Introduction to the Stock Market in 2026
The third year of Wall Street’s bull market rally proved what a wealth-creating machine the stock market can be. When the closing bell rang on Dec. 31, the iconic Dow Jones Industrial Average, benchmark S&P 500, and growth stock-inspired Nasdaq Composite had rallied by 13%, 16%, and 20%, respectively. The evolution of artificial intelligence (AI), the advent of quantum computing, and the expectation that interest rates will be further reduced fanned the flames of optimism for investors.
Key Points to Consider
- Although the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite soared in 2025, the stock market may be on shaky ground in the new year.
- President Donald Trump and Fed Chair Jerome Powell have publicly disagreed about interest rates over the last year.
- However, the nation’s central bank has made dubious history in each of the last two Federal Open Market Committee (FOMC) meetings.
- The stock market may not be as ideally positioned as its leading indexes would indicate, with one serious problem currently standing head and shoulders above the rest — the Federal Reserve.
The Federal Reserve: A Risk Factor for the Stock Market
The job of the nation’s central bank is relatively straightforward: maximize employment and stabilize prices. The FOMC attempts to achieve these goals by adjusting the federal funds rate, which is the overnight lending rate that financial institutions charge each other. While the Fed doesn’t directly adjust interest rates, making changes to the federal funds target rate leads to economic ripple effects that increase or decrease borrowing rates.
Fed Chair Jerome Powell and President Donald Trump’s Disagreement
Fed Chair Jerome Powell speaking with President Trump. Image source: Official White House Photo by Daniel Torok. Wall Street and investors woke up on Monday, Jan. 12, to the unprecedented news that the U.S. Justice Department had opened a criminal investigation into Federal Reserve Chair Jerome Powell concerning his June testimony to Congress covering the $2.5 billion renovation of the central bank’s Washington, D.C., headquarters. The investigation focuses on whether Powell told the truth about this pricey renovation project.
A Historically Divided Fed
Looking back more than three decades, all 12 members of the FOMC, including the Fed chair, are usually in unanimous agreement as to the monetary policy path that should be taken. Even if the path taken hasn’t always been the right one, the individuals perceived to understand the U.S. economy best being in agreement has been a foundational aspect for Wall Street. However, each of the previous four FOMC meetings has featured at least one dissenting opinion. Meanwhile, the last two FOMC meetings have had dissenting opinions in opposite directions! In other words, at least one member favored no rate cut — the FOMC reduced the fed funds target rate by 25 basis points in each of the last three meetings — while another favored a 50-basis-point reduction.
Implications of a Divided Fed
A historically divided Fed is a considerably bigger worry for the stock market. The lack of cohesion from the FOMC runs the risk of undermining the stability that the Federal Reserve is perceived to bring to Wall Street. Additionally, Powell’s term as Fed Chair is set to end in four months, which may further complicate a historically fractured Fed. Despite all the chatter on Wall Street about the possibility of the AI bubble bursting, the stock market’s biggest risk factor in 2026 is broader investor recognition that the Fed is divided — and there’s no easy remedy.
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Conclusion
In conclusion, the stock market may not be as ideally positioned as its leading indexes would indicate, with the Federal Reserve being a significant risk factor. The disagreement between President Donald Trump and Fed Chair Jerome Powell, as well as the historically divided Fed, may undermine the stability of the stock market. Investors should consider these factors before making any investment decisions, and it may be wise to explore other options, such as the 10 best stocks identified by the Motley Fool Stock Advisor analyst team.
