Good Morning Investors,
The Fed's first cut of the Trump 2.0 era is now in the books, and while Wednesday's session closed with mixed signals, overnight futures suggest the market has digested Powell's measured approach and found it palatable. The 25bp cut was never in question, the real story lies in what comes next and how markets navigate the delicate balance between easing policy and persistent structural challenges.
Opening Bell
US equity futures show renewed optimism after Wednesday's choppy session. Nasdaq-100 ($QQQ ( ▼ 0.38% )) futures lead with gains of 0.9%, S&P 500 ($SPY ( ▼ 0.26% )) futures climb 0.9%, while Dow ($DIA ( ▼ 0.53% )) futures advance 333 points. This rotation back into technology reflects investor confidence that the Fed's easing cycle will benefit rate-sensitive growth sectors, despite Powell's cautious messaging about the path ahead.
The labor market remains the Fed's primary concern with jobless claims data due at 8:30 AM. After last week's 263,000 reading, markets expect a decline to 240,000, which would support the Fed's narrative of gradual labor market softening rather than accelerated deterioration.
Nvidia ($NVDA ( ▼ 0.04% )) faces China headwinds as Beijing reportedly discourages domestic firms from purchasing certain AI chips, highlighting the ongoing tech decoupling that remains a persistent overhang for the world's most valuable company. Meanwhile, Lyft ($LYFT ( ▲ 1.39% )) surged 13% on its Waymo partnership announcement, stealing market share momentum from Uber in the autonomous vehicle race.
Fed's Measured Beginning: Unity Masks Future Uncertainty
The Quarter-Point Consensus
As expected, the Federal Open Market Committee delivered a 25bp cut, bringing the fed funds rate to 4.00-4.25%. The decision saw remarkable unity with only one dissent, newly appointed Stephen Miran voting for 50bp. This apparent consensus, however, masks the complexity ahead as the Fed navigates dual mandate tensions for the first time since December.
Powell's messaging struck a deliberately cautious tone, describing the cut as "risk management" rather than the beginning of an aggressive easing cycle. His emphasis on "no risk-free paths now" and the "quite difficult situation for policymakers" underscores the Fed's awareness of threading the needle between supporting employment and containing persistent inflation pressures.
The Dot Plot's Revealing Scatter
The Summary of Economic Projections showed two additional cuts expected this year, with the median terminal rate at 3.50-3.75% by December. More telling is the wide dispersion of views for 2026 and beyond, signaling potential for increased dissent as political pressures intensify and economic data evolves.
The revised GDP forecasts came in higher than expected, aligning with recent resilient economic data and supporting the case for measured rather than aggressive policy accommodation. This backdrop suggests the Fed retains flexibility to pause if inflation proves stickier than anticipated.
Market Dynamics: Technology's Return to Leadership
Post-Fed Rotation Dynamics
Wednesday's mixed close, S&P 500 flat at exactly 6,600, Nasdaq down 0.3%, Dow up 0.6%, reflected initial uncertainty about the Fed's commitment to meaningful easing. However, overnight futures action suggests markets have embraced the dovish shift, particularly in rate-sensitive technology names.
The rotation into Nasdaq futures leadership indicates investors expect the cutting cycle to disproportionately benefit growth stocks with longer duration cash flows. This aligns with our thesis that technology, crypto, and small-caps will lead Q4 performance as rate expectations solidify.
Updated Market Outlook: Raising the Bar
Given the Fed's dovish pivot and resilient economic backdrop, I'm revising my S&P 500 target to 6,800 by year-end, up from my previous 6,500 target. This reflects the combination of easing financial conditions, continued AI infrastructure investment, and the historical precedent of Fed cutting cycles supporting equity valuations.
The path won't be linear, expect continued volatility around inflation data and geopolitical developments. However, the underlying drivers remain supportive for a fourth-quarter rally led by technology and other rate-sensitive sectors.
Corporate Highlights: Autonomous Vehicles and China Dynamics
Lyft's Strategic Victory
Lyft's 13% surge on the Waymo partnership announcement for Nashville deployment in 2026 represents more than just another autonomous vehicle deal. It breaks Uber's quasi-monopoly in the space and validates Lyft's strategy of focusing on profitable partnerships rather than costly in-house development.
The market reaction, Uber down 5% while Lyft soared, suggests investors recognize this as a material shift in competitive dynamics. The robotaxi market remains early stage, but Waymo's technology lead combined with multiple ride-hailing partners creates a more competitive landscape.
Nvidia's China Challenge Continues
Reports of Beijing discouraging domestic firms from purchasing certain Nvidia AI chips underscore the chip giant's unwanted role as a trade war pawn. While this doesn't crack the fundamental AI demand thesis, it highlights concentration risk in what could be Nvidia's largest potential market.
The development reinforces our view that geopolitical tensions will remain a persistent overhang for semiconductor names with significant China exposure. Diversification into other AI infrastructure plays remains prudent risk management.
Technical and Sentiment Picture
Futures Signal Confidence
The overnight strength in rate-sensitive sectors suggests markets have moved beyond initial Fed uncertainty toward embracing the easing cycle. Nasdaq futures' outperformance indicates technology leadership returning, supporting our thesis of sector rotation benefiting growth names.
The S&P 500's close at exactly 6,600 provides a clean technical level, with futures suggesting a break higher toward my revised 6,800 target. Volume patterns and options positioning indicate institutional accumulation rather than speculative euphoria.
AI Monetization Theme for 2026
Looking ahead, 2026 represents the inflection point where AI infrastructure investments begin generating measurable revenue returns. This monetization cycle, combined with easier financial conditions, creates a powerful fundamental backdrop for sustained technology outperformance.
Risk Factors: Persistent Crosscurrents
Despite the constructive setup, several risks require monitoring:
Inflation remains above the Fed's 2% target with potential tariff pressures creating upside risks
China-US tech tensions continue escalating, impacting semiconductor and AI infrastructure names
Labor market data could deteriorate faster than Fed expectations, forcing more aggressive policy responses
Political pressure on Fed independence may undermine market confidence in data-driven policy. This did seem to somewhat moderated with the 11-1 vote yesterday.
The Path Forward: Measured Optimism with Higher Targets
Wednesday's Fed decision marks a pivotal shift from restrictive to accommodative policy bias, even if the pace remains measured. Powell's emphasis on data dependency provides flexibility while the dot plot's dovish tilt supports our constructive equity outlook.
My revised 6,800 S&P 500 target reflects this improved backdrop while acknowledging the journey won't be smooth. Technology's return to leadership, supported by easier financial conditions and approaching AI monetization, creates the foundation for sustained outperformance.
Strategy remains focused on rate-sensitive growth sectors while maintaining small-cap exposure for cutting cycle beneficiaries. The equal-weight S&P 500 approach continues reducing concentration risk while capturing expected breadth expansion as monetary policy supports broader market participation.
Final Thought
The Fed's 25bp cut represents more than policy normalization, it signals recognition that the dual mandate requires balanced attention to employment alongside inflation concerns. While Powell's cautious messaging prevents euphoric positioning, the underlying shift toward accommodation supports our constructive equity outlook.
Markets appear positioned for technology-led strength in Q4, supported by the cutting cycle and approaching AI monetization themes. My revised 6,800 S&P 500 target reflects this improved fundamental backdrop while acknowledging geopolitical and inflation risks require ongoing vigilance.
Use any near-term volatility as opportunity rather than signal. The Fed has begun its pivot, and history suggests patient investors in quality growth names will be rewarded as the easing cycle unfolds.
Dan Sheehan
This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor regarding your specific situation.