Executive Summary
Markets extended their rally in October, rising for a seventh straight month despite intra-month volatility and uncertainty around a December rate cut. The government shutdown has ended, but it has left a gap in economic data, making it difficult to analyze the economy. Despite this data vacuum, optimism around a third consecutive rate cut has helped stabilize markets. A shift in equity leadership away from mega-cap tech, combined with continued strength in corporate earnings and AI-driven investment, provided additional support. However, signs of economic deceleration, including rising unemployment, slowing consumer spending, and persistent manufacturing weakness, are flashing caution. As the data backlog begins to clear, markets are looking for confirmation that the economy is still on track for a soft landing.
1. Key Themes Driving the Market
November was marked by a unique set of crosscurrents, as markets navigated a lack of economic data due to the government shutdown while simultaneously responding to shifting expectations around Fed policy. With key economic data like payrolls, inflation, and GDP growth delayed, investors have relied heavily on non-government data and economic models to gain insight into the health of the economy. Despite the fog, or maybe because of it, the market has latched onto a single clear signal: the Fed looks ready to cut again. The odds of a December rate cut swung wildly in November, but by month-end, the market priced in an 85% probability. Expectations for a third consecutive rate cut underpin the bull market. Equity valuations, credit spreads, crypto, and rate-sensitive assets all lean on the idea that the economy is slowing just enough to justify rate cuts without triggering a recession. The risk: when the backlog clears, it could either validate the soft-landing-plus-rate-cut story or unravel it.
2. Stock Market Recap
November nearly broke the S&P 500’s winning streak, with early-month losses in mega-cap tech dragging the index. However, a cooler-than-expected CPI print, rising unemployment, and dovish Fed commentary revived hopes for a December rate cut, stabilizing the market. The S&P 500 rose +0.2%, but the gain masked a shift away from mega-cap tech and growth stocks. Health Care surged +9.3%, followed by Materials, Consumer Staples, and Energy. Eight of the eleven sectors outperformed the index, as extreme concentration in the Technology sector weighed down the index. Overall, the month saw a sharp narrative shift, driven by uncertainty around a December rate cut and AI fatigue. The VIX market volatility index spiked to its highest level since April before retreating as odds of a December rate cut rebounded.
3. Bond Market Recap
Bonds rallied as soft inflation data and dovish Fed commentary fueled expectations for a December rate cut. Treasury yields ended the month lower despite intra-month volatility, with the front to mid-section of the yield curve seeing the largest decline. It marked the fourth positive month in the last five for the Bond Aggregate, highlighting confidence that interest rates have likely peaked. Investment-grade bonds led the rally, supported by both falling Treasury yields and credit spread tightening. High-yield also traded higher, although rising spreads in lower-rated CCC bonds signaled growing concerns about credit quality.
4. Fed Policy and Interest Rate Expectations
Fed policy remained in focus amid conflicting commentary from Fed officials and a lack of fresh economic data due to the government shutdown. This uncertainty and officials’ commentary created volatility in November and fueled uncertainty about a December rate cut. Commentary started the month hawkish but turned dovish late in the month after September’s delayed labor market report showed rising unemployment and inflation came in cooler than expected. The probability of a December rate cut swung sharply during the month, falling from nearly 100% at the start to under 40% mid-month, then rebounding to 85% by month-end. The market now expects the Fed funds rate to fall below 3% by the end of 2026, with three cuts spread throughout 2026. The takeaway: Fed policy remains uncertain and far from settled.
5. Investor Sentiment and Market Positioning
Investor sentiment remained constructive in November, but signs of caution began to surface. Equities faced a mid-month technical breakdown, briefly slipping below key moving averages before recovering into month-end. This whipsaw pattern reflected a market increasingly sensitive to rate expectations and policy shifts. ETF inflows were strong throughout the month, with the 12-week rolling average near levels last seen in February before the tariff volatility. Seasonally favorable conditions suggest the rally can continue into year-end, but institutional positioning is becoming crowded. Survey data shows equity allocations at cycle highs, while cash levels are approaching contrarian sell signals.
