The 25 Basis Point Olive Branch
The Federal Reserve lowered the cost of capital again. On December 10, 2025, the Federal Open Market Committee (FOMC) delivered its third consecutive 25-basis-point cut, bringing the federal funds rate to a range of 3.50% to 3.75%. This move, per the December 10 FOMC statement, was intended to stabilize a labor market showing signs of cooling. However, the bond market is in open rebellion. While the short end of the curve dropped, the 10-year Treasury yield surged toward 4.25% in the last 48 hours. This bear steepening suggests that fixed-income investors do not share the Fed's optimism regarding long-term inflation control.
Liquidity is no longer a tide lifting all boats. It is a funnel. Despite the rate relief, the S&P 500 fell 1.1% on Friday, December 12, closing at 6,827.41. The narrative of broad-based growth is crumbling under the weight of valuation extremes. We are witnessing a dangerous divergence where the "Fed Put" is losing its potency to lift anything outside of the artificial intelligence ecosystem.
The Data Vacuum and the 43-Day Shutdown
Economic forecasting is currently an exercise in guesswork. The 43-day government shutdown that paralyzed Washington in October and November has left the Bureau of Labor Statistics (BLS) with a massive data deficit. The November CPI report, released today, December 16, 2025, shows headline inflation at 2.7% year-over-year. This is lower than the 3.1% consensus, but the figure is compromised. Because October data collection was suspended, the BLS is using 2-month interpolation to fill the gap.
Core CPI remains sticky at 2.6%. According to the latest BLS data, shelter costs rose 3.0% and energy indices gained 4.2% over the last quarter. For corporate America, this means the cost of doing business is not falling as fast as the Fed's benchmark rate. Margin compression is now the primary threat to the 2026 earnings outlook. The 70 basis points of profit margin expansion predicted by some analysts for next year assumes a level of supply chain stability that the current geopolitical climate does not support.
Federal Reserve Median Rate Projections (Dot Plot December 2025)
Nvidia Blackwell and the Mag-7 Divergence
The term "Magnificent Seven" is becoming a misnomer. There is Nvidia, and then there is everyone else. In its Q3 fiscal 2026 results reported last month, Nvidia posted a record $57.0 billion in revenue, up 62% from the prior year. CEO Jensen Huang confirmed that Blackwell architecture demand is "off the charts," with fourth-quarter guidance reaching $65.0 billion. This single stock accounted for nearly a third of the S&P 500's total returns in 2025.
The cracks are appearing elsewhere. Broadcom (AVGO) saw its shares plunge 11.4% last Friday despite an earnings beat. Investors are no longer rewarding companies for merely meeting expectations; they are punishing anyone who cannot prove immediate ROI on AI capital expenditures. The concentration risk is at historic highs. Analysts at Goldman Sachs now estimate that the seven largest stocks account for 25% of total index earnings. If the AI supercycle slows by even 5%, the remaining 493 stocks—which are projected to grow earnings by only 12.5% in 2026—cannot carry the weight of current multiples.
S&P 500 Sector Growth Projections for 2026
| Sector | Estimated Earnings Growth (2026) | Revenue Growth Est. |
|---|---|---|
| Information Technology | 22.7% | 11.4% |
| Financial Services | 14.2% | 6.1% |
| Health Care | 10.8% | 5.4% |
| Energy | -1.2% | -0.8% |
| S&P 500 (Aggregate) | 15.0% | 7.2% |
The 305 Dollar EPS Benchmark
Wall Street is betting on a perfect landing. The consensus target for S&P 500 earnings per share (EPS) in 2026 is $305, representing a 15% increase over 2025. This assumes that the Fed continues its easing cycle and that the U.S. dollar remains weak enough to support international revenue. However, the "winner-take-all" dynamic is reaching an extreme. While the median S&P 500 company entered Q4 2025 with three months of inventory to hedge against potential 2026 tariffs, small-cap firms in the Russell 2000 are not so lucky. They are facing a 4.5% unemployment rate and rising credit defaults.
The technical mechanism of this market is fragile. We are seeing a "K-shaped" corporate recovery where high-margin tech firms use massive cash buffers to buy back shares—Nvidia has $62.2 billion remaining in its authorization—while cyclical sectors like Autos (TSLA, F) struggle with margin compression and high borrowing costs. The Fed's December cut was a signal of concern, not a victory lap. Jerome Powell noted that the bar for further reductions is now higher, meaning the market can no longer rely on a guaranteed monthly liquidity injection.
Eyes are now fixed on January 13, 2026, when the first clean CPI report post-shutdown will be released. That data point will determine if the Fed holds steady or if the 3.5% floor is just a temporary stop on the way to a harder landing. Watch the 10-year Treasury yield: if it stays above 4.20%, the equity rally is on borrowed time.
