The Fed Cut Rates and Still Managed to Ruin the Party

Earnings beat expectations, but caution grows as Fed hawks reemerge and data dries up.

KEY TAKEAWAYS

• The government shutdown enters day 34, nearing the record

• The Fed cut rates by 25 bps but soft-signaled a pause ahead

• FOMC dissent shows a growing anti-cut faction inside the Fed

• Markets await ADP and ISM data as key labor and sentiment markers

• Earnings remain strong--S&P 500 EPS +11.1% YoY, led by tech

MY HOT TAKES

• Powell’s hawkish wrapper confused more than it clarified

• Data scarcity magnifies every private indicator’s market impact

• Rate path remains the central driver of sentiment

• Confident consumers are still the backbone of growth

• Investors should stay consistent–discipline beats reaction

• You can quote me: “Confident consumers consume. Confident companies employ. Confident investors stick to the plan.”

Personal best. There were a lot of personal bests logged yesterday in New York City as marathoners crossed the iconic finish line of the New York Marathon. Today marks the 34th day of the government shutdown which is now only 1 day short of its personal best/worst record set in 2019. The markets seem to be taking it in stride as indexes hover just below all-time highs after an emotional week of trade.

Markets were propelled by a trade truce between Presidents Trump and Xi which would reopen the spigot of the critical rare-earth minerals, halve Chinese Fentanyl tariffs, cut certain other tariffs by 10 percentage points (though still high), and resume Chinese purchases of US agricultural products (like soybeans). The truce–a temporary one–spans roughly one year. Regardless of whether it’s good or bad, moving some ‘unknown’ into the ‘knowns’ column is always a good thing for markets.

The Fed did exactly what everyone was expecting. It cut the Fed Funds rate by 25 basis points and suspended its quantitative tightening (QT) / balance sheet runoff and surrounded it with a hawkish wrapper. The chairman threw a bucket of ice on the celebration by telling us the obvious, that there were no guarantees of a rate cut in December. Come on guys, are there ever any guarantees in the markets–or life for that matter? Anyway, Powell did his level best to signal that not all FOMC members were all in on further cuts. The Fed thinks unemployment is low but acknowledges that recent developments can be a problem–kind of odd, but that’s the Fed for you. It remains obsessed with 3%, above-target inflation and hopes that threatening to stop cutting rates will cause it to get back to its 2%. The net result: more confusion about the future of the economy… and, er markets. Isn’t that just like the Fed? Futures now give a 67% chance of another 25 basis-point cut in December and Treasury Note Yields rose in sympathy as well. Did I mention that stocks don’t like unknowns? Yeah, we’ll move that one into the ‘unknowns’ column for now.

While we are on that topic, no fewer than three FOMC members hit the tape with their opposition to more rate cuts before the final bell of the week and month would toll. The good news, if you could call it that, is that two of those opinionated hawks are known hawks and they are not voting members until 2026. The bad news is that, despite the vote to cut, there is likely a growing anti-cut sentiment within the FOMC, which is likely why the Chairman cast such a shadowy tone in his post-meeting presser. We will get some more color on just how hawkish that silent movement is later this month (November 19th) when the Fed releases the meeting minutes. For now, it is clear that the data–sparse though it may be–will play a key role in what happens in December. 

That sparse data from last week left us with a mixed picture. Home prices continue to rise and consumers are slightly more confident than expected, but still declining. I would say–without getting into the details–that that is mostly bad with a slight hint of good. Home prices were expected to decline–they didn’t–and they remain a key driver of sticky inflation, and while stronger-than-expected consumer confidence is always good, it is declining. You know my favorite saying: confident consumers consume. We want that–we need that–to ensure that the economy continues to be healthy.

On the data front, nothing was sparse about earnings data last week. We got 5 of the Magnificent 7 and a truckload of S&P 500 companies last week. To date (including this morning), S&P 500 earnings beat EPS and Revenue estimates by 2.35% and 4.96% respectively with the biggest positive surprises coming from Consumer Discretionary and the biggest negative one from communications. Beats are never a bad thing, but EPS growth is paramount if we want to get continued growth. In that area, the S&P has had a strong showing, so far delivering 11.14% year over year EPS while I was looking for somewhere near 8% growth which was in line with the consensus. On the growth front, tech takes the top spot so far, while communications gets the worst-in-show award. 

