Executive Summary
Last week, large-capitalization S&P 500 stocks advanced 0.7%, but small stocks lagged. The three material items for the week included broadly positive big tech earnings, the Fed meeting featuring an expected 25 basis point (bps) cut, and the end of quantitative tightening[1] as of 12/1/25, along with a warning that another cut in December may not happen. Finally, there was an easing of trade tensions between China and the U.S. The best sector was technology, up ~3% while the biggest laggard was real estate, down ~4%.
While the U.S. equity market continues to set new highs, there are some signs of exhaustion under the hood. Specifically, the strength of the MAG7 and tech sector may be masking relative weakness in the broader market. The equal-weighted S&P continues to underperform the capitalization-weighted index by a significant amount: In October, the equal-weighted index returned -1.2%, which certainly pales in comparison to the cap-weighted index advance of over 2% and represents an acceleration of underperformance for the month. Finally, let’s not lose sight of Emerging Market equities, which have appreciated ~34% year to date.
The MAG7 stocks continue to dominate returns and results. The cohort is responsible for 50% of the S&P 500’s return to date, gaining 24% against the index’s 16%. This group is also contributing mightily to fundamental results, with the expectation for 2025 earnings growth of 20% against the rest of the market’s 8%.
The market reaction to the Fed decision was most apparent in the U.S. Treasury market, where yields jumped across the yield curve, bringing the 10-year Treasury yield back above 4% as investors recalibrated expectations for the timing and magnitude of future cuts. Investors focused on Fed Chair Powell’s comment that another cut this year is not a “foregone conclusion.” The U.S. dollar strengthened, as higher yields and the lower probability of additional significant easing provided a tailwind.
Today, “K Economy” high earners continue to enjoy a strong economy where income growth and asset valuations (“wealth effect”) support robust spending. Recent data from Moody’s reveals that the top 10% of earners are responsible for nearly 50% of all U.S. consumer spending, which marks a dramatic increase from this group’s roughly 30% contribution in the 1990s. In contrast, low-income households continue to struggle. Delinquency rates on subprime auto loans have reached record highs, signaling growing financial strain among lower-income Americans as vehicle prices and borrowing costs remain elevated. According to Fitch Ratings, more than 6% of subprime auto loans are now at least 60 days past due, the highest rate ever recorded, as tighter household budgets, slowing wage growth, and unemployment edge higher.
Equities
The S&P 500 returned 0.7% for the week. After notching an all-time high mid-week, stocks retreated as Fed Chair Powell, after delivering the rate cut that the market expected, cautioned about the path of further cuts. Mixed results among mega-cap tech stocks also contributed to mid-week volatility. Midcap (-1.5%) and small cap (-1.3%) stocks failed to join the large cap party, which has increasingly been driven by hopes for AI. Technology (+3.0%) and consumer discretionary (+2.8%) stocks led the S&P 500; materials (-3.7%) and consumer staples (-3.6%) were the laggards. EAFE markets returned -0.5% with gains in the U.K. (+0.8%) and Japan (+1.9%) offset by weakness in Europe (-1.3%), while EM markets returned 0.9% with gains in Korea (+6.9%) and Brazil (+2.1%) offset by China (-1.5%).
From a valuation perspective, the S&P 500, the NASDAQ, and EM trade at or above +1 standard deviation based on historical forward P/E ratios, with the S&P 500 at +2.1, the NASDAQ at +1.7, and EM at +1.6. For the next 12 months, EPS growth for S&P 500 is expected to be 8.9% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 14.6% (vs. 10.7% annualized over the last 20 years). Equities across markets caps, in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had negative returns as rates rose across the curve. Municipals returns were flat, US AGG returned -0.6% and US IG returned -0.9%. HY bonds returned -0.1% while bank loans returned +0.2%. EM debt returned +1.7% as the U.S. dollar rose 0.9% and spreads compressed 49bps.
Rates
Rates rose across the curve as Chair Powell’s comments at the post-meeting conference spooked markets. The recession-watch 3M-10Y spread widened 11bps to +25. The 2Y-10Y spread compressed 1bp to +50. Rates were largely unchanged in other developed markets. The BTP-Bund spread is at 0.75%. 5-year breakeven inflation expectations rose 1bp to 2.41% (vs. low of 1.88% on Sept 10, 2024); 10-year breakeven inflation expectations rose 2bps to 2.32% (vs. recent low of 2.03% on Sept 10, 2024); the 10Y real yield rose 6bps to 1.76%. The market now prices only a 67% probability of an additional rate cut in 2025 vs the Fed’s guidance of one cut. At year-end 2025, the market expects the Fed Funds rate to be 3.72% vs. the Fed’s guidance of 3.5%-3.75%.
Currencies/Commodities
The dollar index rose 0.9%. The commodities complex fell 0.3% as energy prices were flat for the week. Brent prices fell 1.3% to $65/bbl; US natural gas prices rose 24.8% with updates from the weather Service for cooler temperatures, while European gas fell 3.4%.
Market monitors
Volatility rose for equities but fell for bonds (VIX = 17, MOVE = 67); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) rose from -6 to +7.
[1] Stopping quantitative tightening (QT) means the central bank is ending its policy of reducing the size of its balance sheet by letting assets like government bonds and mortgage-backed securities mature without reinvesting the proceeds. This stops the removal of money from the financial system, improves liquidity, and can be seen as a signal to support financial markets and the economy. It effectively keeps the amount of money in the system stable and could potentially lead to lower interest rates.
