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Thought of the day

Market expectations for a Federal Reserve rate cut in December climbed further on Tuesday after the latest data signaled some softening in the US economy. Fed funds futures now imply an 84% probability of a 25-basis-point cut at the next policy meeting, up from 50% last week.

Rate-cut expectations were initially lifted by comments from Fed Vice Chair John Williams and Governor Christopher Waller, who signaled support for easing policy in the near term. The latest economic releases also reinforced the outlook. ADP’s weekly jobs report showed private payrolls falling by an average of 13,500 jobs per week through early November, and September's retail sales were below consensus estimates. Core wholesale prices also came in below expectations, according to September's producer price index (PPI). Last week, the official employment report showed the unemployment rate rose to 4.4%, the highest level since October 2021.

We continue to expect two more rate cuts through the first quarter of 2026, providing a positive backdrop for equities, quality bonds, and gold.

Historically, US stocks perform well when the Fed is lowering rates and the economy is not in recession. Despite recent softer data, consumer spending remains resilient. We expect US economic growth to be supported by fiscal policy measures and healthy consumer and corporate balance sheets, while the effects of recent tariffs should fade. Notably, consumers, who drive 70% of US economic growth, have the lowest debt burden in over 40 years (excluding distortions from fiscal policy during the pandemic). Against this backdrop, we forecast S&P 500 earnings growth of around 11% in 2025 and 10% in 2026. Combined with additional rate cuts, we expect further market gains and maintain our price target for the S&P 500 to reach 7,300 by June 2026.

Falling yields support capital gains for quality bonds. Yields fell across the curve after Tuesday’s data, and we expect further declines as the Fed continues to cut rates—forecasting the 10-year yield at 3.75% by June 2026. With the Treasury relying more on short-term bills, any sharp rise in yields should be limited. This creates an appealing risk-reward for quality bonds, which offer durable income in our base case, and have the potential to perform well in the event of slowing economic activity.

Lower real rates increase the appeal of gold. The drop in US real interest rates—the opportunity cost of holding non-yield-bearing assets like gold—has supported gold’s rally, and we believe further Fed easing amid above-target inflation should continue to support the precious metal. We view gold’s recent consolidation as a pause in its ongoing bull run, as elevated global government debt, as well as political and economic uncertainty, should boost demand for bullion.

So, with more policy easing ahead, investors should ensure sufficient exposure to these asset classes according to their financial plan. Investors should also review their currency allocations as the appeal of the US dollar erodes. We favor the euro and Australian dollar over the US dollar.