Now, let’s talk about the road immediately in front of us, because the course markers matter when the crowd noise fades and it’s just you, your breath, and the pavement. With Washington’s lights still dimmed, the calendar thins out, but what’s left gets heavier. The ADP private payrolls report just moved from a “nice-to-have cross-check” to a “pay attention or trip over it” mile marker. We’ve had two straight months of declines there, and while ADP is not the Bureau of Labor Statistics (BLS), it is a reasonably timely look at how businesses are actually behaving with their headcount. That matters more than usual right now because employment is critical for my favorite consumption and continued economic success. If ADP prints a strong number, it will amplify the Chair’s hawkish wrapper and embolden the committee members who already think the easing campaign has done enough. If it declines… well, that is not a good sign for the economy, but investors obsessed with rate cuts may get cold comfort out of the weakness, because the Fed cannot hawk about if the labor market continues to decay.

Equally important this week are the ISM surveys. Think of them as corporate mood rings with teeth. Manufacturing gives us a feel for new orders, production, and the inventory dance; Services tells us where the real economy breathes because that’s where most jobs live. Everyone loves to trade the headline number, but the subindices are where the rubber meets the road. New Orders and Backlogs tell you whether the pipeline is filling or draining. Supplier Deliveries tells you if friction is returning to supply chains. Prices Paid reveals whether tariffs are showing up in input costs in a way that forces margins to stretch. And the Employment components are the tell for whether managers are hiring on hopes or freezing on fear. If “confident consumers consume,” then “confident companies employ,” and if they both show up at the same party, you get sustainable economic growth.

Because so much of the government data flow is stopped, these private and semi-private reads take on outsize impact in shaping December rate-cut odds. Traders are now stuck with a smaller set of tea leaves used to draw a bead on the economy. When the number of signals shrinks, the weight of each remaining signal rises, and that magnifies market moves, both good and bad. That’s why you should expect a sharper reaction function around the ISM employment components and the ADP print than you might have seen in a “normal” week with a full data calendar. Fewer mile markers, bigger surges when you pass them.

Late in the week, preliminary University of Michigan Sentiment steps on stage. It’s not a government release, which means it arrives on time even when Washington does not. I’ve said it a thousand times and I will say it again because it remains the key to this cycle: confident consumers consume (can you tell that I am obsessed with consumption 🤣). Sentiment is not cash in a wallet, but it’s the willingness to reach for the wallet and tap the card. In a year when politics and tariffs have raised prices and tempers, the strength of consumer willingness is the quiet force holding economic growth and the bull market together. Watch not just the headline sentiment but the expectations component and the inflation expectations series. The one-year and five-to-ten-year readings are the difference between a little heartburn and a chronic condition for the Fed. Pair whatever Michigan says with what ISM’s Prices Paid says, and you have your near-term compass for rates.

Earnings roll on even if most of the fireworks have already popped. This week is about read-throughs and second-order effects. We’ve heard from enough mega-caps to know the broad outlines: AI infrastructure remains a freight train for capex, ad markets are healthier than they were a year ago, and consumers are still spending but they’re choosier. Now we get the validation layer. Cloud-adjacent (like that fancy word) software needs to tell us whether the big platform commentary is trickling down to actual bookings and expansions across the customer base, not just pilot projects that generate headlines. Semiconductor suppliers have to confirm whether inventory normalization is truly behind us and whether the next node of demand is broadening beyond the handful of household tickers everyone anchors on. Consumer discretionary names, particularly those with exposure to higher-ticket items, will tell us if rate relief and wage gains are enough to offset price fatigue. Healthcare has to clear a different bar--procedure volumes, utilization, and payer mix that speak more to real-economy stability than to AI-narrative heat. Energy’s commentary on crack spreads, maintenance cycles, and export flow adds a useful macro layer on top of the trade détente headlines. Tie those together and you’ll see whether October’s optimism was just a sprint finish or the start of a steadier pace.

Guidance remains critical–just as it always is. In a quarter where many companies “beat,” the market has punished anyone who hinted at heavier capex, slowing operating leverage, or a softer top line after December. With the Fed’s tone turning chilly and continued tariffing, managers are incentivized to keep optionality, so watch how often you hear words like “flex,” “calibrated,” and “disciplined.” Those are polite ways of saying “we’re reserving the right to slow hiring, trim marketing, push out projects, or protect margins if demand sways.” Again: confident companies employ. If you hear too much caution, you will see it in payrolls later, and then you will feel it in multiples even if rates drift lower.

