From the studio

Podcast: CIO’s head of global equities on tailwinds for 2026: Apple | Spotify (6 mins)
Podcast: Jump Start | Fed cut expectations, weaker dollar, and US stocks near highs (7 mins)
Podcast: Investors Club | What’s next for US and China tech amid policy uncertainty? (7 mins)

Thought of the day

US equities rallied and US Treasury yields declined after the Federal Reserve delivered its third consecutive interest rate cut, lowering the fed funds target range by 25 basis points to 3.50-3.75%. The decision was widely anticipated.

However, the accompanying statement and press conference signaled a more cautious stance toward further cuts. In the statement, the Fed reused previous guidance from July that the “extent and timing of additional adjustments” to the policy rate will depend on “incoming data, the evolving outlook, and the balance of risks.” And Fed Chair Jerome Powell reiterated that the committee is comfortable with current policy settings for now.

In addition, the Fed announced it will begin reserve management purchases (RMPs) starting on 12 December, with an initial round of USD 40 billion in short-term Treasury bills to be bought over the next 30 days. The central bank indicated that the pace of buying will remain elevated for a few months before being reduced, depending on market conditions.

The Federal Open Market Committee (FOMC) remains divided. Some members supported additional cuts to address the slowdown in the US labor market, while others expressed concern that further easing could reignite inflation pressures. Notably, there were three formal dissents: Stephen Miran favored a larger 50bps cut, while Jeffrey Schmid and Austan Goolsbee preferred no change. Additionally, four non-voting participants registered “soft dissents,” signaling they did not support the decision, and seven officials indicated they expect no rate cuts next year.

Given the divisions within the FOMC, the Fed’s updated “dot plot” showed a wide dispersion of views, with no clear consensus on the path for rates in 2026. The median dot shows one further rate cut in 2026. The Summary of Economic Projections (SEP) showed 2025 core PCE inflation estimates revised down to 3.0% (2026 to 2.5%), unemployment rate forecasts for 2025 and 2026 unchanged at 4.5% and 4.4% respectively, and GDP growth estimates revised up to 1.7% for 2025 and 2.3% for 2026. The long-run policy rate projection remains at 3.0%.

The market reaction was positive for risk assets. The S&P 500 rose 0.7% to close at 6,887 on Wednesday, just shy of its all-time high. The yield on 10-year US Treasuries dipped by 4bps to 4.15%. Gold was trading 0.6% higher at USD 4,234/oz, and the US dollar index fell 0.6%. Sentiment in equity markets turned more cautious after the end of US trading, after weaker-than-expected results from Oracle dented confidence in the outlook for AI.

What do we think?

Our base case is for an additional 25-basis-point rate cut in the first quarter of 2026, moving further toward a neutral policy stance, as labor market conditions remain soft. US inflation is likely to peak in the second quarter at just over 3%, in our view, before stabilizing toward the Fed’s 2% target. Powell noted that "it's really tariffs that are causing most of the inflation overshoot," and repeated his expectation that the impact is likely to be a "one-time price increase."

We expect economic momentum to accelerate into the second half of next year, supported by a shift in policy focus toward targeted tax cuts and deregulation as the midterm elections approach. We expect consumer demand to remain resilient, underpinned by solid wage growth and healthy household balance sheets among middle- and upper-income groups. We see US GDP growth running at around its 2% trend rate in 2026. In his remarks, Powell noted that the labor market has continued to cool, so focus will now likely shift to next week’s payrolls report.

Balance sheet guidance was also in focus, with the Fed’s decision to begin buying short-term Treasury bills, starting with USD 40 billion in maturities up to three years, aimed at addressing year-end funding pressures and ensuring smooth functioning of short-term money markets. These purchases are intended to provide additional liquidity and support repo market stability into the year-end. In our view, this should reinforce the steepening trend in the yield curve, which we anticipate will continue in 2026.

How to invest

With the Fed delivering a 25bps rate cut and given our expectation for another 25bps cut, we see a supportive monetary policy backdrop in 2026 and opportunities in equities, quality bonds, and gold. With the appeal of the US dollar eroding amid lower interest rates, we recommend that investors review their currency allocations. We expect US dollar weakness to persist into the first half of 2026. Investors should align their allocations to these asset classes with their financial plan.

Add to equities. We believe the current environment of solid economic growth, healthy corporate earnings, lower interest rates, and structural innovation drivers makes this an opportune time to add exposure to equity markets. The Fed’s rate cuts should support US stocks given historical precedent in non-recession periods. We forecast S&P 500 earnings per share will reach USD 305 in 2026—up 10% year over year—and see the index advancing to 7,700 by the year-end. The Magnificent 7 will likely continue to be major contributors, in our view, accounting for around half of our earnings growth expectations. Within US equities, we also see compelling opportunities in health care, utilities, and banking, broadening the foundation for further gains.

Transformational Innovation Opportunities (TRIOs). Our TRIO ideas of Artificial intelligence, Power and resources, and Longevity are founded on longer-term structural trends, and we see opportunities to add exposure over a tactical horizon. While the AI capex outlook remains robust, we expect that value creation will increasingly shift from the “enabling layer” to the “application layer” of the AI value chain. In Power and resources, the buildout of AI infrastructure should continue to support data center-linked demand. We also see broader opportunities in companies facilitating grid modernization and supplying critical raw materials. In the Longevity space, we expect strong growth in the obesity, oncology, and medical device markets.

Favor commodities. Commodities are set to play a more prominent role in portfolios in 2026. Our forecasts point to attractive returns, supported by supply-demand imbalances, heightened geopolitical risks, and long-term trends like the global energy transition. Because commodities have historically shown low correlation with equities and bonds, they can help cushion portfolios during periods of market stress. Within the asset class, we see particular opportunities in copper, aluminum, and agriculture, while gold remains a valuable diversifier.

Seek diversified income. The mix of tight credit spreads, uncertainties about government debt, and emergent stresses in credit markets suggests investors need to take a nuanced and diversified approach to yield generation. We believe this should include a mix of high-quality bonds, equity income strategies, and yield-generating structured investments, as well as select exposure to private credit. For 2026, we expect medium-duration quality bonds (four to seven years) to deliver mid-single-digit returns, from a mix of yield and capital appreciation as the Fed cuts rates.