Executive Summary
The recent odds of a December cut have been going down to 44% and a 56% chance of a hold. With that said, there are now three cuts priced into 2026, so the bond market more or less is pushing out the rate cut into next year. Regardless, the Fed is becoming increasingly hawkish as labor market data from Challenger to ADP is weakening, making it difficult to rationalize a rate hold. The inflation side of their mandate is still the issue, and perhaps they are assuming higher inflationary readings in future CPI reports. We continue to believe minimal inflationary pressures from wage growth (narrative shifting from no hire/no fire to larger company layoffs such as Verizon, Amazon, UPS, etc.), commodity markets (both oil and lumber prices near year-to-date lows), and housing prices (as Zillow still says national home prices are up 0.1% year-over-year and while we hear from multi-family developers rental growth is declining). The tariffs may have created more “one-time” inflation in other consumer goods, that could be hitting future inflation reports. However, we don’t anticipate broad-based escalation and strengthening of inflation expectations.
Last week, the S&P 500 was barely positive while the NASDAQ and Russell 2000 declined. We believe the recent downturn was influenced by AI concerns (stay tuned for NVIDIA earnings/guidance Wednesday 11/19), hawkish Fed commentary and a data vacuum from the government shutdown. We believe the OBBB features and deregulation should help support consumers in 2026. In addition, earnings growth has been a tailwind for equities, although future positive returns are limited by valuation multiples. Fed tightening and/or disappointing earnings/guidance from mega AI players could disrupt market complacency and elevate volatility.
Equities
The S&P 500 returned +0.1% for the week. Optimism around the reopening of the government faded through the week as hawkish statements from several Federal Reserve governors dampened optimism around future rate cuts. Traders began to sell risk assets, concerned that the omission of key economic data due to the shutdown may spur the Fed to stand pat. Mid cap (-0.8%) and small cap (-1.8%) stocks sold off. Consumer discretionary (-2.6%) and utilities (-1.0%) were the key laggards in the S&P 500; healthcare (+3.9%) and energy (+2.8%) were the best performing. EAFE markets returned +1.7% with strong gains in Europe (+2.2%), while EM markets returned +0.3% with gains in Brazil (+3.3%) and India (+1.4%).
From a valuation perspective, the S&P 500 and EM trade at or above +1 standard deviation based on historical forward P/E ratios, with the S&P 500 at +2.0 and EM at +1.1. For the next 12 months, EPS growth for S&P 500 is expected to be 10.3% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 17.2% (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 mixed returns as rates rose across the curve. Municipals returned +0.1%, US AGG returned -0.2% and US IG returned -0.2%. HY bonds returned +0.1% while bank loans returned +0.1%. EM debt returned +0.3% as the U.S. dollar fell 0.3%.
Rates
Rates rose across the curve as traders lowered the odds of a December rate cut. The recession-watch 3M-10Y spread widened 3bps to +26. The 2Y-10Y spread widened 1bp to +534. Rates rose in other developed markets. The BTP-Bund spread is at 0.75%. 5-year breakeven inflation expectations rose 1bp to 2.39% (vs. low of 1.88% on Sept 10, 2024); 10-year breakeven inflation expectations rose 1bp to 2.30% (vs. recent low of 2.03% on Sept 10, 2024); the 10Y real yield rose 3bps to 1.83%. The market now prices only a 41% 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 3.77% vs. the Fed’s guidance of 3.5%-3.75%. For 2026, the market expects a further 2 to 3 cuts vs. the Fed’s guidance of 1 cut.
Currencies/Commodities
The dollar index fell 0.3%. The commodities complex rose 1.1% as energy prices rose 1.6% for the week. Brent prices rose 1.2% to $64/bbl; U.S. natural gas prices rose 5.8%, while European gas rose 0.5%, both related to weather fluctuations.
Market monitors
Volatility rose for equities and for bonds (VIX = 20, MOVE = 80); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) fell from +2 to -18 as increased volatility has spooked investors.
