Macro
Macro discussion this week was driven more by policy sequencing than data surprises, with several cross-currents converging. In the US, markets were fully prepared for a 25bp Fed cut, leaving the focus on Powell’s framing, the dot plot, and the credibility of a glide path toward neutral in 2026. While the decision delivered on market expectations, the vote split was notable, reinforcing internal debate over the pace of easing. With November payroll data unavailable ahead of the meeting and services activity still expanding but clearly cooling, the hurdle for pushing back against easing expectations remains high. Labour-market signals continue to soften beneath the surface, while consumer spending and income growth are converging lower, reinforcing a setup that remains supportive for duration despite still-resilient headline growth.
While the rate cut itself was fully discounted, the broader signal remains one of a “hawkish cut” rather than the start of an aggressive easing cycle. Labour-market softness is increasingly visible across alternative indicators, but it remains orderly rather than disruptive. Hiring freezes and replacement-only hiring are becoming more common, while outright layoffs remain contained, consistent with survey evidence indicating that activity is holding up even as employment intentions lag. This gives the Fed sufficient cover to ease policy without signalling concern about downside growth risks.
Trade policy has also emerged as a material macro variable. Markets increasingly view tariffs as a de facto tax on corporate margins and household purchasing power rather than a conventional trade tool. Because U.S. firms pay import duties at the border, costs rise immediately, thereby compressing EBIT when pricing power is limited. Estimates suggest that removing existing tariffs could lift S&P 500 EBIT by roughly 2.4% in 2026, with the largest operating leverage in consumer staples, industrials, and consumer discretionary. On the demand side, tariffs have functioned as a hidden tax on households, costing the average consumer roughly $1,200 over the past year. Any rollback would constitute quasi-fiscal easing, supporting margins and consumption at a time when spending is already slowing, consistent with weak employment growth.
Outside the US, policy divergence remains a defining theme. In Japan, markets continue to reprice the risk of a BoJ hike, keeping upward pressure on JGB yields even as growth data remain mixed, while FX markets have been notably unconvinced by the tightening signal. In Europe, sticky service inflation keeps the ECB on the sidelines despite improving PMIs, reinforcing a cautious, data-dependent stance. In the UK, easing inflation contrasts with soft activity and contracting GDP momentum, strengthening expectations for further BoE cuts. China remains the key macro downside risk, with weak PMIs and low inflation keeping attention on December policy meetings, where the credibility and structure of stimulus will matter more than headline size.
Rates
On Wednesday, the Fed delivered a 25 bp rate cut, lowering the target range for the federal funds rate to 4.75%–5.00%. This marked the third consecutive cut this year and was framed as a recalibration rather than the start of a strong easing cycle. The Fed cited emerging labour-market softness and improving confidence that inflation is no longer accelerating, while stressing that policy remains restrictive.
Crucially, communication emphasised that the base case is now a pause, not a preset easing path. Further cuts remain conditional on either clearer labour-market deterioration or more convincing disinflation, with dissent underscoring uncertainty within the committee rather than a clear directional bias.
That said, the policy backdrop is shifting away from restraint toward gradual easing, even if cuts remain incremental and data-dependent. This matters less as an immediate growth impulse and more as a psychological green light for risk-taking and capital deployment, shaping broader financial conditions beyond the policy rate itself.
Powell acknowledged that inflation risks persist, but noted that tariff-related inflationary pressures are expected to fade into next year, consistent with a one-off price-level effect rather than a structural inflation impulse. Uncertainty around timing and pass-through, however, keeps the Fed cautious about easing too aggressively ahead of confirmation in the data.
Importantly, the Fed now appears well positioned in rates-market terms, with the policy rate broadly aligned with the 2-year Treasury yield after roughly 175 bp of cumulative cuts since the start of the easing phase. This alignment reduces pressure for mechanical follow-up cuts and reinforces the Fed’s ability to remain patient, allowing markets rather than policy guidance to drive further rate adjustments.
The disconnect between market pricing and Fed guidance continues to widen. Markets continue to price in roughly 125 bp of further easing, yet the 10-year yield has moved higher, reflecting rising term premium rather than optimism on growth. Fed funds futures imply policy rates drifting toward 3.00%–3.25%, while the dot plot does not converge to those levels until 2027. This divergence reflects a market view that normalisation will ultimately come sooner than the Fed currently signals, while the long end continues to price scepticism that rate cuts alone will pull yields lower.