6. Corporate Earnings and Valuations
Valuations remain stretched, with the S&P 500 trading at levels only surpassed during the dot-com era. Elevated multiples reflect high expectations for AI-driven earnings growth, accommodative Fed policy, and expectations for continued economic growth. Earnings continue to support the S&P 500’s valuations, with Q3 earnings exceeding forecasts and over 80% of companies beating estimates. However, earnings strength remains concentrated in a few mega-cap tech firms. The margin for error is limited as markets price in an ideal mix of disinflation, Fed support, and AI-capex-driven growth. A disappointment in tech earnings or economic growth could test investor confidence.
7. Economic Trends and Outlook
The shutdown backlog began to clear in late November, revealing a mixed picture. Job growth improved, but unemployment rose to a four-year high. Consumer spending slowed, sentiment fell to post-pandemic lows, and manufacturing remained in contraction. Meanwhile, inflation remains elevated, with tariff impacts beginning to show. Overall, the economy appears bifurcated: AI-related investment is propping up headline economic growth, while traditional sectors like housing and manufacturing continue to struggle.
Bullish Considerations
- The Fed cut rates at back-to-back meetings in September and October, which lowered borrowing costs.
- Disinflation progress continues, as housing and shelter price pressures continue to ease.
- AI-related capital expenditures are translating into earnings growth and productivity gains.
- Corporate earnings remain resilient, with many firms beating expectations despite macro headwinds.
- Falling energy prices provide a boost to consumers’ incomes and reduce inflation pressure.
- The recently passed tax bill includes provisions to spur business investment.
- Bank deregulation may help provide further liquidity to the credit markets and spur economic activity.
Bearish Considerations
- Valuations remain high across stocks, housing, and corporate bonds, fueling talk of an “everything bubble”.
- Stock market indices trade well above historical averages, increasing the risk of downside surprises.
- AI spending is strong, but there’s uncertainty around the profitability of AI capex investments.
- The federal government shutdown has ended, but it’s left a data vacuum that clouds the economic outlook.
- Rising unemployment and slower job growth could threaten future consumer spending.
- U.S.–China trade tensions haven’t been fully resolved, and regional bank stress signals potential credit risk.
- Debt sustainability and Fed independence are increasingly being challenged.
Commentary for the Week Ending 12/05/2025
Equities
The S&P 500 returned +0.4%. Stocks fell at the start of the month as cryptocurrencies declined, and global bond yields jumped after a rout in Japanese bonds. Weak employment data, however, boosted the market’s hopes of rate cuts, and equities rallied later in the week to close near all-time highs. Technology (+1.4%) and energy (+1.4%) were the best-performing sectors in the S&P 500; rate-sensitive utilities (-4.5%) and healthcare (-2.7%) were the laggards. EAFE markets returned +0.8% with gains in Europe (+0.8%), while EM markets returned +1.4% with gains in Korea (+5.0%) and China (+1.3%).
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 +1.9 and EM at +1.2. For the next 12 months, EPS growth for the S&P 500 is expected to be 10.8% (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 negative returns as rates rose across the curve. Municipals returned +0.0%, US AGG returned -0.5% and US IG returned -0.5%. HY bonds returned +0.1% as spreads compressed by 5 bps, while bank loans returned +0.2%. EM debt returned +0.3% even as the U.S. dollar fell 0.5%.
Rates
Rates rose across the curve as global bonds sold off after the spike in Japanese yields due to hawkish commentary from the Japan Central Bank (JCB). The 2Y-10Y spread widened 5bps to +57. Rates rose in other developed markets as well. The Italian Government BTP-German Government Bund spread is at 0.69%. 5-year breakeven inflation expectations rose 3bps to 2.35% (vs. low of 1.88% on Sept 10, 2024); 10-year breakeven inflation expectations rose 4bps to 2.27% (vs. recent low of 2.03% on Sept 10, 2024); the 10Y real yield rose 9bps to 1.85%. The market now prices a 92% 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 3.66% vs. the Fed’s guidance of 3.5%-3.75%. For 2026, the market expects a further two cuts vs. the Fed’s guidance of 1 cut.
