What We're Seeing: Year-End Dovish Fed – 2 December 2024

The Week in Brief

December opened on a positive note. Equity indices were mixed but finished the week mostly higher, as a dovish Fed at its final meeting of the year and continued signs of slowing inflation extended the bullish trend.

The market has been remarkably resilient. After navigating election uncertainty, earnings season, and shifting rate expectations, stocks are ending 2024 near their highs. The Santa Claus rally, that seasonal tendency for markets to drift higher into year-end, appears to be playing out.

Fed Messaging

The Fed delivered what the market wanted to hear. Policymakers acknowledged the progress on inflation and signaled that rate cuts remain on the table for 2025. The dot plot, while not explicitly dovish, was interpreted as confirming the easing bias.

This matters because rate expectations drive so much of the price action. With the Fed signaling it is done tightening and preparing to ease, the discount rate for equities is stabilising. That provides a floor for valuations.

Sector Dynamics

Sector rotation remained limited. Technology and communication services continued to lead, benefiting from both secular growth trends and the rate-sensitive rally. Energy and financials lagged, consolidating after strong performance earlier in the year.

The narrow leadership is a feature to watch. While the overall market is healthy, the concentration in a few sectors means any disappointment there could weigh heavily on indices.

Our Read

We think the setup for 2025 is constructive. The Fed is pivoting, inflation is moderating, and the economy is growing. Corporate earnings have held up well, and balance sheets are generally healthy. This is not a fragile environment.

That said, valuations are not cheap. The S&P 500 trades above historical averages on most metrics, meaning expectations are elevated. The market is priced for a soft landing, and any deviation from that script could trigger a pullback.

For positioning, we are maintaining our balanced approach. Quality growth stocks deserve a place in portfolios, but we are also looking at areas that have lagged. Small caps and value stocks could see catch-up rallies if economic growth remains solid.

What Could Change Our View

The risk case involves inflation surprising to the upside or economic growth slowing more than expected. Either scenario would challenge the current narrative. We are also watching credit markets for any signs of stress, particularly in lower-rated corporate debt. For now, conditions are supportive.

This is informational commentary, not investment advice.