Despite lots of earnings taking center stage, the rate path will remain a key driving force in the background. The futures market moved quickly to price a decent probability of another cut in December, then pulled back as hawks raised their hands. That tug-of-war will continue all week, and it will be sensitive to every shred of labor and inflation driving data we get. Watch the front end of the curve on ADP day and watch term premium chatter around Treasury supply and refunding (Wednesday). Even without the full government release calendar, the plumbing still talks. Credit spreads, especially in consumer-exposed ABS and the lower tiers of high yield, are solid indicators. If spreads stay tame while ISM and sentiment hold up, equities can keep climbing even if the Fed tries to look tough. If spreads start to leak while sentiment softens… well, you might need to push your glasses up your nose and take a close look. 👓

The trade truce headlines helped remove some tail risk, but they didn’t erase the reality that supply chains will be repriced for longer than a single news cycle. Rare-earths relief has mechanical benefits for the long list of components that touch anything with a motor or an antenna. Cutting specific tariffs by ten percentage points lowers some input lines and offers cover for others, but it doesn’t bring prices back to 2019 levels. Expect managers to talk about “localizing” and “near-shoring” as risk management, not a cost-minimization exercise. 

On the consumer front, I continue to watch the subtle split between experiences and durables. Travel, entertainment, and restaurants have held up because people still want to live their lives, while larger durable purchases are more sensitive to financing costs and the feeling that prices went up and never came back down. If Michigan shows resilience in expectations and the incomes-vs-prices balance, it displays continued support for Services. If it slips, look for more “value” talk on earnings calls and a rotation within consumer names. None of this is new, but in a week with fewer datapoints, it will feel new because price action will exaggerate whatever confirms the prevailing mood of the day.

For labor, beyond ADP and ISM Employment, listen closely to anecdotes. Are companies freezing requisitions or still competing for specialized talent? Are they shifting contractor use up or down? Are they leaning on productivity tools like AI to get more out of the same headcount? These data points tell you how confident managers really are. If the answer is “we can’t find the people we need for the projects we must deliver,” that’s bullish for wages and positive for growth–AND possibly a bad omen for inflation.

All of this feeds back into portfolio posture. The temptation after a strong, choppy October is to let last week’s move convince you that the course just flattened. It didn’t. The grade eased for a few miles because a risk fell from “unknown” to “known,” but the map still shows rolling hills. Your job is not to sprint every downhill or panic every uphill. No. Your job, my friends, is to stay consistent. Trim where position size ran ahead of conviction. Add where execution outran narrative. Above all, keep your eye on the long-term importance of earnings power rather than the one-day reaction to a single survey.

Here’s the cheatsheet for the week ahead. The ADP employment report and ISM surveys will be the key data points, with the University of Michigan sentiment report closing things out later in the week. Earnings will continue to provide incremental confirmation rather than new direction, showing whether corporate momentum is holding across sectors. Interest rates remain a critical backdrop, still stable enough for markets to advance, but sensitive to any surprises. The government shutdown limits visibility and gives added weight to each private indicator. If ADP stabilizes and ISM Services Employment remains firm, expectations for a December rate cut stay alive but maybe less certain, financial conditions stay steady, and markets can maintain their current pace. If those indicators weaken, investors should expect a more cautious tone.

Personal bests don’t happen because the course is easy; they happen because you stay present through the hard parts. We are not at the finish line for this market, not even close, and the next few miles tilt slightly uphill. That’s fine. We won’t give up. We’ll do what runners do: keep our pace, control our breath, and hold our form even when the crowd thins. Consistent long-term focus beats sporadic bursts. Confident consumers consume. Confident companies employ. And confident investors stick to the plan, even when the route ahead looks uncomfortable.

LAST FRIDAY’S MARKETS

Stocks ended the week in the green to close out the month, propelled higher by a mostly-positive week of candy-induced energy. Fed hawks vie for the spotlight looking to tame investor expectations for more candy in December. Gold eased a bit but still held on above 4,000.

NEXT UP

• ISM Manufacturing (October) may have inched higher to 49.5 from 49.1.

• Fed speakers today include Daly and Cook.

• Important earnings today: Ares Management, ON Semiconductor, Kenvue, Qorvo, Clorox, Realty Income, Vertex Pharma, Palantir, Hologic, Hims & Hers, Williams, and Sarepta Pharma.

• A lot more coming up this week–even without official government data. Download the attached earnings and economic calendars so you can be one step ahead of the competition and find the biggest buck 🦌😉. AND don’t forget to check out my daily chartbooks!

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