Equity markets may finish the week in a tight trading range as the S&P 500 has failed to close above the 6100 level. On the surface, mega cap tech names such as Alphabet (GOOGL), Tesla (TSLA), and Broadcom (AVGO) have published substantial performance gains this week. Despite these obvious gainers, many cyclical stocks that initially benefited from the election outcome have demonstrated pockets of weakness in overall market breadth. The S&P 500 Value Index has fallen nine straight trading days, and stocks that should benefit from tariffs and a Republican administration such as steel and national defense have been rolling over.

Recent aggregate consumer and producer price data validates a bothersome trend that inflation’s decline has stalled. Core consumer prices excluding food and energy rose 3.3% from a year earlier, flat for the fourth straight month and still well above the Fed’s long-term target of 2%. Of particular concern is services inflation, which on a core basis measured in at 4.6% year over year. Notwithstanding the final inflation report of 2024, the FOMC is expected to reduce the Fed funds rate by 25 basis points next week to further realign rates relative to inflation, which remains elevated but has moderated over time. Due to policy uncertainty around taxation, tariffs, and restrictions on immigration, inflation expectations may remain higher. Therefore, the Fed will have to keep interest rates higher for longer and may signal a pause in rate easement early next year.   

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