Making sense of the equity bounce-back

After a volatile start of November, equity markets resumed their uptrend last week with the S&P 500 index now almost back at its all-time high. Earlier weakness reflected concerns over tech valuations and uncertainty around a December rate cut by the Federal Reserve (Fed). Those odds started to move lower when Fed Chair Jerome Powell surprised the market in October by saying that another rate cut isn’t a foregone decision. With limited key economic data releases ahead of next month’s Fed meeting, the mixed September jobs report (delayed due to the shutdown) and varying comments by Fed officials, suggest a divided Fed. Several members of the monetary policy committee point to the soft labour market as a reason to cut rates, while others prefer to wait with inflation well above target. With the recent comments of New York Fed President Williams highlighting labour market concerns, the scale seems to have tipped in favour of a rate cut. His comments marked the turnaround for equity markets. We expect the Fed to lower rates by 25 basis points in December and continue cutting in 2026, bringing the key policy rate one step closer to 3%, a level considered neutral for economic growth, neither too restrictive nor too stimulative. 

With Jerome Powell’s term ending in May 2026, the process of appointing a new Fed Chair looks to be in its final stage. According to prediction markets, Kevin Hassett, a long-time advisor to President Trump and Director of the National Economic Council, has emerged as frontrunner for the job. With a new Fed Chair, questions over the independence of the Fed could resurface and weaken investor confidence. Combined with expected rate cuts, this underpins our view of a weaker US dollar in 2026. That should be particularly favourable for emerging market (EM) assets, which is why we hold an overweight in EM equities. 

An easier monetary policy stance by the Fed is central to our preference for equities over bonds. Historically, rate cuts bode well for equity markets, provided that economic growth remains resilient. With the US economy set to benefit from reduced trade uncertainty, tax cuts, deregulation and ongoing investments in AI, we think growth will benefit.  

Last week, the UK unveiled its widely awaited Budget aimed at restoring fiscal credibility after prior periods of instability in bond and currency markets. The fiscal stance leans towards austerity, but with most of the adjustments coming from tax increases over a multi-year period rather than deep spending cuts. The UK bond market responded positively as the Budget’s fiscal consolidation measures lower inflation risks and underpin expectations of future Bank of England (BoE) rate cuts. However, the longer-term impact on growth, inflation and interest rates remains uncertain. 

Ahead of the Budget, we increased our position in UK government bonds to lock in attractive yields (hedged to strip out currency effects, for euro-based investors) before they potentially decline next year as we expect the BoE to begin cutting rates. That said, the outlook for Sterling remains mixed. Near-term economic pressure could weaken it against the euro, given no further cuts from the European Central Bank. Against the US dollar, we expect modest strength as the Fed moves ahead with more rate cuts. 

Key data this week includes the ISM (Institute of Supply Management) surveys (Wednesday for the vast services sector), offering fresh insight into November economic activity. As official payrolls data remains delayed post-shutdown, investors will pay particular attention to the employment data by payroll processor ADP. There will also be a few delayed economic reports for September coming through, including industrial production (Wednesday) and personal consumption expenditures (PCE) inflation (Friday). 

In Europe, inflation data will be in focus with the Eurozone-wide number for November released on Tuesday. There will also be inflation data for Switzerland (Wednesday) and Sweden (Thursday). 

On the geopolitical front, the focus continues to be on the Russia-Ukraine conflict. The recent 28-point US-backed peace plan has been adjusted into a 19-point plan to reflect Ukrainian and European interests. While US negotiator Steven Witkoff is visiting Moscow, it is unclear if Russia will accept the revised plan or demand the initial 28-point plan.