Meeting-to-Meeting

We got what we expected in terms of the outcome of the U.S. Federal Reserve meeting, with the FOMC voting to cut the policy rate by 25 basis points — the second consecutive rate cut, bringing the fed funds rate to the 3.75% to 4.00% range. What was the driver? Continued weakness in the labor market has leapt to the front burner for the Fed, and this cut is intended to ease conditions enough to prevent this slowdown from accelerating. There were two dissenters: One member advocated for a more aggressive 50 basis-point cut, and the other was in favor of no cut.

As always, however, those looking for some confidence in further rate cuts were left unsatisfied: The statement and press conference indicated that there was no pre-commitment to a prescribed interest rate path and that the Fed would remain data dependent. Of course, the difficulty in obtaining official data amid the government shutdown is a complicating factor, but Fed Chair Powell remains committed to a “meeting-to-meeting” approach to decision making.

Following the meeting — and now that the communication blackout period is over — investors have heard from several FOMC members who have voiced opposition to easing policy, citing confidence in the U.S. economy and concerns that inflation remains too high. From a market perspective, investors have reduced expectations for another rate cut at the December meeting. While the market-implied probability of an additional 25 basis-point cut next month was over 90% merely a week ago, it sits at just over 60% today. Our base case calls for a cut in December and a slow pace of cuts through 2026, as we approach the 3% neutral rate.

The market reaction to the Fed decision was most apparent in the U.S. Treasury market, where yields jumped across the yield curve, bringing the 10-year Treasury yield back above 4% as investors recalibrated expectations for the timing and magnitude of future cuts. Investors focused on Fed Chair Powell’s comment that another cut this year is not a “foregone conclusion.” The U.S. dollar strengthened, as higher yields and the lower probability of additional significant easing provided a tailwind. U.S. equities ended the day in the red, with particular pain felt in the NASDAQ and across large cap growth markets, which fell over 1% on the day.

While the U.S. equity market continues to set new highs, there are some signs of exhaustion under the hood. Specifically, the strength of the MAG7 and tech sector may be masking relative weakness in the broader market. The equal-weighted S&P continues to underperform the capitalization-weighted index by a significant delta: In October, the equal-weighted index returned -1.17%, which certainly pales in comparison to the cap-weighted index advance of over 2% and represents an acceleration of underperformance for the month.

The MAG7 stocks continue to dominate returns and results. The cohort is responsible for 50% of the S&P 500’s return to date, gaining 24% against the index’s 16%. This group is also contributing mightily to fundamental results, with the expectation for 2025 earnings growth of 20% against the rest of the market’s 8%. 

The “K-shaped” economy, where different segments of the population are experiencing very different levels of economic security and growth, continues to reveal itself in interesting ways. The term was widely used to describe the post-COVID U.S. economic recovery, when different income groups had markedly different economic experiences coming out of the pandemic: Top earners and wealthy households experienced strong growth while others faced ongoing job losses and stagnation. Inflation exacerbates this trend and tends to impact lower-income households more than high earners.

Today, the top arm of the K — the high earners — continue to enjoy a strong economy where income growth and asset valuations support robust spending. Recent data from Moody’s reveals that the top 10% of earners are responsible for nearly 50% of all U.S. consumer spending, which marks a dramatic increase from this group’s roughly 30% contribution in the 1990s. In contrast, low-income households continue to struggle. Moreover, a certain age cohort of U.S. consumers is feeling even more economic pain today amid difficult labor market conditions and continued high prices: Chipotle CEO Scott Boatwright commented this week that diners in the 25-35 age group are cutting back on visits, leading the company to cut its same-store sales forecast for the third consecutive quarter. This comes on the heels of similar comments by McDonald’s CEO Chris Kempczinski. While restaurant chains have tried to address this trend with lower-price options, the younger and lower-income consumers continue to cut back, even as inflation moderates. As a result, we continue to expect more softening in the U.S. economy, and it is likely to impact the lower arm of the K — and the younger age cohort — more significantly going forward.