What's Happening?
Torsten Slok, chief economist at Apollo Global Management, has identified two significant risks that investors are overlooking as they head into 2026. The first risk involves the Federal Reserve's interest rate policy. While markets have priced in at least two rate cuts for the upcoming year, the Federal Reserve's projections suggest only one cut. Slok believes that the Fed is unlikely to cut rates significantly due to persistent inflation and economic momentum. This could maintain elevated capital costs, impacting equities, particularly the S&P 500. The second risk pertains to potential legal challenges to tariffs imposed by President Trump under the International Emergency Economic Powers Act. If the Supreme Court overturns these tariffs,
the government may need to refund $150 billion to $200 billion, increasing Treasury debt issuance and potentially steepening the yield curve.
Why It's Important?
The implications of these risks are substantial for the U.S. economy and financial markets. If the Federal Reserve does not cut rates as expected, it could lead to sustained high borrowing costs, affecting corporate investment and consumer spending. This scenario could dampen stock market performance, particularly for rate-sensitive sectors. Additionally, the potential overturning of tariffs could lead to increased government debt issuance, affecting bond markets and possibly leading to higher long-term interest rates. These developments could influence investor sentiment and economic growth, highlighting the need for careful monitoring of monetary policy and legal proceedings related to trade measures.
What's Next?
Investors and policymakers will closely watch the Federal Reserve's communications and economic data to gauge the likelihood of rate cuts. Any shifts in inflation or economic growth could alter the Fed's stance. Meanwhile, the legal proceedings regarding tariffs will be pivotal. A Supreme Court decision against the tariffs could prompt the administration to explore alternative trade measures, impacting international trade relations and domestic economic policy. Stakeholders, including businesses and financial institutions, will need to prepare for potential volatility in financial markets and adjust their strategies accordingly.
