Interest-rate cuts from the Federal Reserve and optimism over artificial intelligence have helped the stock market higher this year. A divided and changing Fed may complicate 2026.
Tuesday’s release of minutes from the Fed’s December
policy meeting showed a split central bank, with three officials disagreeing with the decision to cut rates for the third time this year, the most significant dissent since 2019.
While the minutes also showed
support for lowering borrowing costs more in 2026, traders see the odds of a rate cut in the first quarter as a coin toss.
Sentiment at the Fed seems as mixed as the economy, which shows signs of both surprising
strength—though growth comes with inflation risks—and weakness, such as a cooling labor market.
Complicating matters is the end of Fed Chairman Jerome Powell’s term in May and the likelihood that President Donald Trump will nominate an acquiescent successor. Trump is worried about the cost of living but also wants lower interest rates, which are inflationary.
The Dow Jones Industrial Average is ending its best year ever on a points basis and the S&P 500 has seen a third year of around 20% gains. A repeat performance in 2026 is likely to need more rate cuts, but only if it doesn’t come with
“stagflation,” a tough-to-navigate market environment where growth falters but inflation runs hot.
Uncertainty over rates also threatens that other pillar of the market: AI hype, which has fueled outsize gains for tech stocks. Fears of an AI bubble are guaranteed to linger. A bubble looks unlikely to burst while the Fed is cutting rates, but the outlook and pace of change for borrowing costs remains key for tech giants that have taken on piles of debt to fund AI sprees.
From trade policy that rocked the global economy to relentless AI surprises, this year more than many taught investors to expect the unexpected. But next year a divided Fed is something to bank on, and it could define the S&P 500 in 2026.
—Jack Denton
***The Barron’s Daily will
take a break for the holiday and next publish on Friday, Jan. 2, 2026.
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Fed Officials Signal Potential for More Cuts, Minutes Show
Federal Reserve officials were more divided over December’s interest-rate
cut than the vote count from the latest meeting of the central bank’s policymaking arm suggested, meeting minutes released Tuesday showed. Several policymakers were close to supporting a pause, while three other policymakers dissented from the decision to cut rates.
- Minutes show that although most Fed officials supported lowering the federal-funds rate for the third straight meeting to a range of 3.50% to 3.75%, a few said that the decision was “finely balanced or that they could have supported keeping the target rate unchanged.”
- The
19 policymakers’ median forecast in the December dot plot pointed to only one quarter-point cut in 2026. But seven officials projected no cut next year, four expected two quarter-point cuts, and several said it would likely be appropriate to “keep the target rate unchanged for some time.”
- Policymakers also adjusted their postmeeting statement to signal a higher bar for additional easing, saying they would “carefully assess incoming data, the evolving outlook, and the balance of risks” in considering the extent and timing of additional adjustments.
- Bad news in the December jobs report on Jan. 9 could push policymakers toward a fourth-straight rate cut at their January
meeting, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank, The Wall Street Journal reported.
What’s Next: Investors are still pricing in a pause at the Fed’s Jan. 27-28 meeting, assigning an 85% probability that rates remain unchanged—and roughly even odds of another pause in March, according to the CME FedWatch Tool.
—Nicole Goodkind and Janet
H. Cho
October Home Prices Increased, But 2026 Sales Still Projected to Rise
Home prices rose more quickly than expected in
October, according to S&P Cotality Case-Shiller data released Tuesday that looked at prices in the 20 of the largest U.S. metropolitan areas. Forecasters expect sales to pick up in 2026, but don’t agree on the route.
- October home prices rose 1.3% in the nation’s largest metro areas, slower than the 1.4% increase in September, but higher than consensus estimates for a 1% increase, according to FactSet. Home prices nationally increased 1.4% in October, greater than September’s 1.3% increase.
- Prices increased the most in Chicago, up 5.8% from 2024, and fell the most in Tampa, Fla., dropping 4.2%. Case-Shiller’s measure lags behind others, but is favored because its methodology is designed to minimize price distortions.
- Pending home sales, a leading measure of
future closed sales based on contract signings, rose 3.3% in November from October, and was 2.6% higher than one year ago. It was the best seasonally adjusted performance in about three years, National Association of Realtors’ chief economist Lawrence Yun said.
- Eighty-three economists, analysts, and other experts surveyed by Fannie Mae and Pulsenomics expect existing-home sales to rise to a median 4.2 million pace in 2026. That’s an improvement from 2023 and 2024, and 2025’s likely rate, but would still be below prepandemic totals.
What’s Next: The Mortgage Bankers Association is calling
for a 6.7% rise in existing-home sales as mortgage rates hover around recent levels and prices dip 0.3%. The National Association of Realtors, meanwhile, foresees a 14% gain in sales as prices rise 4% and expects mortgage rates to fall to around 6%.
—Shaina Mishkin and Janet H. Cho
Why Many Households Could See Higher Winter Heating Bills
