Central banks will be decisive in shaping market trends in 2026

High stock market valuations and the concentration of gains, especially in the technology sector, dominate much of the analysis, although MAPFRE's experts point to another crucial factor: central bank policy. With the Fed facing another rate cut and a likely change in its chairmanship, and a European Central Bank that could take the opposite path if economic growth exceeds expectations, monetary policy could be decisive in the currency, bond, and equity markets.

In statements made this Wednesday, prior to the Fed's final decision, Ismael García Puente, Deputy Director of Strategy at MAPFRE AM, stated that the market is already pricing in a 25-basis-point rate cut, after weeks of uncertainty. In contrast, Fed Chairman Jerome Powell is expected to adopt a more hawkish tone in his upcoming appearance, lowering expectations for rate cuts next year and reiterating his usual message of waiting for macroeconomic data to develop before making any further moves.

Amid these back-and-forths regarding the possibility of further interest rate cuts, which could lead to volatility, Ismael García points out that Donald Trump is “likely” to announce Powell’s replacement soon, replacing him with a candidate more aligned with his views and more inclined to lower rates.

In the short term, a more aggressive monetary policy on the downward trajectory shouldn't necessarily have a negative impact on the markets; in fact, risk assets tend to rise in response to these measures, which translate into cheaper financing for companies. However, this could have a major impact on inflation, which would be fueled by excessive price cuts. Inflation now stands at around 3% in the US, with the country's economic growth coming in at 2%, levels at which interest rates of 1%, the figure that Trump has publicly stated he is pursuing, would be inappropriate.

To this dilemma between promoting growth and controlling inflation that the Fed faces, the MAPFRE AM executive adds another factor in the US economy: the job market. And while "it's not worrying for now," employment in the United States has already begun to show negative signs. Layoffs have already been seen at large companies due to the implementation of AI, and now cuts are starting to be seen at small and medium-sized enterprises.

In Europe, Ismael García believes that economic growth figures could "surprise on the upside," good news that, nevertheless, could see the European Central Bank raise interest rates. This comes at a time of fiscal problems for countries like France and Germany, would mean even greater difficulties for these nations.

The expert sees inflation in Europe as under control and trending positive because tariff tensions are resulting in China diverting products it previously sold in the United States, and at very low prices. Thus, Europe is “importing deflation,” explains Ismael García, so, barring any “shocks” in energy costs, prices will remain stable.

Regarding the markets, García Puente states that investors have an appetite for European equities, although he clarifies that this is due to the intention of diversification and not so much to the belief that they will outperform the US market. At present, Europe boasts “attractive prices,” he explains, and should the Old Continent experience economic growth, it can “regain momentum” in the stock market. But, in the long term, MAPFRE's view is “more constructive” regarding US equities than their European counterparts.

Regarding the evolution of currencies on both sides of the Atlantic, the consensus is that the dollar may continue to fall, a trend that would be accentuated should the Fed lower interest rates further and the ECB raise them. Therefore, analysts will be “closely monitoring” central banks, says Ismael García. Despite these movements, if you look at capital flows, which saw significant outflows from the US in the first half of the year, the expert notes that these “have already calmed down.”