Benchmark indices on Wall Street fell for the third day on Tuesday in a narrow, rangebound session, and the same is likely to continue for the rest of the week as well, albeit any directional trigger.
Despite this, the US markets are set to end yet another year of strong returns, marking a sharp recovery from the Donald Trump tariff tantrums back in April.
The Dow Jones is set to end the year with gains of 15%, the S&P 500 with 18%, while the Nasdaq has outperformed its peers led by the AI boom, gaining 22% this year. From the April lows, the tech-heavy index is up 60%.
Analysts on Wall Street have termed this as a “three-peat”, meaning three straight years of strong, double-digit returns. A “four-peat”, meaning a fourth straight year of similar returns is rare, with the last instance dating back to the 1995-1999 period. Analyst targets for the S&P 500 range from as low as 7,000 to as high as 8,100.
However, there are multiple factors at play that will determine where the global markets will move in the new year. From Geopolitics to the Fed, and who can forget AI. Here’s a look at all of these:
The AI Trade
AI-linked stocks have been the key catalyst behind the recovery on Wall Street this year. Stocks like Nvidia, Alphabet, have added trillions to their market cap this year.
However, questions are now being raised on whether these stocks have priced in way too much optimism. Monetisation of the billions and trillions in spending promised by these companies is now becoming a talking point.
Quarterly results through the year, and a potential timeline of the monetization of this AI-capex will be a key market determinant going into the new year.
Geopolitics
The markets have overcome every geopolitical hurdle this year to emerge stronger and higher, be it the war in the Middle-East, in South Asia, or the Israel-Hamas war. Whether the geopolitical tensions emerge as a buying opportunity or not, the subject will remain a key market factor in 2026 as well.
The Russia-Ukraine war will enter its fourth year in February, with no end in sight. Conflicts between the US and Venezuela are rising. China is carrying out multiple drills near Taiwan after the latter’s multi-billion-dollar arms deal with the US. There is uneasy peace between Israel & Hamas and Israel & Iran, with US President Donald Trump already issuing warnings to both Hamas and Iran.
Any further tensions in the Middle East, or the South China Sea, could put the markets at risk again.
A New Fed Chair
The markets will also greet a new Fed Chair in the new year after Jerome Powell’s term ends in May.
Kevin Warsh, Kevin Hassett, Christopher Waller are among frontrunners and President Trump may make that announcement at the start of the year.
Markets are confident that the new Fed Chair, regardless of the name, will be more dovish than his predecessor. Therefore, they are still pricing in two rate cuts for 2026, despite the dot plot suggesting room for only one.
The most recent Fed minutes also showed officials indicating a pause after the most recent rate cut.
Tariffs & Trade
It was tariffs that roiled global markets in April and the flip-flop since then has only led to the markets discounting any remarks in this regard by the US President in the future.
Markets still await two important trade deals, one between India and the US, and the other between India and China.
Any potential tariffs on Semiconductors, Precious Metals, or Pharmaceuticals, will be watched for as well.
The US Supreme Court’s decision on Trump tariffs will also be keenly awaited.
US Midterm Polls
By the end of 2026, the US will also head into midterm elections, which analysts cite as a Wall of Worry for the markets.
Inflation remains a key talking point, as it remains above the Fed’s 2% target, despite Trump claiming otherwise.
The President has also promised citizens a dividend payout from the Tariff proceeds, and analysts worry that this may also be a reason for inflation to remain persistently higher, thereby leading to fewer rate reductions.
Beyond Equities
Beyond the equity markets, there are multiple questions, Whether the Gold and Silver price rally continue? How will oil prices fare considering the market is bracing for a supply glut in 2026? Can Bitcoin reverse its fortunes? Will the US Dollar continue to remain weak in the new year as well?
The answer to all of these questions could also prove to be a decisive factor for the global markets going into the new year.