Credit
Credit markets remain open and functional, but the tone is shifting from pure demand strength toward supply absorption and issuer differentiation. Investment-grade issuance cooled after a strong start to the month, with just $4.7bn printed most recently, while high-yield issuance remained active. December HY supply is already above $20bn, making it one of the most active Decembers since 2020. The bigger issue is what lies ahead: after roughly $1.7tn of IG supply this year, forecasts for 2026 are clustering around $1.8–1.9tn, driven by a large refinancing wall, a projected ~25% increase in debt-financed M&A, and a sharp rise in tech issuance. Technology supply was up about 75% this year and is expected to double, as AI capex increasingly shifts onto corporate balance sheets. Despite this growing pipeline, public credit spreads remain historically tight, with investment-grade spreads still hovering in the mid-70 bp range and high-yield spreads around ~270 bp, only modestly wider than cycle lows.
So far, the market is absorbing this without stress. Cash remains abundant, and the yield buyer is still in control, reinforced by 7–10% total returns that keep the focus on carry rather than duration. Spreads look range-bound with a mild widening bias as supply builds, but it is hard to see a disorderly move without a macro shock. Policy also matters: roughly 175 bp of rate cuts have already improved coverage for floating-rate borrowers, particularly in loans and parts of consumer credit, even as long-end yields remain elevated and the curve stays steep.
Importantly, rate cuts have not translated into lower long-term yields; the curve has continued to steepen, leaving credit supported by carry rather than falling all-in yields.
Another stabilising factor is private credit, which has absorbed a growing share of lower-quality issuance, effectively leaving public high-yield and loan markets cleaner at a given spread level than in prior cycles.
Oracle sits right at that fault line. The latest earnings highlighted a clear deterioration in cash-flow visibility tied to its AI build-out, with roughly $10bn in quarterly cash burn and $50bn in capex expected this fiscal year, representing about 75% of revenue. This comes on top of around $105bn of net debt, including leases, $16bn of operating lease liabilities, and nearly $250bn of future lease commitments yet to start. While Oracle points to $523bn of contracted future revenue, more than half is linked to OpenAI, a loss-making counterparty with a shorter contract horizon than Oracle’s long-dated property leases. Management reiterated its commitment to an investment-grade rating, supported by $19bn of cash and a recent $18bn bond deal. Still, the lack of clarity around ultimate funding needs has already pushed 5-year CDS spreads wider.
In a market where spreads remain tight largely because risk has been displaced rather than eliminated, Oracle highlights how AI-driven capex can reintroduce leverage and execution risk back into public credit. Until capex intensity peaks and customer concentration eases, Oracle will remain an example of how the AI trade can translate into higher leverage, execution risk, and asymmetric downside for credit.
Equity
U.S. equities were mixed this week, with the Dow up 1.05% and the Russell 2000 rising 1.19%, with small caps setting a fresh record on Thursday. In contrast, the S&P 500 fell 0.63% after a sharp sell-off on Friday, despite also posting a record close earlier in the week, while the Nasdaq was the weakest major index, down 1.62%. Big tech dragged on performance, led lower by META (-4.3%) and GOOGL (-3.7%), while AI enablers (FRMI -33.4%, CRWV -11%) alongside retail favourites and momentum names were notable laggards. Leadership rotated away from crowded mega-cap growth and AI-linked momentum toward cyclicals, value, high-beta and heavily shorted stocks, pointing to internal rebalancing rather than a broad risk-off move.
Sector performance reinforced this rotation. Materials (+2.44%) and Financials (+2.31%) led the market, followed by Industrials (+1.37%) and Consumer Staples (+1.11%), while Healthcare (+0.43%) and Consumer Discretionary (+0.33%) posted modest gains. Communication Services (-3.20%) and Technology (-2.30%) were the weakest sectors, alongside Utilities (-1.14%) and Real Estate (-0.83%), highlighting continued pressure on growth and duration-sensitive areas. Energy (-0.61%) also lagged despite the broader cyclical tilt.