Currencies/Commodities
The dollar index fell 0.5%. The commodities complex rose 1.9% as energy prices rose 2.8% for the week. Brent prices rose 0.9% to $64/bbl; US natural gas prices rose 9.1%, while European gas fell 5.6%, all driven by weather fluctuations.
Market monitors
Volatility fell for equities and for bonds (VIX = 15, MOVE = 67); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) improved sharply from -11 to +14 as investors look to Fed rate cuts.
Weekly Commentary
Markets Rally Through Data Fog as Fed Expectations Drive Sentiment
Stuart Katz
Executive Summary
Markets extended their rally in October, rising for a seventh straight month despite intra-month volatility and uncertainty around a December rate cut. The government shutdown has ended, but it has left a gap in economic data, making it difficult to analyze the economy. Despite this data vacuum, optimism around a third consecutive rate cut has helped stabilize markets. A shift in equity leadership away from mega-cap tech, combined with continued strength in corporate earnings and AI-driven investment, provided additional support. However, signs of economic deceleration, including rising unemployment, slowing consumer spending, and persistent manufacturing weakness, are flashing caution. As the data backlog begins to clear, markets are looking for confirmation that the economy is still on track for a soft landing.
1. Key Themes Driving the Market
November was marked by a unique set of crosscurrents, as markets navigated a lack of economic data due to the government shutdown while simultaneously responding to shifting expectations around Fed policy. With key economic data like payrolls, inflation, and GDP growth delayed, investors have relied heavily on non-government data and economic models to gain insight into the health of the economy. Despite the fog, or maybe because of it, the market has latched onto a single clear signal: the Fed looks ready to cut again. The odds of a December rate cut swung wildly in November, but by month-end, the market priced in an 85% probability. Expectations for a third consecutive rate cut underpin the bull market. Equity valuations, credit spreads, crypto, and rate-sensitive assets all lean on the idea that the economy is slowing just enough to justify rate cuts without triggering a recession. The risk: when the backlog clears, it could either validate the soft-landing-plus-rate-cut story or unravel it.
2. Stock Market Recap
November nearly broke the S&P 500’s winning streak, with early-month losses in mega-cap tech dragging the index. However, a cooler-than-expected CPI print, rising unemployment, and dovish Fed commentary revived hopes for a December rate cut, stabilizing the market. The S&P 500 rose +0.2%, but the gain masked a shift away from mega-cap tech and growth stocks. Health Care surged +9.3%, followed by Materials, Consumer Staples, and Energy. Eight of the eleven sectors outperformed the index, as extreme concentration in the Technology sector weighed down the index. Overall, the month saw a sharp narrative shift, driven by uncertainty around a December rate cut and AI fatigue. The VIX market volatility index spiked to its highest level since April before retreating as odds of a December rate cut rebounded.
3. Bond Market Recap
Bonds rallied as soft inflation data and dovish Fed commentary fueled expectations for a December rate cut. Treasury yields ended the month lower despite intra-month volatility, with the front to mid-section of the yield curve seeing the largest decline. It marked the fourth positive month in the last five for the Bond Aggregate, highlighting confidence that interest rates have likely peaked. Investment-grade bonds led the rally, supported by both falling Treasury yields and credit spread tightening. High-yield also traded higher, although rising spreads in lower-rated CCC bonds signaled growing concerns about credit quality.
4. Fed Policy and Interest Rate Expectations
Fed policy remained in focus amid conflicting commentary from Fed officials and a lack of fresh economic data due to the government shutdown. This uncertainty and officials’ commentary created volatility in November and fueled uncertainty about a December rate cut. Commentary started the month hawkish but turned dovish late in the month after September’s delayed labor market report showed rising unemployment and inflation came in cooler than expected. The probability of a December rate cut swung sharply during the month, falling from nearly 100% at the start to under 40% mid-month, then rebounding to 85% by month-end. The market now expects the Fed funds rate to fall below 3% by the end of 2026, with three cuts spread throughout 2026. The takeaway: Fed policy remains uncertain and far from settled.
