Fed Delivers Quarter-Point Cut Amid Labor Market Caution
The Federal Open Market Committee (FOMC) concluded its final meeting of 2025 by lowering the policy interest rate by 25 basis points, a move that aligned with market expectations but carried a notably cautious tone. Federal Reserve Chair Jerome Powell emphasized concerns over the US labor market, highlighting initial jobless claims data as a key focus point ahead of the release. This decision marked a pivot point, with the Fed signaling a likely pause in January and projecting only one additional cut each in 2026 and 2027. Markets initially celebrated the cut with a significant rally—the S&P 500 posting its best post-Fed performance since March—but momentum faded quickly as broader economic signals and sector-specific pressures emerged.
Yields across the curve adjusted sharply, with the front end seeing pronounced declines: the 2-year Treasury yield dropped to 3.54%, reflecting eight basis points of easing in a single day, while the 10-year hovered around 4.13% to 4.20%, contributing to a steepening yield curve. The 30-year remained stable near 4.8%. This yield movement underscored investor digestion of the Fed’s less dovish-than-feared dot plot, which surprised some by hinting at potential rate hikes rather than the aggressive cuts previously anticipated.
AI Hype Meets Reality: Oracle’s Capex Shock Rocks Tech
A major flashpoint yesterday was Oracle’s earnings report, which ignited fears over escalating AI infrastructure spending. The company disclosed plans to ramp up capital expenditures by an additional $15 billion in its fiscal year to support AI initiatives, including partnerships with entities like OpenAI. While remaining performance obligations (RPO) surged past $530 billion—adding $60-70 billion quarter-over-quarter—and cloud infrastructure revenues grew at 68%, investors focused on the lack of immediate returns. Oracle shares plunged by double digits, the steepest drop since January, dragging the NASDAQ 100 down 0.4% and broader tech sentiment into reversal territory.
This Oracle-led pullback rippled through the AI trade, with pre-market futures signaling further downside: S&P 500 futures off 0.5-0.6%, NASDAQ even weaker. Broader semis faced scrutiny ahead of Broadcom’s results, as traders questioned the sustainability of massive capex commitments amid softening productivity gains. Analysts noted a market shift from rewarding growth projections to penalizing perceived risks, even as demand for AI services remained robust.
Market Snapshots: Small Caps Shine, Bonds Hold Steady
Despite tech woes, rotation played out vividly. The Dow Industrials and materials sector outperformed, with the former logging its best relative session since January. Small caps stole the show via the Russell 2000, now on the cusp—or already achieving—annual outperformance against the S&P 500 for the first time since 2020. This breadth reflected a flight from mega-cap tech toward value and cyclicals, bolstered by Fed liquidity signals.
Bond markets remained well-behaved post-Fed, with the 10-year yield largely unchanged intraday. High-yield and investment-grade credit markets highlighted issuance dynamics: high-yield supply stagnant at five-year levels, while investment-grade saw record gross issuance but net supply under 1%. Treasuries issued at 10% of that pace, creating scarcity that experts anticipate will persist amid a capex supercycle. Volatility of inflation metrics returned to pre-pandemic lows, easing one pillar of the Fed’s reaction function.
Economic Backdrop: Labor, Immigration, and Goldilocks Hopes
Powell’s commentary painted a nuanced US economy outlook for 2026, blending optimism on AI-driven productivity with wariness on labor supply. Immigration shifts contributed to supply constraints, complicating the Fed’s dual mandate. Jobless claims at 8:30 a.m. ET became a pivotal data point, with the base case leaning toward a January hold but potential cuts later in the year.
Broader tailwinds included falling inflation, improving growth, easing fiscal policy in 2026, and liquidity expansion via Fed actions. Positioning remained crowded but not catalytic, per market strategists. Corporate leverage and retail margin debt trends bore watching, alongside M&A waves that could leverage balance sheets further.
Forward Look: Capex Supercycle and Tactical Opportunities
Experts like those from BlackRock and Morgan Stanley expressed bullishness on corporate earnings from AI capex and margin expansion, yet urged tactical caution. The anticipated capex supercycle promises waves of issuance, creating entry points for secondary market concessions. Credit spreads are tight, justified by systemic quality, but M&A-driven leveraging offers selective opportunities.
Eurodollar crossed 117 amid dollar softening, reinforcing risk-on flows outside tech. As 2026 looms, the Fed’s pivot from aggressive easing to data dependence sets the stage for volatility, with AI monetization timelines and labor resilience as linchpins. Yesterday’s whiplash—from Fed euphoria to Oracle reality—encapsulates a market navigating goldilocks aspirations against capex realities.