The Fed's decision to end quantitative tightening (QT) in December, not immediately, could strain funding markets. Investors should monitor rising overnight repo usage and widening SOFR-Fed funds spreads as key indicators of impending weakness in speculative equities.
The market is interpreting stable economic growth paired with only modest Federal Reserve rate cuts as a clear signal to maintain leadership in high-quality stocks. A broad rotation into deep cyclical and small-cap stocks is unlikely until the Fed becomes more aggressively dovish.
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.