(Jan 13) : 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 US$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.
See also: US stocks tumble as fears over Fed’s autonomy weighs on market
“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.
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“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.
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“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.”
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