Bessent Not Powell Will Shape the S&P 500 In 2026

S&P 500 Looks Past The FED

A regime change at the Federal Reserve is expected within three to six months due to the anticipated change in Federal Reserve (FED) Chair and will have implications for the S&P 500.

That regime change will likely shift domination, emphasis, and influence from the FED to the Treasury.

The mid-term elections are on the horizon, and Trump is running out of time to address the cost-of-living crisis or “affordability crisis” that formed a significant part of his electoral campaign.

The current FED approach is having a negative impact on those households at the bottom of the K-shaped economy.

A K-shaped economy that the FED created and perpetuated in tandem with the fiscal policy pursued by recent administrations.

Bessent has signalled that he wants a Treasury more focused on economic growth that supports households, consumers, and businesses, who have been left behind in the K-shaped economic expansion.

In parallel, the new FED Chair will likely push for lower interest rates and further weakening of the Dollar to support that same aim.

Liquidity

Together, these measures will likely inject liquidity.

Markets are conditioned to expect that whenever growth slows or stress appears, central banks will step in with liquidity that lifts asset prices. The expectation is that FED easing equates to a bull market.

However, this established pattern may be about to change in 2026.

FED easing is undirected: liquidity is simply pumped into the money and financial markets, and the hope is that some of it will spill over into the real economy.

However, as history shows, such approaches have more often served only to suppress yields and lift asset prices.

Changes to the banks’ Supplementary Leverage Ratio (SLR) and funding at the front end of the bond market are just some of the Treasury policy measures that will provide a much more directed form of liquidity stimulus (Treasury QE) that will target economic activity and the real economy rather than speculative financial markets.

Strong Economy

As a result of these factors, we anticipate that the U.S. economy will be stronger in 2026, and the business cycle (as measured by the ISM) should show upward momentum.

While Treasury QE funded through short-dated bill issuance and targeted fiscal channels may successfully promote growth, support small businesses, and strengthen economic activity, it does not necessarily translate into strong equity or risk asset performance.

Strong economies don’t always have strong financial markets. Even as the economy improves, financial markets may struggle to generate sustained upside.

Liquidity in the short term is likely to remain tight, and given that the markets remain lopsidedly bullish, a correction is likely.

While we remain cautious about markets in the short term, it is important to note that the balance of probability suggests we are unlikely to see a crash in 2026.

That said, we expect volatility in the S&P 500 in 2026 and gains to be subdued.