Investors are currently navigating two prominent risks in the stock market as they prepare for 2026, according to insights from Torsten Slok, chief economist at Apollo Global Management. Despite maintaining a generally optimistic outlook for the upcoming year, Slok pointed out a significant challenge: the disconnect between market expectations and the Federal Reserve’s own projections regarding interest rate cuts.
As it stands, the market anticipates at least two interest rate cuts by the Fed in 2026. However, the central bank’s forecasts suggest only one rate cut is likely. Slok emphasized that he does not foresee substantial cuts due to persistently high inflation rates and a strengthening economy. On CNBC’s “Squawk on the Street,” he stated, “If rates do not go down, then it will continue to bring back this environment we’ve had for the last few years where the cost of capital stays elevated.” This scenario could pose risks for equities, particularly impacting the S&P 500.
Another potential risk highlighted by Slok concerns the broader economic implications should the Supreme Court decide to nullify tariffs imposed by former President Donald Trump, which were established under the International Emergency Economic Powers Act. These tariffs, announced during what Trump referred to as “liberation day” in April of the current year, could lead to significant financial repercussions if struck down. The administration has indicated alternative options for implementing tariffs even if they lose in court.
Slok cautioned that a ruling against the tariffs could result in the government owing up to $200 billion to businesses that overpaid due to these tariffs. This situation would likely increase the pressure on Treasury debt issuance, potentially leading to a steeper yield curve and higher borrowing costs in the longer term. “This could be a very important headline risk for markets,” he noted, suggesting that investors should remain vigilant.
Despite these headwinds, Slok remains confident in the health of the economy as the new year approaches, stating, “The list of bullet points of the tailwinds is just getting longer and longer.” This confidence indicates a belief that the underlying factors supporting economic growth continue to be robust. As market participants assess their strategies, the combination of potentially elevated interest rates and tariff-related uncertainties will be critical considerations as they move forward into 2026.
