Market Outlook After the December Cut

A 25bp reduction is already fully discounted, so the immediate reaction hinges on two elements: Powell’s tone and the updated policy path in the Summary of Economic Projections.

1. Relief from the uncertainty premium

The past 1 to 2 months have seen wide swings because traders were constantly adjusting the timing and scale of easing. Once the decision is delivered, the uncertainty premium usually narrows. If Powell signals confidence that inflation is on a sustainable path to target, equities typically find support. The first cut in a cycle often lifts valuations because discount rate assumptions stabilise.

2. Risk of a “sell the news” episode

Since the cut is expected, markets may briefly fade if Powell emphasises data dependency or warns against assuming a rapid cutting cycle. If he stresses inflation vigilance, rate-sensitive sectors could pause even though the medium-term bias remains positive.

3. Broader context still favours risk assets

Real rates remain high relative to trend growth. A modest cutting cycle reduces financial stress, supports corporate refinancing in 2026, and helps maintain earnings resilience. Equities can continue to rise provided earnings guidance does not deteriorate.

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How to Think About the 2026 Rate-Cut Path

1. Cuts will likely be slower and shallower than past cycles

The Fed wants to avoid repeating the mistakes of 2020 to 2021 where inflation re-accelerated. With productivity holding up and fiscal policy still accommodative, the neutral rate is drifting higher. This implies fewer cuts than what markets hope for.

2. Growth risks matter more than inflation in 2026

By mid-2026, inflation is expected to be near target, so the debate shifts to whether economic momentum slows as past tightness flows through. If labour-market cooling becomes more pronounced, the Fed may cut more aggressively to prevent a downturn.

3. Watch for divergence between the Fed and other central banks

If the ECB and BoE continue easing more rapidly, a widening rate differential could strengthen the US dollar. A firm dollar tightens global liquidity, which affects Asia equities and commodities. This matters for Singapore investors holding large US tech positions.

4. Narrative for risk assets

A careful, non-rushed cutting cycle is usually best for equities. It preserves confidence, controls inflation expectations, and avoids the recessionary signal that comes with fast and deep cuts. Markets tend to perform best when the Fed is easing because it can, not because it must.

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Practical Positioning Considerations

Short term: Expect stabilisation if Powell avoids introducing new hawkish risks. Growth and quality tech may lead again because discount rates stop rising.

Medium term (2026): Focus on companies with pricing power and healthy free-cash-flow margins. These names benefit from both lower financing costs and clearer demand visibility.

Risk to monitor: If Powell pushes back against market pricing, implying only 1 or 2 cuts in 2026, long-duration assets may consolidate.