To gauge a durable improvement in market liquidity, investors should monitor the most sensitive assets rather than the broad market. A rally in low-quality, profitless growth stocks provides the clearest and earliest signal of improving financial conditions, as these companies are most dependent on accessible capital.

The Fed is behind its usual schedule for easing policy due to data delays and COVID-era distortions. This has suppressed the typical market rotation but means the eventual dovish policy will likely be stronger than expected, creating significant upside for early-cycle investments.

With the Federal Reserve signaling a market backstop, capital is flowing from concentrated large-cap tech winners into more cyclical, under-loved small-cap stocks (IWM). This support de-risks 'Main Street' sectors and signals a potential broadening of the market rally.

Despite weak underlying economic data, the probability of a recession is not over 50% due to anticipated policy stimulus. This includes Fed rate cuts, major tax cuts, and deregulation, which are expected to provide significant, albeit temporary, economic support.

J.P. Morgan highlights a confluence of factors in 2026 that could create significant inflationary pressure. These include planned tax cuts, major national events like the FIFA World Cup and America's 250th birthday, and potential shifts in immigration policy, creating a powerful fiscal tailwind.

Following a dovish Fed meeting, the outperformance of small-cap stocks (IWM ETF) versus large-cap tech is the key signal of a healthy, broadening market rally. This indicates capital is flowing beyond mega-cap names into the wider economy, confirming a "game on" sentiment for risk assets.

Current market weakness, driven by a Federal Reserve that is moving too slowly, presents a strategic buying opportunity. Investors should reposition into sectors that have lagged for years, such as small/mid-cap stocks and consumer discretionary goods, as they stand to benefit most when the Fed inevitably takes more aggressive action.

Despite strong Q3 revenue surprises suggesting a recovery, the Federal Reserve's reluctance to cut rates aggressively is preventing a market expansion into smaller-cap and lower-quality cyclical stocks. The market needs a clearer dovish signal before this rotation can occur.

The US economy is seeing a rare combination of high government deficits, massive AI-driven corporate investment, and bank deregulation. If the Federal Reserve also cuts rates based on labor market fears, this confluence of fiscal, corporate, and monetary stimulus could ignite unprecedented corporate risk-taking if growth holds up.