Looking beyond near-term market moves, the broader equity backdrop remains shaped by an exceptional multi-year rally, with three consecutive years of gains above 20%. A defining feature of this cycle has been the concentration of returns in a relatively small group of large-cap, AI-exposed stocks. Against elevated valuations and increasingly crowded positioning, a 15–20% correction in 2026 would not be surprising and would likely represent a healthy reset rather than a break in the broader bull cycle. The key risks are not macro-driven but expectation-driven, particularly regarding the scale and timing of returns from AI-related investments. With leverage low, investor positioning still cautious, and policy conditions gradually easing, any drawdown would more likely be temporary and treated as a buying opportunity rather than a regime shift.
Recent AI-related developments point to a more selective and execution-focused phase of the cycle. Oracle shares sold off after reporting weaker-than-expected free cash flow alongside a further escalation in AI-related capex, with full-year spending guidance raised by roughly $15 billion to around $50 billion. Broadcom also declined after earnings despite beating expectations and raising guidance, reflecting an extremely high bar following a more than 75% year-to-date rally and renewed focus on the monetisation path of its disclosed six-quarter AI backlog of approximately $73 billion, which supports long-term demand but offers limited near-term margin visibility. In contrast, Broadcom reported a doubling of AI-related revenues, while Oracle disclosed a sharp acceleration in remaining performance obligations tied to AI infrastructure demand, underscoring continued order momentum despite near-term cash-flow pressure.
OpenAI released its latest model, announced a strategic partnership alongside a $1 billion equity investment from Disney, and highlighted measurable enterprise productivity gains, while Nvidia received approval to resume sales of its H200 chips into China and indicated it is evaluating additional production capacity after demand exceeded supply. Taken together, these developments suggest the AI cycle remains intact but increasingly differentiated, with valuation discipline, cash-flow credibility, and customer quality becoming as important as growth exposure.
This same pattern of heavy upfront investment, long-dated payoffs, and strong investor willingness to underwrite dominant platforms is also visible beyond listed equities. SpaceX is pressing ahead with an insider share sale that values the company at just over $800 billion, based on a per-share price of roughly $420, nearly double the level implied in mid-2025, and is simultaneously laying the groundwork for a potential IPO in 2026 that could target a valuation of around $1.5 trillion and raise $30–75 billion, depending on the size of the float. This float size is very small, consistent with most large-cap IPOs, and it would concentrate demand and drive valuation discovery on a constrained number of shares. On current projections, SpaceX is expected to generate about $15 billion of revenue in 2025, rising to $22–24 billion in 2026, implying an IPO valuation multiple of roughly 65× forward sales, one of the highest ever contemplated for a company of this scale. While management emphasises that SpaceX has been cash-flow positive for several years, the underlying cash flows remain opaque, particularly given the capital intensity of Starship, satellite expansion, and longer-dated projects such as orbital data centres and lunar infrastructure. As a result, the valuation is largely narrative-driven, relying less on near-term financial metrics and more on the belief that SpaceX will dominate large segments of the future space, communications, and data economy. That narrative is reinforced by expectations of unprecedented retail investor demand for a once-in-a-generation listing, strong index-driven institutional participation, and a substantial “Elon premium”, reflecting Musk’s proven track record of repeatedly redefining entire industries.
Against the backdrop of elevated valuations and concentration risk in developed markets, emerging-market equities offer a potential source of diversification. After a prolonged period of underperformance versus U.S. dollar-denominated assets, EM equities delivered strong returns in 2025, raising the prospect of a cyclical inflexion. Valuations remain attractive relative to developed markets, particularly the U.S., while a softer dollar and more accommodative global rate environment could provide additional support. Stronger medium-term growth prospects, underpinned by demographics, rising consumption, and investment flows, further strengthen the case, particularly in markets positioned to benefit from global technology and infrastructure investment.
Finally, there is little evidence of the classic macro imbalances that typically precede deep and prolonged equity drawdowns, such as excessive credit growth, overheating labour markets, or forced deleveraging. As a result, any equity correction is more likely to reflect valuation normalisation and positioning adjustment within a late-cycle expansion rather than the onset of a macro-driven recession.