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Last week, the S&P 500 and Dow Jones indices ended with losses, with the latter falling 2% at the outset. As always, there was talk of a top, an inevitable correction, and later a downturn.
To answer whether this is really the case, we first need to understand what has caused the worsening market sentiment. The key factor that stands out is macroeconomic data.
The main issue seems to be stalled inflation progress. In November, CPI was 0.3% month-on-month (October: 0.2%), and core CPI was also 0.3% month-on-month (October: 0.3%).
The good news is that both figures met expectations. The bad news is that the Fed may reconsider its plans if the situation does not improve — and with Trump’s proposed tariffs, that seems unlikely.
For example, instead of another rate cut, they could pause. We will find out to what extent this risk is realistic on Wednesday during the Fed meeting, during which they will also release an updated Dot Plot.
The projections suggest the midpoint for 2025 will increase to 3.625% (up from 3.375%) and 3.125% in 2026 (up from 2.875%), signaling three 25-basis-point cuts in 2025 and two more in 2026.
But is this enough to reverse the trend?
If it wasn’t before, why should it be now? Even if Powell and his team decide to pause, the economy and markets still look broadly stable (if we are to believe the official data).
Yes, bankruptcies could increase, but it hasn’t been a big problem so far. The biggest problem is that the stocks of the major US market movers are ridiculously expensive, but that hasn’t scared anyone yet, either.
The fact that U.S. index futures opened this week with a higher gap suggests that market participants probably expect a “Santa Claus rally,” which usually begins in the second half of December.