5. Investor Sentiment and Market Positioning
Investor sentiment remained constructive in November, but signs of caution began to surface. Equities faced a mid-month technical breakdown, briefly slipping below key moving averages before recovering into month-end. This whipsaw pattern reflected a market increasingly sensitive to rate expectations and policy shifts. ETF inflows were strong throughout the month, with the 12-week rolling average near levels last seen in February before the tariff volatility. Seasonally favorable conditions suggest the rally can continue into year-end, but institutional positioning is becoming crowded. Survey data shows equity allocations at cycle highs, while cash levels are approaching contrarian sell signals.
6. Corporate Earnings and Valuations
Valuations remain stretched, with the S&P 500 trading at levels only surpassed during the dot-com era. Elevated multiples reflect high expectations for AI-driven earnings growth, accommodative Fed policy, and expectations for continued economic growth. Earnings continue to support the S&P 500’s valuations, with Q3 earnings exceeding forecasts and over 80% of companies beating estimates. However, earnings strength remains concentrated in a few mega-cap tech firms. The margin for error is limited as markets price in an ideal mix of disinflation, Fed support, and AI-capex-driven growth. A disappointment in tech earnings or economic growth could test investor confidence.
7. Economic Trends and Outlook
The shutdown backlog began to clear in late November, revealing a mixed picture. Job growth improved, but unemployment rose to a four-year high. Consumer spending slowed, sentiment fell to post-pandemic lows, and manufacturing remained in contraction. Meanwhile, inflation remains elevated, with tariff impacts beginning to show. Overall, the economy appears bifurcated: AI-related investment is propping up headline economic growth, while traditional sectors like housing and manufacturing continue to struggle.
Bullish Considerations
Bearish Considerations
Commentary for the Week Ending 12/05/2025
Equities
The S&P 500 returned +0.4%. Stocks fell at the start of the month as cryptocurrencies declined, and global bond yields jumped after a rout in Japanese bonds. Weak employment data, however, boosted the market’s hopes of rate cuts, and equities rallied later in the week to close near all-time highs. Technology (+1.4%) and energy (+1.4%) were the best-performing sectors in the S&P 500; rate-sensitive utilities (-4.5%) and healthcare (-2.7%) were the laggards. EAFE markets returned +0.8% with gains in Europe (+0.8%), while EM markets returned +1.4% with gains in Korea (+5.0%) and China (+1.3%).
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 +1.9 and EM at +1.2. For the next 12 months, EPS growth for the S&P 500 is expected to be 10.8% (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 negative returns as rates rose across the curve. Municipals returned +0.0%, US AGG returned -0.5% and US IG returned -0.5%. HY bonds returned +0.1% as spreads compressed by 5 bps, while bank loans returned +0.2%. EM debt returned +0.3% even as the U.S. dollar fell 0.5%.
Rates
Rates rose across the curve as global bonds sold off after the spike in Japanese yields due to hawkish commentary from the Japan Central Bank (JCB). The 2Y-10Y spread widened 5bps to +57. Rates rose in other developed markets as well. The Italian Government BTP-German Government Bund spread is at 0.69%. 5-year breakeven inflation expectations rose 3bps to 2.35% (vs. low of 1.88% on Sept 10, 2024); 10-year breakeven inflation expectations rose 4bps to 2.27% (vs. recent low of 2.03% on Sept 10, 2024); the 10Y real yield rose 9bps to 1.85%. The market now prices a 92% 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 3.66% vs. the Fed’s guidance of 3.5%-3.75%. For 2026, the market expects a further two cuts vs. the Fed’s guidance of 1 cut.
Currencies/Commodities
The dollar index fell 0.5%. The commodities complex rose 1.9% as energy prices rose 2.8% for the week. Brent prices rose 0.9% to $64/bbl; US natural gas prices rose 9.1%, while European gas fell 5.6%, all driven by weather fluctuations.
Market monitors
Volatility fell for equities and for bonds (VIX = 15, MOVE = 67); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) improved sharply from -11 to +14 as investors look to Fed rate cuts.
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