Early-Cycle Transition: Balancing Risks & Opportunities Ahead

Group 1: Equity Market Performance - Equities rallied in Q3, with broadening market participation driven by improving trade policy, rate cut optimism, and better-than-expected corporate earnings [1] - The Nasdaq Composite Index and S&P 500 Index achieved their best Q3 since 2020 and their best September in 15 years, despite poor seasonal trends [1] - US growth was up 9.8%, emerging markets increased by 9.5%, and US small-caps rose by 9.2% during the quarter [1] Group 2: Federal Reserve Actions - The Federal Reserve cut the fed funds rate by 25 basis points in September, lowering the target range to 4.00–4.25%, marking the resumption of an easing cycle [2] - Chair Powell noted that the labor market is showing signs of weakness, with low hiring becoming a growing concern [2] - The updated Summary of Economic Projections indicated inflation is expected to remain above target at 3.1% for 2025, while GDP growth for the year was revised up to 1.6% [2] Group 3: Historical Performance Insights - Historical data shows that the S&P 500 tends to rally significantly in the 12 months following a pause in Fed rate cuts [3] - The S&P 500 Equal Weight index has historically outperformed its market-cap weighted counterpart when market leadership broadens [3] - The current market-cap weighted index is on its best streak since the late 1990s, but a shift may occur due to recent dovish monetary policy [3] Group 4: Economic Outlook - The economy exhibits signs of a late-cycle environment, yet early-cycle signals are emerging alongside a dovish monetary policy outlook [4] - Fundamentals appear constructive in sectors like banks and small to mid-cap equities, with expectations of narrowing earnings growth gaps between large tech firms and the broader market [4] - Despite challenges such as a softening labor market and sticky inflation risks, corporate results have exceeded expectations, and PMIs remain near or above expansionary thresholds [5]