Markets Update December 2025 - US monetary policy in 2026: Between market support and leadership risk

In the meantime, market participants had doubts about this move – but ultimately, the US Federal Reserve (Fed) lowered its key interest rate once again at its meeting in December, thereby avoiding potential turbulence at the end of the year. However, the decision-making body, the 12-member Federal Open Market Committee (FOMC), was more divided than it had been for years: three members voted against the majority decision – and did not even agree among themselves. Two members voted against an interest rate cut, and another representative, Trump confidant Stephen Miran, even advocated an even greater interest rate cut. The committee's projections for 2026 are just as inconsistent, ranging from an interest rate hike to six key interest rate cuts. Monetary policy debates at the Fed are likely to be heated in 2026.

Fundamentally, the monetary policy environment heading into 2026 is market-friendly – especially compared to the beginning of this year. After three interest rate cuts in 2025, the key interest rate will be around 75 basis points lower than in January. In addition, balance sheet reduction was halted this month and a bond-buying program was even initiated. This is likely to continue in the coming quarters in order to counteract the increasing liquidity bottlenecks in the interbank market. Accordingly, the Fed's balance sheet dynamics in 2026 are likely to be significantly more positive than in the previous year. Instead of withdrawing liquidity from the system through balance sheet reduction, as in 2025, it will once again act as a net provider of liquidity in 2026 – which typically supports the financial markets.

A major source of uncertainty for 2026 remains the successor to Fed Chairman Jerome Powell. Currently, Trump's top economic advisor Kevin Hassett is considered the favorite. In terms of expertise, he is undoubtedly a suitable candidate for the post. However, his proximity to the US president increases the risk of politically motivated interest rate decisions. Hassett has repeatedly emphasized that, if appointed, he would strictly adhere to macroeconomic data and preserve the Fed's monetary policy independence. However, whether he would be able to consistently defend this independence against possible political pressure is likely to become a key issue for market participants if he is appointed.

Corporate profits in 2026: clearly on track for growth

Another important factor for the markets is corporate earnings growth. This is currently robust: according to corporate outlooks and analyst estimates, earnings are likely to continue to grow significantly in 2026. Earnings momentum is also expected to broaden over the course of the year, after recently being strongly influenced by artificial intelligence. The negative impact of tariffs will steadily diminish compared to 2025, so more sectors are likely to contribute to earnings growth.

Despite this positive earnings outlook, double-digit stock market returns are not the base case scenario for 2026. Given already high valuations, professional investors should not expect further expansion. Conversely, with valuation levels remaining largely constant, earnings growth remains the key driver of share prices. And this points to high single-digit to low double-digit return expectations for global equities.