Good morning investors,
The Russell 2000 hitting all time highs validates my Thanksgiving call perfectly as small caps lead the post Fed rally. Oracle crashed 11% on massive AI spending that's taking too long to generate revenue, reigniting bubble fears across tech. Powell delivered the expected hawkish cut with three dissents, the first triple dissent since 2019, signaling the Fed is deeply divided heading into 2026. With the dot plot showing just one cut next year versus two expected in September, the bar for further easing has risen dramatically.
The newsletter will be a little longer than normal as I digest the Fed meeting and takeaways from yesterday, so I apologize in advance!
Opening Bell: Oracle Hangover
S&P ($SPY ( ▲ 0.23% )) futures down 0.3% and Nasdaq ($QQQ ( ▼ 0.32% )) futures off 0.5% while Dow ($DIA ( ▲ 1.36% )) futures rise 30 points. Oracle ($ORCL ( ▼ 10.83% )) plunges 12% premarket after disappointing Q2 revenue of $16.06 billion versus $16.21 billion expected despite 68% infrastructure growth. The company shocked markets raising capex guidance to $50 billion for fiscal 2026, up $15 billion from September's forecast.
Nvidia and AMD each fall over 1% in sympathy while CoreWeave drops 3% as AI infrastructure fears spread. Eli Lilly rises on obesity drug delivering record 28.7% weight loss in best case analysis, clearing path for knee arthritis indication.
Fed's Triple Dissent Drama
Wednesday's quarter point cut came with unprecedented division: Kansas City's Bowman and Chicago's Logan dissented hawkish wanting pause, while Governor Miran dissented dovish wanting 50 basis points. This first triple dissent since 2019 reveals a fractured committee struggling to balance sticky 2.8% inflation against softening labor markets.
The dot plot's shift to just one 2026 cut from two in September sent the clearest hawkish signal. Seven members see no cuts at all next year while projections range wildly from zero to six cuts, showing a committee without consensus. Powell acknowledged the decision was "a close call" where he could "make a case for either side."
My Fed Analysis
The Fed delivered a quarter point cut and paired it with language that clearly aims to slow expectations for further moves. The reappearance of “extent and timing” is a known signal that the bar for additional easing has been raised. Combined with three formal dissents and several “would have preferred no cut” participants, the message is simple: policy is now in a holding pattern unless the labor market deteriorates meaningfully.
The dot plot stays broadly intact, with only one cut implied in 2026 and another in 2027, but the dispersion remains the real story. Projections range from zero to six cuts next year, seven members see none at all, and a minority believe rates are already too low. A committee shaped like that rarely provides clean forward guidance and tends instead to reinforce uncertainty in discount rates.
The mechanics of the balance sheet deserve more attention than Powell gave them. The Fed has been running duration tightening QT, allowing longer dated securities to roll off while reinvesting mortgage paydowns increasingly into Treasury bills rather than notes. That shift alone removes roughly $17 billion a month of demand from the long end and has been part of the upward pressure on ten year yields since early December.
The Fed also announced $40 billion a month in bill purchases to calm funding markets. Powell worked hard to separate this from monetary easing, but markets tend to blur the line whenever the Fed buys anything. The key distinction is that these are liquidity operations, not a pivot toward QE.
Finally, it's worth noting that ISM manufacturing remains below 50, reinforcing why the Fed is reluctant to deliver more cuts without clearer evidence of cooling demand. When ISM eventually moves back into expansion, it typically unlocks broader risk appetite across small caps, cyclicals, and even crypto. We're not there yet, which is why the Fed feels no urgency to keep cutting.
Long End Tells the Real Story
The long end of the curve continues to rise for reasons that have very little to do with the policy rate. The bigger driver is fiscal sustainability. Interest expense has surged by nearly $1 trillion over the past decade, and the deficit is running at 6.2 percent of GDP during an expansion. Investors understand that short term rates can be cut, but structural debt dynamics don't disappear just because the Fed trims the front end.