Weekly Commentary
S&P Gains Mask Underlying Market Exhaustion
Stuart Katz
Executive Summary
Last week, large-capitalization S&P 500 stocks advanced 0.7%, but small stocks lagged. The three material items for the week included broadly positive big tech earnings, the Fed meeting featuring an expected 25 basis point (bps) cut, and the end of quantitative tightening[1] as of 12/1/25, along with a warning that another cut in December may not happen. Finally, there was an easing of trade tensions between China and the U.S. The best sector was technology, up ~3% while the biggest laggard was real estate, down ~4%.
While the U.S. equity market continues to set new highs, there are some signs of exhaustion under the hood. Specifically, the strength of the MAG7 and tech sector may be masking relative weakness in the broader market. The equal-weighted S&P continues to underperform the capitalization-weighted index by a significant amount: In October, the equal-weighted index returned -1.2%, which certainly pales in comparison to the cap-weighted index advance of over 2% and represents an acceleration of underperformance for the month. Finally, let’s not lose sight of Emerging Market equities, which have appreciated ~34% year to date.
The MAG7 stocks continue to dominate returns and results. The cohort is responsible for 50% of the S&P 500’s return to date, gaining 24% against the index’s 16%. This group is also contributing mightily to fundamental results, with the expectation for 2025 earnings growth of 20% against the rest of the market’s 8%.
The market reaction to the Fed decision was most apparent in the U.S. Treasury market, where yields jumped across the yield curve, bringing the 10-year Treasury yield back above 4% as investors recalibrated expectations for the timing and magnitude of future cuts. Investors focused on Fed Chair Powell’s comment that another cut this year is not a “foregone conclusion.” The U.S. dollar strengthened, as higher yields and the lower probability of additional significant easing provided a tailwind.
Today, “K Economy” high earners continue to enjoy a strong economy where income growth and asset valuations (“wealth effect”) support robust spending. Recent data from Moody’s reveals that the top 10% of earners are responsible for nearly 50% of all U.S. consumer spending, which marks a dramatic increase from this group’s roughly 30% contribution in the 1990s. In contrast, low-income households continue to struggle. Delinquency rates on subprime auto loans have reached record highs, signaling growing financial strain among lower-income Americans as vehicle prices and borrowing costs remain elevated. According to Fitch Ratings, more than 6% of subprime auto loans are now at least 60 days past due, the highest rate ever recorded, as tighter household budgets, slowing wage growth, and unemployment edge higher.
Equities
The S&P 500 returned 0.7% for the week. After notching an all-time high mid-week, stocks retreated as Fed Chair Powell, after delivering the rate cut that the market expected, cautioned about the path of further cuts. Mixed results among mega-cap tech stocks also contributed to mid-week volatility. Midcap (-1.5%) and small cap (-1.3%) stocks failed to join the large cap party, which has increasingly been driven by hopes for AI. Technology (+3.0%) and consumer discretionary (+2.8%) stocks led the S&P 500; materials (-3.7%) and consumer staples (-3.6%) were the laggards. EAFE markets returned -0.5% with gains in the U.K. (+0.8%) and Japan (+1.9%) offset by weakness in Europe (-1.3%), while EM markets returned 0.9% with gains in Korea (+6.9%) and Brazil (+2.1%) offset by China (-1.5%).
From a valuation perspective, the S&P 500, the NASDAQ, and EM trade at or above +1 standard deviation based on historical forward P/E ratios, with the S&P 500 at +2.1, the NASDAQ at +1.7, and EM at +1.6. For the next 12 months, EPS growth for S&P 500 is expected to be 8.9% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 14.6% (vs. 10.7% annualized over the last 20 years). Equities across markets caps, in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had negative returns as rates rose across the curve. Municipals returns were flat, US AGG returned -0.6% and US IG returned -0.9%. HY bonds returned -0.1% while bank loans returned +0.2%. EM debt returned +1.7% as the U.S. dollar rose 0.9% and spreads compressed 49bps.
Rates
Rates rose across the curve as Chair Powell’s comments at the post-meeting conference spooked markets. The recession-watch 3M-10Y spread widened 11bps to +25. The 2Y-10Y spread compressed 1bp to +50. Rates were largely unchanged in other developed markets. The BTP-Bund spread is at 0.75%. 5-year breakeven inflation expectations rose 1bp to 2.41% (vs. low of 1.88% on Sept 10, 2024); 10-year breakeven inflation expectations rose 2bps to 2.32% (vs. recent low of 2.03% on Sept 10, 2024); the 10Y real yield rose 6bps to 1.76%. The market now prices only a 67% probability of an additional rate cut in 2025 vs the Fed’s guidance of one cut. At year-end 2025, the market expects the Fed Funds rate to be 3.72% vs. the Fed’s guidance of 3.5%-3.75%.
Currencies/Commodities
The dollar index rose 0.9%. The commodities complex fell 0.3% as energy prices were flat for the week. Brent prices fell 1.3% to $65/bbl; US natural gas prices rose 24.8% with updates from the weather Service for cooler temperatures, while European gas fell 3.4%.
Market monitors
Volatility rose for equities but fell for bonds (VIX = 17, MOVE = 67); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) rose from -6 to +7.
[1] Stopping quantitative tightening (QT) means the central bank is ending its policy of reducing the size of its balance sheet by letting assets like government bonds and mortgage-backed securities mature without reinvesting the proceeds. This stops the removal of money from the financial system, improves liquidity, and can be seen as a signal to support financial markets and the economy. It effectively keeps the amount of money in the system stable and could potentially lead to lower interest rates.
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