Weekly Market Update

This chart shows that the Fed has set easier policy than the Taylor Rule would suggest.

At last week's FOMC meeting, Chair Powell emphasized a December rate cut is “not a forgone conclusion—far from it,” both in his prepared remarks and the Q&A.

We see this reflecting a deliberate effort to

1. temper market expectations for a near-term cut and
2. convey a split in views among policymakers about the wisdom of further easing absent employment and inflation updates.

For example, Governor Waller said there is no data fog, and the Fed has enough information to continue cutting rates. Sticky inflation pressures, rising tariff effects, resilient real GDP nowcasts (Atlanta Fed GDPNow tracking 4.0% annualized q/q growth for 3Q), and solid corporate earnings all argue against further easing despite signs of labor market softness.

The data-driven Taylor Rule suggests Fed policy remains accommodative, consistent with the entire post-COVID cycle (Figure 1). We see Powell’s rhetoric reinforcing this reality and fed funds futures markets scaled back expectations for a December cut from near 100% to under 70%.

If the government reopens and federal agencies restore data before December 10th, the Fed will be in a stronger position to evaluate the case for a December rate cut and its 2026 projections. Absent new economic data, we expect the FOMC to remain uneasy about easing policy further amid a data vacuum.

We see the Fed in a challenging position in balancing market pricing versus their evaluation of appropriate policy, given how strongly the Fed wants to avoid disappointing markets.

Until key government data returns, our focus is on earnings transcripts for economic clues, state-level jobless claims, new ADP data, ISM surveys, and inflation tracking from the Harvard Tariff Tracker.

Bottom line: Potential disappointment for ongoing rate cuts into 2026 puts pressure on rate-sensitive sectors such as small caps and further reinforces our preference for large caps in this environment.

Current year-over-year (y/y) Q3 earnings growth stands near 12%, highlighting a resilient market with a concentrated composition. The technology sector, growing roughly 23% y/y, accounts for more than 70% of the index's y/y net income growth for Q3.

S&P 500 capital expenditures is expected to rise 21% y/y this quarter, but only 6% when excluding the Magnificent 7¹ and other tech leaders. Market pricing shows this divergence clearly. The size factor continues to favor large caps over small caps, consistent with strong earnings growth among the former.

Early in rate-cutting cycles, small caps often outperform during the first month; however, large caps usually take the lead over the subsequent six months by over 4% — a pattern we expect to persist.

On a cumulative basis, small cap index funds have lost flow support since January 2023 while Nasdaq index funds have continued to attract steady inflows.

We see this reflecting the fundamental construction of the large versus small indices: the former retains better ratios of debt-to-assets, floating rate debt to total debt, and positive earnings momentum.

The large index (Russell 1000) holds roughly +18% tech and +10% communications services index exposure relative to small (Russell 2000), two of the most profitable sectors that we continue to favor as leadership in the AI-driven cycle.

Bottom line: The AI race remains strong as hyper-scalers lift 2025 CapEx guidance and stress the need to sustain spending in 2026 to preserve market leadership amid capacity constraints. We continue to favor large-cap leaders with high-quality balance sheets and strong earnings growth potential.

On fundamental characteristics, the broader S&P 500 looks much better than the index's median performance (Figure 2). This is important because the largest eight names in the index account for ~40% of overall market cap.

This top heavy concentration on price performance and fundamentals makes investors uncomfortable to idiosyncratic swings, sparking call for the broadening out of the equity market.

We would be more worried if the market was driven higher not on fundamentals but on price alone by these companies. But because the fundamentals on these mega-cap companies are so strong, and they're moving the U.S. indices to new highs, we're less worried but will continue to monitor.

Bottom line: This is direct support for our preference to have a quality bias in portfolios. At this stage in the cycle, economic and market fundamentals take on increased importance. That's why it's key that what we own has strong fundamental drivers as the cycle matures.

This chart shows that the S&P Benchmark outperforms the index’s median growth y/y.