by Professor Jeremy J. Siegel Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
Last week’s market narrative was defined by yet another extraordinary surge in tech stocks, inflation developments generally aligning with expectations, and anticipation of the upcoming Federal Reserve meeting.
The continued dominance of the Magnificent Seven in the equity markets has been striking, underscoring a lack of rotation into value or small-cap stocks despite fleeting moments of activity in those sectors. The Nasdaq climb past the 20,000 level grabbed headlines, with momentum appearing to stem from fund managers seeking to align with benchmarks ahead of year-end reporting. While this tech-led rally persists, a recalibration and rotation is possible in January to reflect more balanced market leadership.
On inflation, the (Consumer Price Index) CPI data landed precisely as predicted, yet the Producer Price Index (PPI) underscored persistent stickiness of inflation. Shelter costs, which weigh heavily on the core CPI, increased by 0.3%. Encouragingly, the critical rental and owner-occupied components saw a more subdued 0.2% rise, though a jump in lodging away from home pushed the overall shelter index higher. With shelter accounting for over 40% of core CPI, a sustained deceleration in housing costs will be vital to easing price pressures. There is still a lagged component in the official BLS metrics and when we substitute real-time rental metrics for BLS shelter, both core and headline CPI are below 2%.
The Federal Open Market Committee (FOMC) meeting this week looms large. I expect the Fed to deliver a rate cut— but a hawkish one. I believe the dot plot may show a large number of members preferring only two cuts next year, and this might jar risk assets. I believe the Summary of Economic Projections (SEP) will reveal long-term expectations of the funds rate will move up to 3.0% or 3.1% or potentially higher. Since the market is expecting a rate cut Wednesday, and there has been no push back by Powell, I think a 25-basis point (bp) cut at this meeting is in the bag, although there might be dissents. Remember, I estimate that the neutral Fed Funds Rate to be 3.5% to 4.0%, far higher than the consensus of FOMC members, but still 50 bps to 100 bps lower than current rate.
Money supply growth has stabilized around a 5.5% annualized increase, while commodity prices have plateaued and GDP growth appears robust, likely landing around 3% for Q4. However, a slight uptick in unemployment last month cemented market expectations for a December rate cut. Nevertheless, the economy is not showing any weakening signs.
In Washington, President-elect Trump’s visit to ring the opening bell at the New York Stock Exchange symbolizes his administration’s prioritization of the stock market. His proposal to slash regulatory red tape for foreign firms investing over $1 billion is an intriguing lever to spur capital deployment, alongside ongoing discourse around tariffs and immigration. The president’s outreach to China’s Xi Jinping, including an invitation to his inauguration (reportedly turned down), sets the stage for potentially significant trade negotiations, though the initial volley of 100% tariffs signals tough bargaining ahead.
Looking ahead, the market’s resilience reflects continued optimism about AI-driven growth and deregulation. However, the tangible economic benefits of AI adoption remain distant, leaving the bullish sector narrative intact for now. A rotation into neglected areas of the market, such as value or small-cap stocks, could materialize in 2025 if regulatory reforms and easing financial conditions create a more favorable backdrop for these non-tech segments. Investors should remain vigilant as tech valuations climb further, with an eye toward rebalancing opportunities early next year.
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