Weekly Commentary
Hawkish Fed, Weakening Labor Data, and Markets Pushing Cuts to 2026
Stuart Katz
Executive Summary
The recent odds of a December cut have been going down to 44% and a 56% chance of a hold. With that said, there are now three cuts priced into 2026, so the bond market more or less is pushing out the rate cut into next year. Regardless, the Fed is becoming increasingly hawkish as labor market data from Challenger to ADP is weakening, making it difficult to rationalize a rate hold. The inflation side of their mandate is still the issue, and perhaps they are assuming higher inflationary readings in future CPI reports. We continue to believe minimal inflationary pressures from wage growth (narrative shifting from no hire/no fire to larger company layoffs such as Verizon, Amazon, UPS, etc.), commodity markets (both oil and lumber prices near year-to-date lows), and housing prices (as Zillow still says national home prices are up 0.1% year-over-year and while we hear from multi-family developers rental growth is declining). The tariffs may have created more “one-time” inflation in other consumer goods, that could be hitting future inflation reports. However, we don’t anticipate broad-based escalation and strengthening of inflation expectations.
Last week, the S&P 500 was barely positive while the NASDAQ and Russell 2000 declined. We believe the recent downturn was influenced by AI concerns (stay tuned for NVIDIA earnings/guidance Wednesday 11/19), hawkish Fed commentary and a data vacuum from the government shutdown. We believe the OBBB features and deregulation should help support consumers in 2026. In addition, earnings growth has been a tailwind for equities, although future positive returns are limited by valuation multiples. Fed tightening and/or disappointing earnings/guidance from mega AI players could disrupt market complacency and elevate volatility.
Equities
The S&P 500 returned +0.1% for the week. Optimism around the reopening of the government faded through the week as hawkish statements from several Federal Reserve governors dampened optimism around future rate cuts. Traders began to sell risk assets, concerned that the omission of key economic data due to the shutdown may spur the Fed to stand pat. Mid cap (-0.8%) and small cap (-1.8%) stocks sold off. Consumer discretionary (-2.6%) and utilities (-1.0%) were the key laggards in the S&P 500; healthcare (+3.9%) and energy (+2.8%) were the best performing. EAFE markets returned +1.7% with strong gains in Europe (+2.2%), while EM markets returned +0.3% with gains in Brazil (+3.3%) and India (+1.4%).
From a valuation perspective, the S&P 500 and EM trade at or above +1 standard deviation based on historical forward P/E ratios, with the S&P 500 at +2.0 and EM at +1.1. For the next 12 months, EPS growth for S&P 500 is expected to be 10.3% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 17.2% (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 mixed returns as rates rose across the curve. Municipals returned +0.1%, US AGG returned -0.2% and US IG returned -0.2%. HY bonds returned +0.1% while bank loans returned +0.1%. EM debt returned +0.3% as the U.S. dollar fell 0.3%.
Rates
Rates rose across the curve as traders lowered the odds of a December rate cut. The recession-watch 3M-10Y spread widened 3bps to +26. The 2Y-10Y spread widened 1bp to +534. Rates rose in other developed markets. The BTP-Bund spread is at 0.75%. 5-year breakeven inflation expectations rose 1bp to 2.39% (vs. low of 1.88% on Sept 10, 2024); 10-year breakeven inflation expectations rose 1bp to 2.30% (vs. recent low of 2.03% on Sept 10, 2024); the 10Y real yield rose 3bps to 1.83%. The market now prices only a 41% 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 3.77% vs. the Fed’s guidance of 3.5%-3.75%. For 2026, the market expects a further 2 to 3 cuts vs. the Fed’s guidance of 1 cut.
Currencies/Commodities
The dollar index fell 0.3%. The commodities complex rose 1.1% as energy prices rose 1.6% for the week. Brent prices rose 1.2% to $64/bbl; U.S. natural gas prices rose 5.8%, while European gas rose 0.5%, both related to weather fluctuations.
Market monitors
Volatility rose for equities and for bonds (VIX = 20, MOVE = 80); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) fell from +2 to -18 as increased volatility has spooked investors.
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Investment Commentary Sources: Bloomberg. Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any Investment decisions. The information contained herein was carefully compiled from sources believed to be reliable, but Robertson Stephens cannot guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Past performance does not guarantee future results. Forward-looking performance targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2025 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere. A2782
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