Inside Markets — Uncertainty Ahead

We expect the US economy to remain resilient in a high-for-long rate environment. We look for the US exceptionalism theme to be reinforced by supportive domestic policy, expansion of the business cycle, resilient labor dynamics and a broadening out of the AI cycle. We also see the potential pro-business policies to deliver lower energy prices and generally stronger capital markets/deal activity. However, the path to policy change will likely be bumpy and markets are more vulnerable to negative surprises because a lot of that good news has already been priced in.

Expectations about policy become a reality in January and February. The US government is not an easy system to navigate and all new administrations face challenges in delivering policy across a range of priorities. The first week of January is typically underwhelming as people slowly return to the office. We also expect policy headlines to remain relatively light until January 20 and then we expect a highly actionable ‘first 100 days.’ The parts that appear early-on will likely be the policy that worry markets, specifically tariffs and immigration. But, we also look for larger-than-expected regulatory change that markets will welcome – and markets will be moving from headline to headline – sometimes overnight.

The Fed’s updated median dot for ’25 generated a negative market reaction. Consensus was expecting 2-3 rate cuts in ’25 with the pattern of dots unambiguously centered on 2 cuts. The Fed’s messaging was also incrementally hawkish, suggesting the committee could be somewhat reluctant or slower to cut rates. And markets will likely be more sensitive to downside growth developments with this type of Fed dynamic. The ‘Fed put’ is still in place, but monetary policy should now be considered as a floor rather than a tailwind – at least until there’s reassurance on inflation progress.

An uneven policy path, reluctant Fed and full SPX valuation (~21x forward estimates) has us looking to add equity exposure on pullbacks only. The SPX held our near-term technical support zone on Friday in the 5783-5865 upside gap from 11/6 and Friday’s bullish outside day qualifies as a reversal. Many stocks are now oversold and have room to work higher into CQ4 earnings season than begins on January 15 and the inauguration on January 20.  We continue to see the potential for less-transparent forward guidance during Q4’24 earnings calls on the basis policy uncertainty and post-inauguration headlines could produce some unwanted volatility.