Updated Market Outlook Post Fed & AI Earnings (Still Bullish?)
First, I want to make sure all of you read my summary of the markets during midterm elections. I demonstrated the volatility that accompanies the uncertainty during this election year. I also hinted at changes in the portfolios starting in January of next year. For those that I have already talked to, we will be making changes soon in January. For those who I have not talked to, I will be sending my summary of three portfolios going into next year from moderate to aggressive. I am recommending that for most or you that you switch to moderate which is a 60/40 split between stocks and bonds. Now lets look at the markets going forward:
Three of the last “big” events of the year came and went last week and they did impact markets, but to understand that, we have to look at it in two separate time frames: Between now and year-end and in 2026. First, covering what happened, the Fed gave us a mixed decision in that it cut rates, signaled a pause and provided investors with a surprise (the T-bill purchases).
Then, ORCL earnings (which were the most important of the week) did nothing to reduce rising concerns that all this AI cap-ex may not be sustainable (or produce the best ROI), while AVGO earnings (which were good) revealed that AI Enthusiasm is under serious pressure. These developments altered the market outlook, although that specific impact will depend on time frame. Looking at the market between now and year-end, which I admit is more shortsighted than we are in this Report but still matters given annual performance numbers, the net impact of last week’s news is to favor the “rest of the market” over tech.
The Fed decision wasn’t hawkish enough to cause a broader decline and that’s why we saw non-tech sectors rally on Thursday and Friday and that can continue into year-end if the data this week doesn’t contain any negative surprises.
Looking at 2026, the bullish case for stocks has been somewhat diminished. AI Enthusiasm isn’t dead by any means, but it has sustained damage and sooner than later the market needs news that shows all this massive cap-ex spend is producing positive Return On Investment (ROI). At a minimum, it’s reasonable to assume that tech and tech-aligned sectors will not carry the market higher at the start of 2026, as they did in ’24 and ’25. So, that bullish tailwind has been reduced.
Turning to the Fed, its support for the market was also diminished if we look beyond the short term. According to the Fed, they are effectively “done” with rate cuts, which removes a bullish tailwind that has excited the markets since mid-2024. Yes, the new Fed chair could be more dovish than Powell, but the chair is just one vote and as we’ve seen, the Fed is very divided.
Positively, the Fed isn’t a headwind on growth and the Fed being on pause isn’t a problem as long as economic data stays solid. However, it does diminish a tailwind that’s helped stocks rally for more than a year.
So, is the outlook for 2026 suddenly bearish? No. The diminishing of tailwinds doesn’t mean the outlook is suddenly negative, so I am not advocating for reducing long exposure. But I do think that, as we start 2026, the case for the “rest of the market” finally taking leadership from tech is the strongest it’s been in two-plus years, and I would urge everyone to review exposure to ensure we’re not all still married to the fortunes of the tech sector. And if that means increasing allocations to the “rest of the market” and balancing out sector allocations, there’s reasons to justify it. To be clear, I’m not negative on tech, but the tailwinds that have propelled tech to massive outperformance over the past few years (and carried the rest of the market higher with it) have been diminished and that needs to be acknowledged as we head into 2026. In addition, the election year uncertainty will have an impact on the markets for most of the year.