At the end of 2025, global financial markets are at a critical turning point. The Federal Reserve (Fed) has officially ended quantitative easing (QT) and shifted to asset purchases under reserve management, marking a transition in monetary policy from a tightening cycle to an easing cycle. As of December 2025, the Fed's balance sheet will be approximately $6.5 trillion, a significant contraction from $8.9 trillion at the peak of the pandemic. It is now maintaining ample reserves by purchasing short-term Treasury bonds monthly (initially around $40 billion). This "technical" liquidity injection, while the Fed emphasizes it is not quantitative easing (QE), effectively increases the money supply within the system, supporting asset price increases. The current macroeconomic environment indicates that the Federal Reserve's target range for the federal funds rate is 3.5%-3.75%, which, after three 25-basis-point rate cuts in 2025, has fallen to its lowest level since 2022. The dot plot shows that only one rate cut is expected in 2026, with the long-term neutral interest rate remaining around 3%. This reflects the Fed's cautious balance between its dual mandate of inflation and employment: core PCE inflation is projected at 3.0% in 2025 and will fall to 2.5% in 2026, with the unemployment rate stabilizing at 4.4%-4.5%. However, market pricing suggests that investors expect further easing to address potential economic slowdown. The concept of liquidity is key to understanding asset prices in 2026. When liquidity is ample, borrowing costs decrease, funds flow into risky assets, driving up stocks, precious metals, and commodities; conversely, tight liquidity puts pressure on asset prices. In 2025, signs of a shift from tight to loose liquidity have emerged: pressure in the repo market has eased, and the Fed is injecting funds through reserve management purchases to prevent a repeat of the 2019 crisis. This is analogous to a rising water level in a pool, causing all assets to "float higher." Historical data shows that during periods of easing, asset prices often rise in tandem with fundamentals, even with moderate economic growth. The interest rate path is the core driver of the easing cycle. The Fed controls short-term interest rates; rate cuts make borrowing cheaper, leading to corporate debt refinancing, increased investor risk exposure, and lower cash yields, driving funds towards stocks and real assets. Valuation expansion stems from future earnings calculated at lower discount rates. The rate-cutting cycle has already begun in 2025, and if it continues in 2026 (even just once), it will further amplify this effect. The US dollar index (DXY) has fallen to around 97.86, down about 12% from its year-to-date high. A weaker dollar amplifies the attractiveness of dollar-denominated assets, particularly gold, silver, and commodities. While the Fed's balance sheet expansion is termed "reserve management," the market views it as a liquidity injection. Starting in December 2025, the Fed will begin purchasing short-term Treasury bonds to maintain ample reserves. This is not a one-off event: the US government's massive deficit, bank reserve needs, and market stability require sustained liquidity support. Once the "tap" is turned on, a rapid shutdown risks systemic collapse; therefore, easing cycles often exceed expectations. Historically, the Fed responded to pressures through expansion during events such as the 2008 financial crisis and the 2020 pandemic. A weak dollar is a byproduct of easing. Interest rate cuts reduce the attractiveness of holding the dollar, and increased money supply dilutes purchasing power. A weak dollar drives up stock, gold, silver, and commodity prices. For example, gold and silver are priced in US dollars; a depreciating dollar requires more dollars to buy the same amount of metal. Essentially, the rise in precious metal prices reflects the depreciation of the dollar, not an increase in the intrinsic value of the metals. This is also why precious metals perform exceptionally well during periods of monetary easing. As of December 2025, gold was priced at approximately $4,490 per ounce, a year-to-date increase of over 70%; silver was priced at approximately $71 per ounce, an increase of approximately 140%. The S&P 500 index rose approximately 16%-18% year-to-date (approximately 17.8% including dividends). These gains are partly due to expectations of further monetary easing. Analysts are divided on their 2026 outlook: optimists like Goldman Sachs predict gold will reach $4,900, with some institutions seeing it above $5,000; silver's average forecast is $56-65, with extremely optimistic forecasts exceeding $100. The stock market is expected to see moderate gains, but with increased volatility. However, this view is not without controversy. Critics argue that loose monetary policy creates asset bubbles, detaching from economic fundamentals. While strong economic growth is projected for 2025 (Q3 GDP annualized at 4.3%), slowing employment and high debt (federal debt exceeding 120% of GDP) pose risks. Excessive easing could reignite inflation, forcing the Fed to reverse course and leading to market corrections. Some analysts warn that while liquidity injections may boost risk assets in the short term, they amplify inequality, encourage speculation, and increase systemic vulnerability in the long term. Historically, loose monetary policies have often been followed by bursting bubbles, as seen in 2008. The Fed's "implicit guarantee" (Fed Put) is another support. When markets experience sharp declines, the Fed often intervenes to stabilize them through interest rate cuts, liquidity injections, or emergency programs. This stems from the risk of market crashes spreading to credit, employment, housing, and government finances. The current system is more sensitive to liquidity: debt levels are at record highs, market interconnectivity is higher, and stresses spread faster. Therefore, significant corrections are likely to be met with policy support. However, this does not mean the market will never fall; it only indicates that a deep recession will be buffered. In May 2026, Fed Chairman Powell's term ends, and the new leadership typically brings a shift in policy tone towards easing to stimulate economic growth and asset prices, especially before the midterm elections. This could reinforce the tendency for "overheated economies" and further support assets. Connecting these factors: In an environment of declining interest rates, increased liquidity, a weak dollar, and Fed intervention preparations, both physical and risk assets benefit. Value stores such as stocks, ETFs, gold, and silver will attract capital. This does not mean a straight upward trend: volatility and pullbacks are inevitable. However, with ample liquidity, pullbacks are often bought into.
Specific Asset Outlook:
Equity Market
The S&P 500 performed strongly in 2025 and is expected to continue its moderate rise in 2026. Technology stocks will dominate, but value stocks and small-cap stocks may rotate. The risk lies in the already high valuations; a correction is possible if earnings growth slows. Analysts predict an average increase of 10%-15% in 2026, but better-than-expected gains are possible if liquidity continues.
The S&P 500 performed strongly in 2025 and is expected to continue its moderate rise in 2026. Technology stocks will dominate, but value stocks and small-cap stocks may rotate. The risk is that valuations are already high, and a correction is possible if earnings growth slows.
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