A "hawkish cut" is consensus for Wed FOMC, but this is also a "market clearing" event, hence, December rally still intact.

We still expect the S&P 500 to finish 2025 achieving new all-time highs, reaching 7,000-7,300. But the path seems labored, and in the first days of December, the S&P 500 is flat so far. Multiple catalysts lay ahead with the most meaningful being the December FOMC rate decision this week.

  • Our 2026 Outlook report will be released on Thursday December 11th. Please keep an eye out for it.
  • All eyes on the FOMC Meeting on Wednesday:
    - 12/8 Mon 11:00 AM ET: Nov NYFed 1yr Inf Exp 3.2%
    - 12/9 Tue 6:00 AM ET: Nov Small Business Optimism Survey 98.3e
    - 12/9 Tue 10:00 AM ET: Oct JOLTS Job Openings 7115ke
    - 12/10 Wed 8:30 AM ET: 3Q ECI QoQ 0.9%e
    - 12/10 Wed 2:00 PM ET: Dec FOMC Decision -25bpe
    - 12/11 Thu 8:30 AM ET: Sep Trade Balance -63be
    - 12/11 Thu: 2026 Year Ahead Outlook Webinar
  • Clearly the Fed decision is the most important event in December, even if the rate outcome is not likely to be a surprise. Both interest rate markets and prediction markets see >90% chance of a 25bp cut. But the Fed decision is meaningful for several reasons.
  • At the Oct FOMC press conference, Powell threw cold water on the notion of a December cut, and the FOMC minutes showed voting members were undecided. And it was only recently that incoming data, particularly weakening labor markets, and also the downturn in inflation, that a cut seemed more likely.
  • So it is understandable that investors are wary of this coming Dec FOMC rate decision.
    - this is expected to be another "hawkish cut" given many member sees rates closer to neutral
    - but given the downside risks to labor markets and expected further cooling of inflation
    - a "data dependent" Fed seems very backwards looking
  • In our view, even if this is a "hawkish cut," equities should still be resilient post meeting:
    - a "hawkish cut" is the base case
    - QT ended on December 1,
    - and the Fed is now expected to be buying $45-$50b per month in Treasuries
    - and if Fed sounds too "hawkish," the White House may invoke the "shadow Fed" chair
  • President Trump has stated that he knows his pick for the next Fed Chair. If the Fed is too hawkish, we expect the White House to soon announce Powell's replacement. This would be a surprise. Currently, prediction markets show a 90% chance no new Fed Chair is announced before year-end.
  • Ultimately, we see this as a "market clearing" event. That is, investors want to get the Fed meeting out of the way and then markets can focus on the seasonals and other reasons for a December rally.
  • The Fed meeting is one of several positive catalysts we see for December. There are six reasons we expect stocks to rally in December:
    1. Fed is set to cut in Dec + QT ending
    2. The US economy remains healthy and there is pent up demand. ISM manu <50 for nearly 3 years. And housing has pent up demand.
    3. The government shutdown over = blackout in eco data over, restoring visibility
    4. Performance chasing. Investors are offsides as the Nov selloff caused many funds to throw in the towel. Already 2025 is the worst year for fund manager performance with 78% trailing their benchmark.
    5. Equities got oversold in November with RSI falling to the lowest level since the April tariff lows. And in April 2025, there was actual reasons for market fear.
    6. It’s seasonal. December usually finishes strong. But given the deep pullback in Nov, Dec should be even stronger.
  • The setup for December gains is also favorable:
    - since 1950, there 25 years where S&P 500 up 15% thru Nov
    - of these, only 4 instances where November was "flat or down"
    - this is the case in 2025
    - 4 of 4 instances, S&P 500 gained in December
    - median gain +3.5%
  • Those 4 years, similar to 2025:
    - 1950, Dec gain +4.7%
    - 1963, Dec gain +2.4%
    - 1967, Dec gain +2.6%
    - 2021, Dec gain +4.4%
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