Wall Street Stages Cautious Bounce Amid Fed Angst: Markets Wrap
(Bloomberg) — Stocks and bonds bounced from session lows, but caution remained on Wall Street after the Trump administration escalated its attack on the Federal Reserve, raising concern about central bank independence.
While the S&P 500 erased its drop and hit a new record, unease over interference in monetary policy kept a lid on the market. Capital One Financial Corp., American Express Co. and JPMorgan Chase & Co. sank as President Donald Trump called on credit-card companies to cap rates at 10% for a year. Alphabet Inc.’s value rose to $4 trillion.
The Fed’s perceived independence from government whims is a bedrock assumption of markets, and any change to that perception could weigh on sentiment. While independence risks will likely be a key theme in 2026, Krishna Guha at Evercore says there are two ways to interpret US markets stabilizing.
“The first is this does not matter to markets,” he said. “The second is it matters a lot, but partly for this reason investors think this move is going nowhere and the administration will look for a de-escalation off ramp. We are firmly in the second camp.”
Investors have spent the past week shrugging off various Trump dramas and focusing on the economy, which has shown signs of growing health. Everything from improved productivity data, robust semiconductor demand, rising shipping rates and gains in industrial production and services output has emboldened market bulls.
The defining feature of this market is how little investors seem to care about an increasingly noisy backdrop including geopolitics, policy risk, and macro uncertainty, according to Mark Hackett at Nationwide.
“The bull market still has legs, and it’s entirely possible that we see further gains irrespective of what happens with internal and external policy, said Giuseppe Sette at Reflexivity.
The S&P 500 edged up to around 6,980. The KBW Bank Index lost almost 1%. Alphabet led gains in megacaps as Google confirmed a multiyear deal with Apple Inc. to power the iPhone maker’s artificial-intelligence technology.
The yield on 10-year Treasuries advanced two basis points to 4.19%. A dollar gauge slid 0.2%. Gold hit fresh highs.
“US equities were under pressure early, only to stabilize and inch higher as initial concerns that the pressure on Fed independence would weigh on risk assets faded,” said Ian Lyngen at BMO Capital Markets. “If nothing else, there appears to be dip-buying interest in both stocks and bonds at the moment.”
Earlier stock losses came after Jerome Powell said the central bank had been served grand jury subpoenas from the Justice Department threatening a criminal indictment. In a forceful written and video statement released Sunday, Powell said the action was related to his June congressional testimony on ongoing renovations of the Fed’s headquarters.
In an interview with NBC News on Sunday, Trump denied having any knowledge of the investigation into the central bank.
“While there has been minimal market reaction, the situation raises concerns about the potential erosion of the Federal Reserve’s institutional independence and market stability, prompting bipartisan reactions from lawmakers and economists alike,” said Jason Pride at Glenmede.
Importantly, as of now, no criminal charges have been filed, Pride noted, but the situation deserves ongoing monitoring given the risk it introduces to perceived Fed independence, long-term inflation expectations, and long-term rates.
“Whether the White House’s latest attempt to influence Fed policy succeeds or not is key to the medium- and long-term market implications,” said Thierry Wizman at Macquarie Group. “But if it does succeed, we foresee a weaker dollar, a steeper yield curve, higher long-term yields, and higher inflation breakevens as modal outcomes, all else equal.”
The strength of the evidence in favor of greater central bank autonomy lowering inflation has often been overstated, and even complete independence offers no guarantee of low inflation in future, according to Jennifer McKeown at Capital Economics.
“But sustained political intrusion into monetary policy would come at a cost, even if markets are willing to overlook it in the short term.”
The Trump administration’s latest attack on the Fed’s independence poses a threat to the US stock market, at least in the short term, according to JP Morgan Securities’ trading desk.
“While macro and corporate fundamentals support a tactically bullish stance the risk to Fed independence creates an overhang and thus we are cautious in the very near-term,” Andrew Tyler, head of global market intelligence, said. “The risk around Fed independence is likely to push the US toward near-term underperformance.”
“Are the subpoenas and threat of criminal prosecution simply a ploy to manipulate the Fed? I can’t say, but I can say that I hope not,” said Mark Malek at Siebert Financial. “The Fed must remain independent in order for the central bank to remain effective and – and this is important – or the integrity of the US dollar and the all-important Treasury markets to remain the world’s benchmarks.”
