The new year started off rough for the S&P 500 (^GSPC 0.21%), as the war in Iran weighed heavily on the market. But with hopes of the conflict ending, there’s been a reversal, and investors appear to be bullish again. As of Monday’s close, the S&P 500 was up around 4% since the start of 2026, rallying in recent weeks.
Investor sentiment can change quickly, however. If there are hopes of the war ending, then stocks might surge. If the expectation is that the conflict may drag on, then the bears are sure to come out.
However, one of the biggest factors that may weigh on the markets this year is what happens at the Fed. On May 15, Jerome Powell’s term as Fed chair is set to end, and whether the transition is a smooth one or not could weigh heavily on the stock market.
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There’s plenty of uncertainty ahead
Kevin Warsh is President Trump’s pick to succeed Powell, and he’s in the midst of confirmation hearings. However, there’s uncertainty around whether the nomination will go smoothly. There is an ongoing federal investigation into Jerome Powell related to renovations at the Federal Reserve, which critics believe are unfounded, and that Trump may be unfairly targeting Powell.
That investigation isn’t sitting well with Senator Thom Tillis, who has previously said he would block the nomination of Warsh until the probe is dropped. And with less than a month until Powell’s term as Fed chair is set to expire, there isn’t a whole lot of time for things to get sorted. Trump has also recently stated that he would fire Powell if he doesn’t leave willingly, and believes the investigation must go on.
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Investors should brace for volatility
The Federal Reserve’s policies can significantly impact the stock market. If interest rates are lowered, they can lead to a surge in speculation and stock trading, which can push already high valuations to new levels, potentially making stocks vulnerable to significant declines later on. And lowering interest rates before inflation is under control can be problematic. Inflation got out of control in 2022, and that year, the S&P 500 crashed by more than 19%. If investors lose confidence in the Fed and its policies, they could be tempted to pull money out of stocks.
While it may seem like it should be a smooth transition, going from Powell to Warsh, there could be considerable volatility ahead. How it all plays out will undoubtedly impact the markets, and now may be a good time for investors to consider reducing risk, given not only that markets have been hitting record highs recently but also due to the uncertainty ahead.
