Mid-week market update: My former Merrill Lynch colleague Fred Meissner of
The Fred Report wrote on the weekend that “the yearend rally has started, and a trend following indicator…we primarily use for risk management to show that trends have turned positive on key indexes”. From a purely technical perspective, I agree. The S&P 500 has begun an upper Bollinger Band ride. Past upper BB ride episodes has seen the index advance further, followed by a period of consolidation and mild pullback.
Is the pause in the advance in stock prices the end of the upper BB ride that signals an imminent pullback and consolidation? In the short run, there are three sources of volatility for the stock market. We just had the Fed decision today. This week, we will see several Magnificent 7 stocks report earnings. In addition, the market will see the results of the Trump-Xi meeting.
The FOMC Decision
As expected, the Fed cut rates by a quarter-point today. The decision was accompanied by a dovish dissent for a half-point cut (Miran) and a hawkish dissent of no cut (Schmid).
It was a hawkish cut as Powell pointed out during the press conference that a “December cut is “not to be seen as a forgone conclusion. In fact, far from it”. He went on to cite “strongly differing views about how to proceed in December”. The market responded by discounting another quarter-point cut at the December meeting, followed by a more moderate path of rate cuts in 2026.
For banking system nerds, the real question was the Fed balance sheet decision. The WSJ reported that Jerome Powell “in a rare speech devoted primarily to technical monetary plumbing dynamics, said the central bank could approach the point ‘in coming months’ where it needed to end the three-year-long campaign to shrink its holdings”. That’s because as the Fed begaun to shrink its balance sheet, otherwise known as quantitative tightening (QT), “most of the Fed’s balance-sheet runoff drained cash not from banks but from a separate deposit facility where money-market funds could park cash”, otherwise known as the overnight reverse repo (ON RRP) facility. Now that ON RRP is almost all gone, further balance sheet runoffs will directly impact banking system liquidity. As the accompanying chart shows, banking system liquidity has been falling, which creates a headwind for risk assets like stocks.
In the end, the Fed “decided to conclude the reduction of its aggregate securities holdings on December 1”. Powell acknowledged that the Fed will have to start expanding its balance sheet to accommodate banking system liquidity needs at some point in the future.
Earnings Season
This week is the heaviest week of Q3 earning season as the bulk of the S&P 500 is scheduled to report results.
Market heavyweights META, MSFT, and GOOGL report results today after the close. AMZN and AAPL report tomorrow.
The preliminary results from Q3 earnings season has been above average. EPS and sales beat rates are above their 5-year averages and forward 12-month EPS estimates continue to rise, which are signals of positive fundamental momentum.
How the market reacts to earnings reports this week as a significant portion of the S&P 500 report results will determine the near-term outlook for stock prices. One key question is the impact of tariffs on margins. Consensus estimates of Q3 margins are flat compared to Q2. Fed Chair Powell also highlighted mentions of the K-shaped recovery in earnings calls of “consumer facing companies”. While the high-end consumer is healthy, lower-end consumers are struggling. Investors should be vigilant for surprises, either to the upside or downside on margin guidance.
Finally, Trump and Xi are expected to meet Thursday on the sidelines of the APEC Summit in South Korea. Both sides are maing conciliatory noises ahead of the meeting. While we are unlikely to see a complete trade peace, market expectations of a retreat of belligerent positions. Trump has said that he would cut the 20% tariffs imposed China over the import of fentanyls.
Bloomberg reported that “China has bought at least two cargoes of U.S. soybeans” as a signal of a thaw in trade relations.
In addition, NVIDIA soared to a fresh all-time high and a $5 trillion market capitalization in anticipation of a relaxation of controls on the exports of its Blackwell chip.
The market is positioned bullishly. Will it be disappointed, or rewarded?
In conclusion, the technical position of the stock market argues for the start of a year-end rally. My inclination is to buy any dips, should disappointment set in in the coming days.
