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Thought of the day

The S&P 500 gained 1.6% and the tech-heavy Nasdaq rose 2.7% on Monday, helped by comments from Federal Reserve Governor Christopher Waller signaling his support for a rate cut next month. Waller’s remarks followed similar comments from FOMC Vice Chair John Williams last week. Fed funds futures now imply a 79% probability of a rate cut at the next Fed policy meeting, which concludes on 10 December, up from 42% just a week ago.

The mood around tech stocks also turned more positive. Alphabet led Monday’s gains in the AI trade, with its shares rising 6.3% amid positive sentiment about its upgraded AI model, Gemini 3, which builds on Gemini 2.5 released earlier this year. Alphabet’s momentum extended to other AI-linked stocks, with the Philadelphia semiconductor SOXX index rising 4.6%.

Despite Monday’s gains and without taking any single-stock views, concerns about the elevated valuations of the AI-linked stocks that have driven much of 2025’s market rally could persist. But while investors should expect further bouts of volatility, we believe that Fed rate cuts, robust corporate earnings, and the AI growth story will sustain the equity rally into 2026.

The Fed has room to cut rates further.  Although recent comments by top Fed officials have underlined a split on the timing of the next rate cut, we believe economic data will justify further easing.  Despite stronger-than-expected job creation in September, the unemployment rate rose to its highest level since October 2021, which should also help keep inflation in check. We expect the Fed to deliver two additional 25-basis-point rate cuts by the end of the first quarter of 2026, as inflation expectations remain well anchored and the Fed prioritizes risks to employment.

Earnings strength across the broader market is laying the groundwork for sustained gains. In addition to robust earnings from the tech sector during the third-quarter reporting period, there were signs of strength across the board. The median S&P 500 company beat earnings per share (EPS) expectations by close to 5%, which was higher than normal. We now expect S&P 500 EPS to grow by 11% this year and 10% in 2026, higher than our previous estimates. With our forecast of the S&P 500 reaching 7,700 by the end of 2026, we see compelling opportunities not only in tech, but across the health care, utilities, and banking sectors.

Increasing opportunity in the application layer. The AI investment narrative is shifting from enabling infrastructure to the application layer, where cash flow generation becomes the focus. In our view, the benefits of AI are likely to increasingly accrue to companies leveraging the technology in practical applications to boost efficiency and profitability. We recommend pivoting toward businesses using AI for advertising, coding, and automation, as well as sectors like US health care, where AI can reduce costs from drug discovery to clinical trials. This evolution offers an opportunity to broaden exposure to AI and rethink strategies for capitalizing on its transformative potential.

So, while markets may experience volatility as they digest new data and headlines, we believe that the bull market is intact. We recommend investors build a clear plan, deploy excess cash, construct a strong core portfolio across equities, fixed income, and alternatives, as well as selectively hedge risks.