That’s why ten year yields have climbed even though only 1.7 percent of Treasury issuance in the past year has been in maturities of twenty years or more, and 84 percent has been in T-bills. When issuance is overwhelmingly short dated but pressure shows up at the long end, the market is sending a very clear message: the issue is credibility, not supply.
This repricing isn’t isolated to the United States. Long dated yields in the UK, Germany, and Japan have risen by several hundred basis points from their cycle lows. Investors across the developed world are demanding a higher term premium in response to growing debt loads and weaker fiscal anchors.
There's also a quiet policy debate emerging over whether long run stability ultimately requires more Treasury ownership by price sensitive private investors rather than the central bank. It's far from a consensus view, but the fact that it’s being discussed at all tells you how seriously markets are reassessing the fiscal backdrop.
Commodities and precious metals reinforce the same message. Broad commodity indices have moved above a rising 200-day moving average for the first time in years, gold continues to trend higher, and silver’s outsized rally hints at speculative tension building under the surface. These are classic signals that investors remain uneasy about long term fiscal discipline, even as inflation moderates.
Oracle's AI Reality Check
Oracle's 11% plunge reflects the market's shifting focus from AI demand to funding sustainability. Remaining performance obligations surged 440% to $523 billion, proving demand isn't the problem. The issue is Oracle's debt load expanding rapidly as credit default swaps hit highest levels since 2009.
Capital expenditures of $12 billion in Q2 versus $8.25 billion expected, now guided to $50 billion for fiscal 2026, show the staggering cost of AI infrastructure. Free cash flow turned negative $10 billion with total debt reaching $106 billion. Markets question whether Oracle is stretching too far chasing hyperscale contracts.
Small Caps Validate My Call
The Russell 2000 hitting all-time highs confirms my Thanksgiving prediction when I urged buying the November selloff. Small caps benefit most from rate cuts as floating rate borrowers finally get relief. With ISM manufacturing below 50 for months, these companies desperately need easier financial conditions.
Wells Fargo's 2026 S&P target of 7,400-7,600 suggests 11% upside but moderating returns. Their caution about a "not smooth" path acknowledges the volatility ahead as Fed divisions, fiscal concerns, and AI reality checks create crosscurrents.
Today's Key Earnings
Broadcom reports after close with implications for the entire semiconductor space. Any weakness could pressure AMD which has failed three times at $225 resistance. The custom chip story needs validation as hyperscalers develop in-house alternatives.
Costco provides consumer health check while Lululemon tests whether premium retail can sustain momentum. Both matter for reading K-shaped recovery dynamics where affluent consumers drive results.
Final Thought
The market finds itself at a fascinating juncture where leadership is starting to shift from narrow mega cap dominance toward broader participation. The Russell’s breakout alongside tech turbulence captures that transition perfectly. Oracle’s 11 percent collapse isn’t about fading AI demand; it’s about the financial strain of funding AI at scale. In an environment where the long end is rising for structural reasons, companies that rely on heavy leverage to chase growth are being priced with far less generosity.
The Fed’s triple dissent underscores how divided the institution has become heading into 2026. Powell managed to hold this committee together, but his successor inherits a house without consensus at a moment when fiscal dynamics are deteriorating and the market is demanding a higher term premium. Cutting the front end won’t fix those structural issues. The curve is telling the story policymakers won’t.
My positioning remains unchanged: overweight small caps and financials benefiting from steepening yield curves, cautious on overleveraged tech, and bullish on companies with durable pricing power. We’re entering a phase where stock selection matters far more than index direction. Companies that can monetize AI without destroying balance sheets win. Those that can’t will feel the repricing quickly.
Use tech weakness to trim overcrowded trades and add to areas that benefit from broadening participation. The year end chase is still alive, but the leadership is changing.
As always, feel free to reach out with questions about navigating this rotation.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.