Will the December Fed Decision Matter to Markets?

Investor Sentiment & Market Outlook - Investor sentiment regarding the sustainability of the AI trade experienced a significant boost in recent months, followed by a period of rethinking in the last four weeks [2] - Investor positioning indicators, including systematic positioning for CTAs, risk parity, volatility target strategies, and momentum signals, have decreased from above the 95th percentile to the 50th percentile, indicating reduced warning signals [5] - The market's catalyst for recovery in the next two to three months is earnings, not necessarily the Federal Reserve's December decision [8] Earnings & Sector Performance - Concerns around OpenAI overshadowed Nvidia's earnings, despite the company beating expectations and providing better guidance [9] - The earnings beat trade for the third quarter was the strongest since 2021, indicating a generally positive earnings season [10] - Consensus expectations for fourth-quarter sequential earnings growth for the S&P are down 1%, and excluding tech, net income expectations are down 8% [11] - Eight out of eleven sectors are expected to report a sequential decline in earnings, creating a potentially bearish setup [12] - Small and mid-cap companies in the United States experienced a relatively strong earnings season, offering potential fuel for the market beyond big cap tech stocks [14] - Broadening has been happening in the market, with industrials, healthcare, financials, and even energy sectors up 6% to 14% year-to-date [16][17] Potential Risks & Concerns - A major concern is when CapEx starts to decline, leading to worries about higher tech debt [1] - There are concerns that the open air universe might only benefit Google, potentially threatening the broader Nvidia and hyperscale trades [4] - Investors may have excessively cut risk or taken up hedges in November, potentially missing out on a market melt-up driven by earnings [12][13]