“After shrugging off last week’s geopolitical surprises, US markets face domestic political headlines as trading kicks off this week,” said Chris Larkin at E*Trade from Morgan Stanley. “Barring additional surprises, the markets will likely turn their attention to earnings and inflation data.”
US consumers probably experienced only a modest pickup in inflation as 2025 drew to a close, consistent with price pressures that are gradually abating.
The core consumer price index, regarded as a measure of underlying inflation because it strips out volatile food and energy costs, is seen rising 2.7% in December from a year earlier. That’s just a touch more than the 2.6% annual advance in November, which was the smallest since early 2021.
“Overall, while the Fed cannot dismiss the possibility of a more sustained inflationary episode, a cooling labor market should help contain price pressures,” said Seema Shah at Principal Asset Management. “Inflation is expected to remain slightly elevated through 2026, with a return to the 2% target this year appears unlikely.”
A survey conducted by 22V Research showed that 33% of investors believe that the market reaction to CPI will be “risk-on,” 45% said “mixed/negligible” and only 21% “risk-off.”
This week’s US inflation data is unlikely to “ruffle any feathers”, according to Max Kettner at HSBC. If anything, the fourth quarter reporting season with a similarly easy-to-beat setup like in the last two quarters should be the next bullish catalyst, he said.
In fact, traders are also gearing up for the unofficial start of the US earnings season, with a handful of big banks reporting results.
There’s little doubt that lenders, especially the six biggest Wall Street lenders, will deliver a massive earnings haul, thanks to a surge in corporate dealmaking, strong trading revenue and lower costs owing to productivity gains from artificial intelligence. But that’s largely old news.
What investors want to know is how these companies, with their unique insight into the state of an economy many across Wall Street expect to boom, view 2026. Attention, particularly on the consumer, is piqued because the outlook has been clouded by the shutdown and interruptions to government data. Top of mind will be consumer lending, from provisions for loan losses to how Americans are using — and paying off — credit cards.
Overall, company guidance and consensus revisions are lifting expectations for US profits in the fourth quarter, setting the stage for another potentially resounding earnings beat, according to Michael Casper and Wendy Soong at Bloomberg Intelligence.
Based on current estimates, S&P 500 constituents are expected to deliver earnings growth of 8.4% in the fourth quarter and 14.6% in 2026. Excluding the “Magnificent Seven” megacaps, profit growth is projected at 4.6% and 13.3%, respectively, they said.
Strong earnings per share doesn’t mean strong price returns, according to Savita Subramanian at Bank of America Corp.
“Earnings optimism is justified and even weaker guides are not reason to worry – it’s seasonally appropriate,” she said. “But ‘alpha’ on beats is less of a slam dunk: early reporters that have beat lagged the following day. Boom earnings years have seen lower price returns than normal- equities anticipate rather than react.”
The first week of the fourth quarter earnings season could help set the tone for how stocks trade through the rest of the month, noted Anthony Saglimbene at Ameriprise.
Strong updates on credit, margins, and capital deployment from key banks could help anchor confidence as the reporting season quickly broadens to the rest of Corporate America over the coming weeks, he said. However, if expenses run hot or guidance turns cautious, reactions could be more volatile, and the narrative may shift toward a more selective or defensive stance.
“Earnings will need to do more of the heavy lifting this year to keep major averages rising,” Saglimbene concluded. “Starting this week, investors will see if Corporate America is up for the challenge.”
To Robert Edwards, 2026 is likely to be a sawtooth year for the markets, where stocks experience a 7-15% pullback in the first half of the year for the simple reason that too much of Wall Street is bullish.
“The market is due for a sentiment reset and we expect that reset to take place in the next six months,” said the chief investment officer of Edwards Asset Management. “This sentiment reset is necessary fuel for the next leg of the bull market. We expect stocks to reach record highs by year-end.”
