Trump's Policy Moves Fail to Shake Investor Sentiment in 2026 Market Outlook

Market sentiment remains broadly indifferent to Trump's recent policy announcements. Despite sweeping proposals such as banning institutional investors from buying single-family homes and restricting defense contractor dividends, the S&P 500 closed the week with mixed results. The Nasdaq, however, managed to post a slight gain, while the Dow and S&P 500 posted modest declines. Trump's latest moves, announced on Truth Social, left defense stocks like Lockheed Martin and Northrop Grumman in the red.

Wall Street analysts expect the S&P 500 to rise by about 9.6% in 2026, but many see this as a stretch. Historical data shows that the index rarely achieves such returns, and the average price targets from analysts imply a slightly more optimistic 10% gain. Still, the forecasts tend to be conservative, and analysts have missed the mark before. For instance, in 2025, the average target was 3.5% below the actual closing level.

The Federal Reserve's rate-cutting cycle is a key tailwind for the market. In 2025, the Fed cut rates three times, and more cuts are expected in 2026. While inflation remains slightly elevated at 2.7%, the rising unemployment rate is forcing the central bank's hand. Most Fed policymakers anticipate at least one more rate cut this year, while Wall Street expects two.

Why Did This Happen?

Trump's first year in office was marked by a strong stock market performance, with the S&P 500 rising 16.3% in the last 12 months. However, his second year could be more challenging. Tariffs, consumer spending, and AI spending are among the factors that could influence market performance. Despite Trump's claims that tariffs bring manufacturing back to the U.S., the Institute for Supply Management (ISM) reports that U.S. manufacturing activity has contracted in nine consecutive months.

Consumer spending, which accounts for roughly 70% of U.S. GDP, is another concern. While aggregate spending remains strong, it is being driven by high-income earners. Middle- and lower-income consumers have seen their spending stagnate. Car repossessions and foreclosures are also on the rise, signaling potential economic weakness ahead.

How Did Markets React?

The market reaction to Trump's policy moves has been muted. After May, the S&P 500 managed a positive return in six of the seven final months of 2025, driven by renewed optimism in AI and Fed easing. However, the defense sector took a hit, with Northrop Grumman falling 5.5% and Lockheed Martin down 4.8% following Trump's statements.

Venezuela's oil supply situation has also caught investors' attention. After a U.S. military strike and the capture of President Nicolas Maduro, the country's oil exports have effectively dropped to zero. This has pushed the country's state oil company, PDVSA, to cut production as storage capacity nears its limit. While the immediate impact on oil prices has been limited, longer-term implications could be significant if U.S. sanctions are relaxed and Venezuela's output increases.

Goldman Sachs analysts noted that any recovery in Venezuelan production would likely be gradual and require substantial investment. They estimate a $4-per-barrel downside to 2030 oil prices in a scenario where production rises to 2 million barrels per day. However, in the short term, Venezuela's limited production is not expected to cause significant price volatility.

What Are Analysts Watching Next?

Investors are closely watching the December nonfarm payrolls report, scheduled for Friday, to gauge the health of the labor market. The unemployment rate is expected to have fallen to 4.5% in December after hitting a four-year high of 4.6% in November. The JOLTS report also showed a larger-than-expected decline in job openings, suggesting businesses are cautious about hiring amid economic uncertainty.

The Federal Reserve's monetary policy will remain a key focus for investors. With the Fed expected to continue its rate-cutting cycle in 2026, market participants are looking for signs of further easing. However, if unemployment continues to rise or inflation reaccelerates, the Fed may be forced to pause or even reverse its policy.

In the energy market, the Venezuela situation remains a wildcard. If U.S. sanctions are lifted and production recovers, oil prices could face downward pressure. Analysts at JPMorgan project that Venezuela could lift output to 1.3–1.4 million barrels per day within two years. This would add to the global supply and weigh on prices, especially in a market already oversupplied.

Investors remain cautious but not overly concerned. While Trump's policies have introduced uncertainty, the market appears focused on fundamentals such as AI-driven growth and Fed easing. For now, investors are keeping a close eye on both domestic economic data and global geopolitical developments, including the situation in Venezuela, to determine the path forward for 2026.