has significantly outperformed other S&P 500 components, driven by the AI narrative. However, the AI supply chain is globally distributed and vulnerable to disruptions due to trade policy uncertainty. Any rupture in the supply chain could hinder AI development and potentially trigger a market correction.

X. Portfolio Positioning & Conclusion

Ian Spivac’s current portfolio positioning remains largely unchanged: long gold, short the US dollar against the pound, euro, and Canadian dollar, short risk (through put verticals) against Bitcoin, Russell, NASDAQ, and the S&P, long Brazilian stocks, and long MSOS (marijuana stocks) with January 2027 expirations.

Conclusion:

The economic data expected next week is largely anticipated and unlikely to fundamentally alter the baseline outlook. The markets desire more aggressive easing than the Fed currently intends, and a lack of such easing could lead to disappointment and a potential pullback. The overarching theme remains one of uncertainty, particularly regarding trade policy, which is impacting global trading volumes and creating vulnerabilities in the AI supply chain. The Fed appears well-supported in its current approach, with data largely confirming its assumptions. The key question is whether the markets will accept the Fed’s cautious approach or demand more immediate action, potentially leading to increased volatility in 2026.