Corporate Highlights:
Nvidia Corp. plans to invest $1 billion over five years in a new laboratory with Eli Lilly & Co., aiming to speed up the use of artificial intelligence in the pharmaceutical industry. Societe Generale SA is scrapping a self-developed artificial intelligence tool in favor of Microsoft Corp.’s Copilot solution, highlighting the challenges even large lenders face in building out their own offering in the cost-intensive technology. Paramount Skydance Corp. ratcheted up the stakes in the monthslong battle for Warner Bros. Discovery Inc., saying it plans to nominate directors to the board to thwart a merger with Netflix Inc. UnitedHealth Group Inc. used “aggressive strategies” to maximize diagnoses and boost payments for patients on private Medicare health plans, a new Senate report found, adding to pressure on the largest US health insurer. Eli Lilly & Co. said it expects its highly anticipated weight-loss pill to receive US regulatory approval as early as the second quarter of 2026, slightly later than it signaled earlier. Novo Nordisk A/S’s obesity pill will allow it to tap into a massive population of patients that have not yet taken GLP-1s, the drugmaker’s chief executive officer said. Sarepta Therapeutics Inc. reported its embattled gene therapy is expected to miss fourth-quarter sales estimates. Moderna Inc. said its US Covid business did better than expected last year, a rare bright spot for the vaccine maker, which has struggled with the decline of people getting its shot. A US judge ruled Orsted A/S can resume development of a wind farm project off the coast of Rhode Island while it challenges the government’s latest stop-work order, a major win for the Danish energy giant in an ongoing fight with the Trump administration over renewable energy. Shake Shack Inc. reported preliminary fourth-quarter sales below Wall Street estimates, another sign of struggles in the fast-casual restaurant sector. Five Below Inc. boosted its sales forecast beyond Wall Street estimates after reporting a banner holiday shopping season. Allegiant Travel Co. agreed to buy Sun Country Airlines Holdings Inc. in a $1.5 billion cash-and-stock transaction, further driving consolidation in the US airline industry amid intensifying competition. Alaska Air Group Inc. is upgrading its technology systems in the wake of painful outages that upended operations and hit earnings, a crucial step in the company’s strategy to establish itself as a global carrier. QXO Inc. is raising another $1.8 billion from investors including Apollo Global Management Inc. and Temasek Holdings Pte, comfortably more than doubling the $1.2 billion financing deal it announced last week. The US Supreme Court turned away a bid by Hertz Global Holdings Inc. to avoid more than $320 million in payments to bondholders tied to its Covid-era bankruptcy, leaving in place a ruling that favored creditors. Michael Saylor’s Strategy Inc. acquired almost $1.25 billion in Bitcoin, marking the company’s largest purchase of the digital asset since July. UBS Group AG said planned Swiss banking reforms are a threat to the national economy as pressure builds on the government to water down the proposals. Airbus SE expects aircraft engines to remain in tight supply this year, suggesting that the bottlenecks that have complicated output in recent years show no signs of abating any time soon. Heineken NV Chief Executive Officer Dolf van den Brink is stepping down abruptly as the brewer faces a drop in beer sales and underperforms rivals. Simon Carter, chief executive officer of British Land Plc, is set to step down from the role after five years and will head to P3 Logistics Parks to lead the GIC Pte-owned investor and developer. Birkenstock Holding Plc reported strong sales figures for the final months of 2025 as demand stays robust for its high-end sandals and clogs, despite the impact of a weaker US dollar and tariffs. Mercedes-Benz Group AG fell further behind BMW AG in selling electric vehicles, leaving the automaker increasingly reliant on a slate of upcoming models to revive interest in its plug-in lineup. Some of the main moves in markets:
Stocks
The S&P 500 rose 0.2% as of 4 p.m. New York time The Nasdaq 100 was little changed The Dow Jones Industrial Average rose 0.2% The MSCI World Index rose 0.2% Bloomberg Magnificent 7 Total Return Index was little changed The Russell 2000 Index rose 0.4% KBW Bank Index fell 0.9% Currencies
The Bloomberg Dollar Spot Index fell 0.2% The euro rose 0.2% to $1.1665 The British pound rose 0.4% to $1.3463 The Japanese yen fell 0.2% to 158.19 per dollar Cryptocurrencies
Bitcoin rose 0.8% to $91,336.45 Ether fell 0.6% to $3,098.59 Bonds
The yield on 10-year Treasuries advanced two basis points to 4.19% Germany’s 10-year yield declined two basis points to 2.84% Britain’s 10-year yield was little changed at 4.37% The yield on 30-year Treasuries advanced two basis points to 4.83% The yield on 2-year Treasuries was little changed at 3.54% Commodities
West Texas Intermediate crude rose 0.6% to $59.47 a barrel Spot gold rose 1.9% to $4,593.38 an ounce –With assistance from Vildana Hajric.
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