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Expectations that this week’s FOMC meeting will result in a 25-basis point cut in the fed funds rate — to a range of 3.50-3.75% — jumped from 30% to 87% in the past three weeks. This reversal was triggered in large part by New York Fed President John Williams who stated that inflation expectations were well-anchored, wage growth has moderated, and inflation should get back to the Fed’s 2% goal in 2027. He also noted that the labor market has cooled down and the downside risks to jobs have increased.
Still, investors remain nervous ahead of this week’s FOMC announcement as seen by the mixed price performances in equities in the last two sessions. We believe the Fed needs to cut rates at this meeting since the employment environment is holding steady, but just barely. If the Fed fails to lower rates this week, we expect the stock market will respond badly.
New weekly initial unemployment claims fell to 191,000 at the end of November, the lowest number since the late 1960’s. And while this low number might suggest it is a strong job market, it was a holiday week which means claims may not have been filed, were postponed, or not tallied in a timely manner. The JOLTS report for October did not provide much new information. Job openings increased marginally and the declining trend in the hires rate and the quits rate continues. See page 3.
The ISM nonmanufacturing index showed little change. The headline index rose 0.2 to 52.6 in November, and seven of 10 components of the survey increased this month. Four components remain below the 50 breakeven level. However, our focus was on the employment index, which rose 0.7 to 48.9. This was a very modest increase, but it was sufficient to keep the combined manufacturing and nonmanufacturing ISM employment index — now at 92.9 — from falling below the standard deviation range of 92.1 to 112.7. Again, the job market is holding steady but is far from robust. See page 4.
The NFIB Small Business Optimism Index was 99.0 in November, up 0.8 points and above its 52-year average of 98. Of the 10 components, six increased, three decreased, and one was unchanged. An increase in those expecting real sales to be higher contributed most to the improvement. However, the Uncertainty Index also rose 3 points to 91. An increase in owners reporting uncertainty about plans for capital expenditures in the next three to six months was the primary driver of the rise in the Uncertainty Index. However, in our view, the best news of the report was the jump in hiring plans from 15 to 19, the highest level since December 2024. Although this index remains well below the August 2021 level of 32, it is up nicely from the low of 12 recorded in May of this year. See page 5.
Nevertheless, the main reason the Fed should be lowering rates this month is that current jobs data will be revised downward by a significant amount in February. The BLS estimates that the adjustment to March 2025 payrolls will be a reduction of 911,000 jobs!! In short, whatever the current data suggests about job growth is probably overstated. For this reason, the Fed should cut interest rates as an insurance policy against a recession.
Newly released data for the PCE deflator showed a small rise from 2.7% YOY to 2.8% YOY in September. (Technically the index was up 2.74% YOY in August and up 2.79% YOY in September.) The core PCE deflator fell from 2.9% to 2.8%. Although this data release is unlikely to influence the Federal Reserve’s rate decision, it does align with Fed President John Williams’ comments that inflation appears well anchored and continues to hover slightly under 3%. Note that it is also well below the long-term average of 3.5% YOY. Assuming inflation might remain stable in October, November, and December, the real fed funds rate would show a decline from 170 basis points in January to 110 basis points presently. This is merely an estimate, yet it could spark a debate about whether fed policy is currently dovish (real rates falling) or hawkish (real rates steady or higher), depending upon one’s forecast for the economy.
There are signs of weakness in both housing and autos. In November total seasonally adjusted vehicle sales rose 2.1% month-over-month but were still down 6.1% YOY. Total sales of light weight trucks fell 2.7% YOY. Of this, domestic sales of light weight trucks fell 1.9% YOY and foreign sales of light weight trucks fell 5.7% YOY. It appears that tariffs on foreign vehicles and interest deductions on domestic vehicles are supporting domestic sales even during a sales slump. (The One Big Beautiful Bill allows consumers to deduct interest paid on loans for new, domestic-assembled vehicles purchased for personal use between 2025 and 2028. The benefits of this should show up in the first quarter as taxpayers file 2025 returns.) See page 7.
The University of Michigan consumer sentiment ended four straight months of declines by increasing from 51.0 to 53.3 in December. The rise was due entirely to expectations, which jumped from 51 to 55. Present conditions fell from 51.1 to 50.7. Total consumer credit rose $9.2 billion in October, or 0.2% for the month, and revolving credit rose $5.4 billion, or 0.4%. As a result of this increase, the 6-month rates of change for total, nonrevolving, and revolving consumer credit were 0.9%, 0.8%, and 1.2%, respectively. This is a big improvement from the negative – and worrisome — rates of change seen from December 2024 through May 2025. The year-over-year changes are still negative for revolving credit but are positive for nonrevolving and total credit growth. See page 8.
The Fed meets this week, but next week on December 16, 2025, the BLS will release the employment report for November and on December 18, 2025, will release the CPI and real earnings for November. On December 23, 2025, the Bureau of Economic Analysis will release the initial estimate for third quarter GDP. All these reports have the potential to move the market and will provide expectations for what the Fed may do at its January 27-28, 2026, meeting. However, in the interim, a new Fed Chair is apt to be announced and that may override any and all economic data!
Third quarter earnings season is ending and there was little change in earnings estimates this week. However, we would note that the current S&P Dow Jones consensus estimate for 2025 S&P 500 earnings is $263.75 and LSEG IBES’ estimate is $271.81. Our long-standing earnings estimate of $270 once looked too high but could be too low! For 2026, S&P Dow Jones estimates earnings of $308.28 and LSEG IBES estimates $309.28. Our estimate of $310.50 is unchanged and again could prove to be too conservative. What is important to note is that earnings growth is supporting the current advance. That is the opposite of a bubble. This market could turn into a bubble, but we believe it is way too early to be concerned.
The technical condition of the equity market improved this week due in large part to a new all-time high in the NYSE cumulative advance decline line on December 4, 2025. The 10-day average of daily new highs also rose to 260 and the 10-day average of daily new lows fell to 51. This combination of more than 100 new highs per day turns this indicator from neutral to positive. We continue to be buyers on dips.
Gail Dudack
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.
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