The current economic landscape presents a divergence between the behavior of stock indices and macroeconomic fundamentals. Following the recent Federal Reserve (Fed) decision and the release of new employment data, a technical analysis regarding the impact of monetary policy on various asset classes and the probability of a cycle shift is essential.
Below are the key points to understand the current situation and projections for the fiscal year 2026.
1. Current Context: The Federal Reserve and Market Reaction
The Fed has executed a 25 basis point rate cut, setting the target range between 3.5% and 3.75%. This decision, the third of the year, was not unanimous, with three dissenting votes within the FOMC, reflecting the complexity of balancing inflation and growth.
The immediate market reaction has been mixed across different asset classes:
- Equities (Small-caps): The Russell 2000 index has reached new all-time highs, surpassing 2,531 points. This index, composed of small-capitalization companies, is highly sensitive to debt. A rate cut reduces their financing costs, boosting valuations.
- Commodities: Silver extends its bullish momentum, setting a record above $60 (trading at $61.59).
- Cryptoassets: Bitcoin shows volatility in the $92K-$94K range, sustained by strong institutional demand (Bitcoin ETFs registered net inflows of $152 million).
However, the real economy shows signs of fatigue: US job openings stagnated at 7.7 million in October, and small businesses report price increases of 34%, evidencing persistent inflationary pressure.
2. Dynamics between Interest Rates and the Labor Market
For the next Fed meeting (January 28, 2026), market consensus (77%) anticipates rates being held steady, versus 23% expecting further cuts. The determining factor is no longer just inflation, but the protection of the labor market.
The Function of Rate Cuts
It is fundamental to understand the economic theory behind these decisions. A rate cut acts as a monetary stimulus to revive a slowing economy. The recessionary economic cycle typically follows this sequence:
- Economic deceleration.
- Decrease in consumption and demand.
- Reduction in corporate profits.
- Increase in layoffs (rising unemployment).
- Further contraction in consumption.
The Fed cuts rates to break this vicious cycle, making saving less attractive and encouraging capital investment in new projects that demand labor.
Unemployment as a Leading Indicator
There is a critical historical correlation: the unemployment rate functions as a leading indicator for rate cuts. When unemployment begins to rise sharply, central banks initiate the cutting cycle.
As observed in the chart, the inflection point where unemployment stops rising often coincides with aggressive interest rate reductions. Currently, data suggests the beginning of a labor market adjustment cycle that could force the Fed to continue with cuts.
3. Historical Correlation: Rate Cuts and the Stock Market
There is a misconception that a rate cut automatically implies a sustained stock market rally. While it may generate optimism in the short term (especially in indebted indices like the Russell 2000), in the medium term, rate cuts often precede market corrections if they coincide with a recession.
Historically, market downturns coinciding with rate cut cycles have been recorded in the years: 1960, 1970, 1975, 1980, 1990, 2000, 2008, and 2020.
4. Currency Analysis and Valuations (P/E Ratio)
The Fed’s monetary policy has a direct impact on the foreign exchange market (Forex). Given a rate cut in the US (and assuming stability at the ECB), the dollar tends to weaken against the euro.
- EUR/USD Trend: A strengthening of the euro is observed. Historically, levels of EUR/USD > 1.20 have represented strategic points for acquiring dollars with a long-term investment view.
S&P 500 Valuations
From a fundamental standpoint, the US market presents demanding valuations. The P/E Ratio (Price-to-Earnings) is currently situated above 27. Statistically, when this ratio exceeds the level of 23, subsequent years tend to offer flat or negative returns.
5. Conclusions and Strategic Perspectives
Based on the data presented, the scenario for 2026 suggests caution and selectivity.
- Recession Risk: The Fed’s prioritization of the labor market indicates concern over a potential technical recession or a hard landing for the economy.
- Liquidity: In environments of high P/E ratios and potential earnings corrections, capital preservation and liquidity become priorities to capitalize on future opportunities.
- Asset Selection: Rational investment in this cycle favors companies with consistent earnings growth and healthy balance sheets, avoiding companies with excessive valuations or declining profits.
- Capital Flows: Despite potential corrections, the US continues to attract global capital and industry (to the detriment of other zones like Europe), which will maintain interest in North American assets in the long term, especially if acquired at a favorable exchange rate and following market corrections.
In summary, although upward inertia may be maintained in the short term, macroeconomic indicators signal the need for a defensive stance given the volatility expected for the next fiscal year.
