There are a number of headwinds making some investors nervous about next year. Some of these will cause pullbacks. But I suspect Trump will trump some of these headwinds.

The most important economic policy body on the planet is the US Federal Reserve. This is the world’s top dog central bank that set the scene for stocks and our super with a 0.25% interest rate cut yesterday.

Ahead of the big news story, our stock market was predicted to open 41 points higher, which mimicked the positive trends on the less tech-centric market indexes in the US, namely the Dow Jones and Russell 2000 market indicators.

In the end, while our market only gained 12 points, today there’s an expectation that our market will open 97 points higher. It would be even higher if we were expecting an interest rate cut like the Yanks.

By the way, yesterday’s unemployment report has raised questions about our labour market strength, with full-time jobs down 56,500 in November – the biggest monthly decline since December 2023. While part-time jobs were up, the net loss of jobs was 21,300, when economists expected a 20,000 lift!

But why is a simple interest rate cut so important to stock market investors and, ultimately, our super funds here in Australia?

Absorb this: about 66% of international investments by our super funds go to US assets. This puts the total close to $870 billion! We’re talking about $4 trillion in super funds and 31% in overseas assets, so the US exposure is around 20% for our super!

This has been a good thing because the US stock market has been up 86% over the past five years, while our market has risen only 29%. Our big industry super funds (such as Australian Super, Cbus, Host, Hesta, etc.) can’t just invest locally because they have too much money and need to access the world’s markets and assets to get reasonable returns.

That’s why the average industry super fund has returned around 7.5% over the past decade, which helps our super fund money double every 10 years or so.

The website Investopedia put it simply when explaining why the world’s biggest economy and stock market are so important to world stock markets. This is how Wall Street impacts our lives: “Wall Street drives the U.S. equity market, which in turn is a bellwether for the global economy. The 2000-02 and 2008-09 global recessions both had their genesis in the U.S., with the bursting of the technology bubble and housing collapse, respectively.”

Stock prices can drive economies up or down and the New York Stock Exchange and its tech-index buddy the Nasdaq are the big kahunas that can generate wealth, confidence and economic activity effects for the entire planet.

That’s why this rates decision by the Fed and its hinting that maybe more cuts are coming helps stocks in the US and worldwide. Why? Let me explain:

1. Lower interest rates help avoid a US recession.
2. Lower interest rates make term deposits and bonds less attractive and stocks more investible.
3. Lower interest rates help economic growth and US companies should be more profitable and that helps stock prices.
4. Lower interest rates help companies avoid bankruptcy.
5. Lower interest rates kickstart the economy and create jobs that then drive consumer spending, investment and what economists call the multiplier effect.

Add this to the impact of Artificial Intelligence on productivity and economic growth, along with President Trump’s One Big Beautiful Tax Act (that delivers tax cuts and promised financial deregulation) and it’s reasonable to think stock prices should head higher.

What could go wrong? Try these:

1. AI becomes seen as a bubble that could lead to a big sell-off.
2. The Supreme Court rules Trump’s tariffs illegal, which would lead to a manageable correction and a stock buying opportunity because the positives of no tariffs would be greater than the negatives.
3. World War III — let’s not go there but in 1939 the Dow went up 15% and ended up positive over the duration of the war!
4. A black swan event, which by definition isn’t expected, so I’ll have to gamble on that.
5. Trump selects a bad choice to replace Fed boss Jerome Powell, though this would again lead to a stocks pullback that would be a buying opportunity.

On the AI threat, I prefer the views of arguably the world’s great IT nerd and big brain: Microsoft founder Bill Gates. Gates told CNBC this: “AI is the most important thing going on. Does it mean all of these companies with high valuations will be winners? No, it’s going to be hyper competitive.

“AI is only a bubble in the sense that not all of these valuations will end up going up. Some of them will go down. AI is a deeply profound technology that will reshape the world. There’s not the slightest doubt about that.”

There will be winners and losers but as some companies results won’t reflect big wins from AI, their share prices will fall. Others will be winners, and their share prices will spike higher. That’s why being in diversified investments is a great way to play AI, which super funds generally do.

Overnight, Oracle, which is seen as a big AI player, reported worse than expected and so tech stocks were sold off. But it wasn’t a big miss, so this anti-AI stance could be short-lived if another big AI company surprises on the upside with its results.

One final point and it links to the history that the second year of a US President is generally the worst. Because of this, I’m making my financial planning clients a little more defensive but I’m still accessing growth by investing in income-paying growth funds.

You see, I think Donald Trump will move heaven and earth to make sure he doesn’t have a crash on his watch. And as long as AI beats the bubble rap and he delivers tax cuts as well as financial deregulation, and the Fed delivers expected tax cuts, then I’m happy to go along for the ride with stocks in 2026.

I’m less confident about stocks in 2026 than I was for the past few years, but I’m still not ready to go super defensive or even bearish. My best tip is to watch this space because when I get scared, you will be the first to read about it!

For the record, the Fed sees a slowing US economy and that’s why they cut the official rate of interest target — the key overnight borrowing rate — so it’s now between 3.5% to 3.75%. Like our RBA they are going to watch the data drops over the next few months and that will determine if more cuts are needed.

Looking at what is called the “dot plot” that tracks what the Fed members expect will be needed, it seems like one cut in 2026 and another in 2027 is on the cards. But this can all turn on a dime if the economy is worse or better than expected.

Importantly, the Fed members think US economic growth will be at 2.3%, which says they’re ruling out a recession, which is also good news for stock players in 2026. Let’s hope they are right!