Fed Rate Cut Hopes Buoy Markets

Key Highlights

• Markets advanced for a second straight week, with the S&P 500, Nasdaq, and Dow all closing within reach of record highs.¹

• Fed expectations solidified, with futures pricing an ~90% chance of a 25 bps rate cut next week amid cooling inflation and improving labor data.¹³

• Small caps and growth sectors outperformed, signaling a broadening rally as investors leaned into risk ahead of potential easing.¹

• The dollar weakened again, helping push copper to record highs, while oil stabilized and gold hovered near historic peaks.¹

• Corporate catalysts added momentum, including Netflix’s multibillion-dollar bid for Warner Bros. Discovery² and strong earnings from Salesforce, Ulta, and other tech and consumer names.²³

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Markets climbed again in the first week of December, supported by growing conviction that the Federal Reserve will deliver a rate cut next week. Major indices moved closer to record highs as inflation data remained calm, labor indicators strengthened, and volatility stayed muted. Sector leadership favored growth areas, small caps continued to rebound, and a weaker dollar lifted commodities. Corporate earnings surprises and one of the biggest media deals of the decade added to the week’s momentum.

Equities Approach Record Levels

U.S. equities posted their second consecutive weekly gain. The S&P 500 rose about 0.3%, the Nasdaq gained 0.9%, and the Dow added 0.5%, leaving all three within striking distance of all-time highs.¹ The advance broadened beyond mega-cap names: small caps extended last week’s sharp rally, with the Russell 2000 gaining another 0.8%.¹ Investors appear increasingly comfortable taking on higher-beta exposure as financing conditions look set to ease.

Growth sectors led the way. Communication services hit a record high, boosted by strong performance from media and internet names.¹ Technology and consumer discretionary also outperformed.¹ Defensive pockets—utilities, healthcare, and energy—lagged, despite stable oil prices.¹ Healthcare slipped in part due to a policy shift: a federal advisory panel withdrew its long-standing recommendation for universal hepatitis B vaccination at birth, weighing on related stocks.¹

Volatility remained subdued throughout the week. The VIX fell below 16, near its yearly lows, reflecting a market largely unfazed by macro risks or geopolitical tensions.³ International markets were mixed but generally positive: European equities advanced modestly, while Japan declined late in the week amid expectations the Bank of Japan may soon raise rates.¹

Economic Data Supports a Fed Pivot

Economic releases strengthened expectations that the Fed will cut rates at the December 10–11 meeting. The PCE price index—the Fed’s preferred inflation measure—rose 2.9% year-over-year, with core PCE slightly below expectations.¹ These reports, delayed by the fall government shutdown, confirmed that inflation continues to drift toward the Fed’s target.

Labor data helped reinforce the case. Initial jobless claims plunged to 191,000, the lowest since 2022, underscoring continued labor-market resilience.³ Continuing claims also edged lower.³ Meanwhile, early-December consumer sentiment improved to 53.3, beating expectations, though overall confidence remains historically subdued.¹

By Friday, futures markets were pricing in roughly an 87–90% probability of a quarter-point cut next week.¹ Fed officials had increasingly signaled openness to easing in recent speeches, pushing expectations sharply higher from late November. Analysts expect a split vote, but the direction of policy appears set: the Fed is ready to begin loosening financial conditions as inflation cools and economic growth moderates at a steady pace.

The largest unknown now is the path beyond December. Investors are watching closely for signs that Chair Powell may endorse additional cuts early in 2026. A more cautious message—framing December as a one-off adjustment—could temper market enthusiasm, but recent data gives the Fed cover to adopt a more dovish tone if desired.

Global Central Banks, Currency Moves, and the Dollar’s Slide

While the Fed prepares to ease, the Bank of Japan is signaling the opposite. Japanese government bond yields climbed to multi-year highs this week on expectations the BOJ may raise its policy rate to 0.75%—potentially its highest level since the mid-1990s.¹ The yen strengthened modestly, while Japan’s equity market fell on the prospect of higher domestic borrowing costs.¹

This divergence—Fed easing and BOJ tightening—has begun to unwind the long-running yen carry trade, in which investors borrowed cheaply in yen to invest in higher-yielding U.S. assets.¹ Although the unwind has been orderly, it represents a potential source of volatility if yield differentials continue to narrow.