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Thought of the day

US markets held steady on Tuesday as investors await the Federal Reserve’s interest rate decision later today. Markets are widely anticipating a 25-basis-point cut that would bring the federal funds rate to a range of 3.50-3.75%.

However, the Fed’s messaging, the “dot plot,” and the summary of economic projections will be of equal importance. Minutes from the last Federal Open Market Committee meeting and recent remarks from policymakers have both pointed to a divergence in policy views among Fed officials.

We expect the Fed to keep its options open and avoid constraining future policy decisions, with the “dot plot,” which charts the rate forecasts of top officials, likely to show a wide range of views from dovish to hawkish.

But we also see scope for further easing in the first quarter of 2026, as inflation forecasts should continue to trend lower toward the Fed’s 2% target, while the unemployment rate may be revised higher. The latest Job Openings and Labor Turnover Survey (JOLTS) painted a mixed picture of the labor market, indicating a rise in layoffs and less hiring in October, despite an increase in the number of available positions.

Against the backdrop of more accommodative monetary policy, we see opportunities in equities, quality bonds, and gold.

Stocks historically perform best when the Fed cuts in non-recession periods. Data going back to 1970 shows that the S&P 500’s average annualized returns at any given time are just below 10%, which rises to 12% when the US economy is not in recession. But investors enjoy the best returns (15%) when the economy is not in recession and the Fed is easing, which we define as a Fed rate cut within the last three months. In our view, the macro environment will likely continue to be in the most favorable condition through the early part of next year, supporting the equity market’s next leg up amid robust earnings. We expect the S&P 500 to reach 7,300 by June next year and 7,700 by the end of 2026.

Quality bonds play an important role in portfolios as a source of yield and diversification. Additional Fed easing should also bode well for quality bonds, and we see the potential for capital appreciation. We view high grade government and investment grade corporate bonds as a valuable source of portfolio income and diversification, and we expect medium-duration quality bonds (four to seven years) to deliver mid-single-digit returns in the coming year, exceeding cash rates.

Fed cuts should spur further gold demand. Given gold’s non-interest-bearing characteristics, we believe further Fed easing and potentially lower real yields should continue to support the precious metal. Combined with continued geopolitical uncertainties, potential changes in the domestic US political environment, and rising government debt, we believe the current strong buying trends of central banks and investors should continue. We rate gold as Attractive and stay long the metal in our global asset preferences, and believe it remains an effective portfolio diversifier. We forecast bullion to reach USD 4,500/oz by June 2026.

So, investors should ensure sufficient exposure to these asset classes according to their financial plan. We also recommend investors review their currency allocations as the appeal of the US dollar erodes. Tactically, we favor the euro and the Australian dollar.