As we enter the year 2026, the outlook for the market seems to be more favorable than it has been since 2021. This may seem hard to believe, especially after the strong performance of global markets last year. However, it is important to remember that investors faced many uncertainties throughout 2025, which caused some worry. These uncertainties were mainly centered around policy changes and their potential effects on the market. Questions such as whether the creation of the Department of Government Efficiency would lead to a recession, if the US would engage in a trade war, and what the Federal Reserve's priorities would be in terms of inflation and market support, dominated headlines and kept investors on edge. Now, as we look ahead to 2026, we can see that many of these uncertainties have been resolved, and two powerful forces are working in favor of investors: policy clarity and Federal Reserve support. Let's take a closer look at how these factors may impact the market this year.
The Macro Reset: Policy Fog Has Lifted
It's no secret that investors dislike uncertainty more than they dislike bad news. Throughout 2025, they faced three major policy unknowns that caused hesitation and weighed on the market. However, now, they finally have some answers. One of the biggest concerns was the creation of the Department of Government Efficiency and the possibility of immediate spending cuts of $2 trillion. This sparked fears of a potential government-induced recession. However, as we now know, this did not come to fruition. The US did experience some hiring freezes and increased scrutiny on government spending, but the catastrophic demand shock that was feared never materialized. In fact, the Department of Government Efficiency quietly wound down in November of 2025, and concerns about a "slash and burn" approach to government spending are no longer a major market concern.
Another major uncertainty in 2025 was the looming expiration of the Tax Cuts and Jobs Act. This created a significant overhang at the beginning of the year, causing CFOs to freeze spending plans and slowing down M&A activity as it was difficult to accurately predict returns on investment without knowing the future of tax policy. However, in July of 2025, the "One Big Beautiful Bill Act" was enacted, setting tax rates for the next several years. This provided businesses with the visibility they needed to move forward with confidence and unlock their balance sheets.
The third major policy risk in 2025 was trade rhetoric, which seemed to escalate daily. Threats of 100% tariff rates and fears of an extreme universal tax that could lead to stagflation (a combination of high inflation and slow economic growth) caused significant concern among investors. This uncertainty even led to a brief bear market. However, now, investors have come to realize that any tariff-related inflation is manageable and not a major threat to margins.
The Fed Has Shown Its Cards: Support, Not Restraint
Aside from fiscal policy, one of the most critical factors for the market is the Federal Reserve. In 2026, the Fed appears to be shifting from fighting inflation to protecting the expansion, which could be a powerful backer for the market. For the first time since 2021, the Fed is using both of its primary tools to support asset prices. This includes lowering short-term interest rates and ending quantitative tightening in December of 2025.
The impact of the Fed on market performance cannot be overstated. When the Fed started to sound hawkish (meaning they were leaning towards raising interest rates) in late October of 2025, the Range investment team took notice and became more cautious. This resulted in a struggling market for several weeks. However, after a noticeable dovish pivot (meaning they were leaning towards lowering interest rates) in Fed-speak in late November, the market resumed its upward trajectory.
The Outlook for 2026 - A 'Risk On' Backdrop
With more clarity comes more confidence. 2026 may finally be the year when the tangible benefits of a more pro-business policy mix start to show up in data and support a broader range of stocks. The "animal spirits" that many expected to emerge in 2025 may finally come to fruition, thanks to policy clarity and a Federal Reserve that is shifting from restraint to accommodation.
This could result in two positive dynamics for the market. First, we may see wider market participation, meaning that more companies may start to see growth in their earnings and feel more confident in investing. In 2025, it was mainly the big companies that drove index performance, while the average US company struggled to grow earnings and make significant investments due to uncertainty. However, with the fog of uncertainty lifting, we may see a shift towards domestic cyclicals, industrials, financials, and service businesses that are most sensitive to planning certainty.
Secondly, we may see a more supportive environment for valuations (the price of stocks). With the Fed ending quantitative tightening and providing a less restrictive liquidity backdrop, investors may start to apply a lower "hurdle rate" to future cash flows and demand less of a return to own equities. This does not necessarily guarantee higher P/E multiples (price-to-earnings ratio), but it does provide a floor for valuations, making it easier for stock prices to hold steady through normal growth or inflation noise.
Of course, it's important to keep in mind that policymakers do not have a blank check to remain accommodative. They must maintain credibility, and the bond market will continue to act as a "governor" on monetary and fiscal policy. If interest rates spike significantly, equity valuations may come under pressure. However, for now, it appears that both lawmakers and the Fed are focused on enabling, rather than curtailing, the economic expansion.
Disclosures:
This article contains forward-looking statements which reflect Range Advisory, LLC's current views, expectations, beliefs, and/or projections about future events or results. These statements involve risks and uncertainties - including, but not limited to, market conditions, regulatory changes, and economic conditions - which could cause actual results to differ materially from those expressed or implied by such statements. Range undertakes no obligation to update or revise any forward-looking statements to reflect new information, future events, or otherwise, except as required by law. Readers should not place undue reliance on these forward-looking statements, as they are for informational purposes only and do not constitute investment advice or a recommendation to buy, hold, or sell any security. Past performance is not indicative of future results. The views, opinions, and analyses expressed in this article are those of Range as of the date shown, and are provided for informational purposes only.
This story was produced by Range and reviewed and distributed by Stacker. RELATED CONTENT: How To Protect Your 401 As Trump Tariffs Spark Stock Market Crashes
