What Happened Last Week
- The Fed Delivers: The Fed delivered a 25 basis-point cut with a slightly hawkish tilt.
- Tech Earnings Disappoint: Oracle and Broadcom failed to meet lofty expectations, leading the tech sector lower.
- Cyclicals Hold On: More cyclical parts of the market continue to benefit from an anti-tech rotation trade.
What We’re Watching This Week
- Economic Data: This week sees a catch-up of tier-one data releases, providing helpful color on the state of the labor market and the inflation picture.
- Fed Race: Investors will continue to assess last week’s movement in the Fed race, while a slate of Fed speakers offer more details on last week’s meeting.
- Bank of Japan (BOJ): The BOJ is expected to raise rates by 25 basis points as other central banks begin to eye 2026 rate hikes.
Investment Management Team’s Views
Investors accepted a hawkish Fed cut, but objected to some disappointing news from two key players in the AI buildout last week. The NASDAQ 100 and S&P 500 both ended the week lower, led down by tech and the mega-caps, as cyclicals, internationals, and small-caps rose. Over the last month, small-caps have led the NASDAQ 100 by over 5%. The cyclical growth theme continues to gain momentum as investors ratchet up expectations for 2026 growth and the tariff overhang dissipates. While the tech trade has plenty of fundamental support and the technicals remain positive, Oracle and Broadcom’s softer reports have contributed to AI exhaustion. They may indicate further investor rotation ahead as the market adjusts exposure into next year.
The Fed’s hawkish cut ended the set of insurance cuts against a theorized tariff-induced slowdown in growth. Now, with 75 basis points of easing in 2025 and interest rates close to neutral, any further reductions in the overnight rate are only likely if the labor market buckles. The tail end of the week saw renewed drama in the Fed Chair race as President Trump cast doubt on the presumptive nomination of Kevin Hassett, leading to a sharp reaction in betting odds in Kevin Warsh’s favor. Existing divisions among the Fed board have led investors to sell the dollar and steepen the yield curve amid U.S. policy uncertainty.
The week ahead is the last full-participation week of 2025, before the lighter-volume trading sessions around the holidays. The backlog of economic data from the lengthy government shutdown is finally beginning to clear; this week will see the release of more timely labor, retail, and inflation data for November, along with some partial October data. A sprinkling of earnings reports will fill in the outlook for U.S. retail, and Micron will be the last major tech firm to report for the year. Rounding out the week, the BOJ is expected to hike rates by 25 basis points on Friday. With other global central banks forecasting hikes next year, there are implications for the dollar outlook in 2026.