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What the Fed’s Next Move Could Mean for Your Portfolio
Market overview
Markets extended their winning streak last week, rising for the fifth consecutive time and setting yet another record high. Headlines, however, centered on the U.S. labor market flashing signs of fatigue.
Labor market revisions
The Bureau of Labor Statistics erased 911,000 jobs from prior estimates, revealing an even softer labor backdrop than previously understood. With initial jobless claims concurrently climbing, the Federal Reserve’s rate cut this week came as little surprise, confirming expectations of a more supportive policy stance in response to the slowdown.
Equity and bond performance
Despite labor concerns, last week delivered broad gains across equities and bonds. U.S. equities rose 1.6%, led by large-cap growth stocks at 2.5% compared with just 0.5% for value. Small-cap growth added 0.8%, while small-cap value slipped modestly by -0.2%. International markets were also strong, with developed equities advancing 1.2% and emerging markets surging nearly 4.0%. Year-to-date, emerging markets lead all major categories, up more than 25%, supported by robust gains in South Korea, China and Taiwan. Within fixed income, municipal bonds rebounded strongly, gaining 1.5% after a difficult stretch, while taxable bonds added 0.4%. Balanced 60-40 portfolios— traditionally a mix of 60% equities for growth and 40% bonds for stability—benefited meaningfully from broadbased strength.
FIGURE 1 
Drivers of growth
Growth leadership again reflected strong tailwinds from artificial intelligence (AI), boosted by optimism following Oracle’s announcement that contracted revenue for its cloud infrastructure business more than tripled in just three months. Management projects sales could climb from $18 billion this fiscal year to more than $140 billion within five years.
Fed policy shift
As expected, market movement this week was primarily driven by the 25-basis point cut. Markets had already priced in near certainty of the move, with CME FedWatch showing a 96% probability ahead of the meeting. Equities powered ahead following the Fed’s decision, buoyed by corporate earnings strength, optimism around AI and easing monetary conditions.
This marks the first cut since September 2024, bringing the federal funds rate range to 4.00% to 4.25%. The shift was quickly reflected in bond markets. As short-term rates dropped, the yield curve steepened. While the long end saw modest downward pressure in yields, whether those moves hold will depend heavily on inflation, fiscal deficits and supply dynamics.
Why revisions matter
For investors, these changes ripple through portfolios by supporting equity valuations, lowering borrowing costs and easing financial conditions. Longer-term rates also influence mortgages, discount rates and bond returns.
That is why revisions to the labor market, which may seem like backward-looking data, can have very real forwardlooking implications for portfolios. While markets have embraced a more supportive Fed, future cuts will depend on the balance between inflation progress and further signs of labor weakness.
Looking ahead
Investors now debate how quickly the central bank will move from here. Expectations are for two additional cuts by year-end and as much as 150 basis points through 2026, though history shows markets often price in easing cycles faster than the Fed ultimately delivers.
As shown in Figure 2, expectations for rate cuts have often run ahead of the Fed’s actual actions, a gap that can shape how interest rate changes affect portfolios.
FIGURE 2
About Quick Takes
Amid data revisions and policy shifts, Quick Takes offers timely commentary to help you focus on what matters most for your portfolio. Published as part of fathom—our thought-leadership blog makes it easy to revisit prior issues and stay informed.
