Markets Pull Back Ahead of Fed Decision as Rate Path Uncertainty Weighs on Sentiment

Markets opened the week on a cautious note, snapping a four-day equity rally as investor focus shifted squarely to Wednesday’s pivotal Federal Reserve meeting. Despite strong recent performance, the S&P 500 gave back ground after nearing its all-time high, while Treasury yields climbed in a broader global bond selloff. Traders are nearly certain of a rate cut this week, but diverging views on the pace and extent of easing in 2026 are adding volatility. Key corporate headlines and geopolitical risks further weighed on sentiment.

Key Headlines & Market Movers:

• Fed Cut Expected, But Path Forward Is Murky: A quarter-point rate cut on Wednesday is widely expected, with markets pricing in an 87% chance of a move. However, uncertainty looms over how aggressively the Fed will continue easing into 2026. A lack of fresh data during the government shutdown, persistent inflation concerns, and growing dissent within the FOMC have added to the unpredictability. Commentary from officials suggests that the tone of Powell’s press conference will be crucial, with a likely message of caution on additional cuts in the near term.

Global Bond Selloff Resumes: Treasury yields rose again Monday, with the 10-year settling around 4.17%, extending losses from last week. Similar pressure was seen in European debt markets following hawkish signals from the ECB. Strategists warn of a potential regime shift as the Fed's influence wanes relative to fiscal dynamics, raising the risk of higher long-term rates, steeper curves, and persistent inflation.

• AI-Driven Rally Faces Reality Check: Markets are increasingly questioning the durability of this year’s AI-led equity gains. With 2025 focused heavily on capex in the AI space, investors now expect 2026 to deliver tangible productivity and earnings results. In the meantime, many managers appear hesitant to increase exposure ahead of year-end amid thin liquidity and strong YTD performance.
• Deal Drama and Corporate Moves Drive Stock Swings: Paramount Skydance launched a hostile $30/share bid for Warner Bros. Discovery, undercutting Netflix’s existing offer and triggering movement across media stocks. President Trump’s antitrust warning further clouded the picture. Meanwhile, IBM made a bold $9B acquisition of Confluent, boosting shares nearly 30%. Tesla fell after a Morgan Stanley downgrade, while Marvell dropped on chip supply concerns. Carvana and CRH rallied on news of S&P 500 inclusion.

S&P 500 Sector Performance

Looking Ahead

Wednesday’s Fed decision remains the clear focal point. While the rate cut is likely a foregone conclusion, markets will be laser-focused on Powell’s tone, updated projections, and any signals about the pace of future cuts. With a divided FOMC and an uncertain macro outlook, volatility may persist into year-end. Investors should expect thinner trading and a defensive tone unless clarity emerges from the Fed or data surprises decisively.

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