What 2026 has in store for oil prices, politics, and ETFs

Market Catalyst - December 29, 2025 Summary

Key Concepts: Santa Claus Rally, ETF Investment Themes, US-China Trade Relations & Tariffs, Fed Policy & Composition, Small Business Outlook, AI Impact on Economy & Labor Market, Commodity Outlook (Oil & Precious Metals), Leveraged ETFs.

Market Overview & Recent Performance

The US stock market is experiencing a down day, continuing a recent streak of negative performance as 2025 nears its end. The Dow is underwater, while the S&P 500 is down 1/3 of 1%. The 10-year Treasury yield is up one basis point to 4.14%, and the 30-year is flat at 4.81%. The US Dollar Index is up slightly (4/10 of 1%). All 11 large-cap sectors are down, led by Real Estate, Tech, Materials, and Communication Services. Utilities and Healthcare are the least affected. The NASDAQ 100 shows choppy movement, with Nvidia and Tesla showing slight gains. The Dow is also showing a bearish picture, with most stocks down less than 1%, except for Nike, which is up 1.98%. Bitcoin is down 2/3 of 1% over the last 24 hours, with Ethereum and Ripple also in the red. Year-to-date, the S&P 500 is up 17%, the Dow up 13%, and the Nasdaq up 20%.

1. Market Indicators & 2026 Outlook

The program highlighted the “Santa Claus Rally” – the final two trading days of the year (Friday and Monday). Positive performance on these days is considered a bullish indicator for the year ahead, while negative performance suggests a potentially negative year. Currently, the outlook is leaning bearish. Three indicators will be crucial in January to assess the year ahead.

2. Trade & Tariff Landscape in 2026

Henrietta Trades of Veta Partners discussed a potentially pivotal Supreme Court decision regarding the legality of existing tariffs (estimated at $3 trillion in impact). The Court could either uphold the President’s authority to maintain these tariffs or strike them down, forcing a re-litigation of trade policy similar to earlier in 2025.

• Impact of Tariff Removal: If tariffs are overturned, it could benefit both American consumers and corporations. Corporations initially limited price increases but saw shrinking margins; removal could lead to margin expansion or increased consumer spending.
• Political Implications: Removing tariffs could be a boon for the Republican party, as 67% of Americans disapprove of the current tariff policy, equating to an average $1,800 annual hit on households, disproportionately affecting lower and middle-income earners.
• Potential for Chaos: If the Supreme Court strikes down the tariffs, the administration may attempt to re-impose them through different mechanisms (AIPA, 232, 301 tariffs), potentially creating market confusion and volatility.

3. Government Shutdown Risk & Fed Policy

A potential government shutdown looms, but Henrietta Trades believes a shutdown is unlikely (25% probability). The focus will shift to expiring ACA subsidies, potentially increasing healthcare costs for many Americans. The composition of the Federal Reserve will also change, with a new Fed chair potentially being appointed in May. The market is reacting negatively to the possibility of Kevin Hassett being appointed. There is also concern about the President potentially attempting to remove Jay Powell before his term ends. Lisa Cook’s role is being closely watched in this context.

4. Small Business Outlook (KAmerica Small Business Pulse Index)

Bill Adams of KAmerica Bank discussed the survey results. A majority of small business owners are wary of the impact of tariffs in 2026 but remain optimistic overall. Tech and construction are leading optimism, while retail is more cautious. This suggests a potential “K-shaped” small business community, with some sectors thriving while others struggle.

• Tariff Impact: Tariffs are a significant problem for small businesses due to narrower profit margins and limited pricing power.
• Labor Market: The labor market has shown signs of weakness, potentially due to businesses prioritizing AI investment over hiring.
• Economic Growth: The Fed’s expected rate cuts in late 2025 are likely to fuel broader economic growth, benefiting sectors like housing and auto sales.

5. Commodity Outlook (Oil & Precious Metals)

Pavl Mulchanov of Raymond James discussed the commodity outlook. Oil is headed for its biggest annual drop since 2020 due to oversupply and sluggish global demand. Prices are unlikely to fall significantly below $55/barrel (the “threshold of pain” for the industry), but there’s little reason for a price increase. Peace talks between Russia and Ukraine could further pressure oil prices.

• Energy Sector Stocks: Despite lower oil prices, energy stocks may perform well due to capital discipline, dividends, and share buybacks.
• AI & Electric Grid: The biggest opportunity in the energy sector lies in the intersection of AI and the electric grid, driven by increasing electricity demand and the need for grid modernization.

6. ETF Investment Themes for 2026 (Anuka Ul, CFRA)

• Pharmaceuticals/Healthcare: Positive sentiment is returning to the pharmaceutical sector due to the resolution of tariff uncertainty and the potential for innovation. (e.g., PJP ETF)
• Buffer ETFs: These ETFs offer downside protection while capping upside potential, appealing to investors nearing or in retirement, especially given potential market volatility in a midterm election year.
• International Equities: International markets, particularly Korea and Southern Europe, have outperformed the US market in 2025, driven by semiconductor strength and financial/utility sector performance. (e.g., XUS ETF)
• Leveraged ETFs: While launches continue, investor outcomes haven't always matched expectations, and some consolidation may occur.

Notable Quotes:

• Henrietta Trades: "We're waiting very eagerly for this $3 trillion binary event. Is the Supreme Court going to let the president keep all these tariffs in place or is he going to say actually you don't have this authority?"
• Robert F. Smith: "Genai will enable enterprise software to eat services."
• Bill Adams: "Tariffs are going to be more of a pressure on their operating models and on their profitability than on larger businesses."

Synthesis/Conclusion:

The market faces a complex outlook for 2026, with potential headwinds from trade policy, government shutdowns, and a slowing global economy. However, opportunities exist in specific sectors like healthcare, international equities, and innovative technologies like AI. Investors should consider strategies that balance risk and reward, potentially incorporating downside protection and focusing on companies with strong fundamentals and capital discipline. The Supreme Court’s decision on tariffs and the evolving composition of the Federal Reserve will be key factors to watch.