The honeymoon is over.
As of November 16, 2025, the U.S. equity market is grappling with a dual-track reality. On Friday, November 14, the S&P 500 closed at approximately 6,840, maintaining its status in a persistent bull run driven by the AI capital expenditure cycle. However, beneath the surface of record highs, a fiscal expiration date is ticking. The market is no longer pricing purely on earnings momentum. It is now pricing the structural shift of January 1, 2026, when the bulk of the Tax Cuts and Jobs Act (TCJA) individual provisions are scheduled to sunset. This represents a 4 trillion dollar fiscal drag that the next Congress must navigate.
Inflation settles into a sticky plateau
The October Consumer Price Index (CPI) report, released on November 13, 2025, provided a sobering look at the late-cycle economy. Per the Bureau of Labor Statistics, headline inflation rose at an annual pace of 2.7 percent. While this is a significant cooling from the 2022 peaks, it remains stubbornly above the Federal Reserve’s 2 percent target. Core inflation, which strips out volatile food and energy, registered at 2.6 percent. The data confirms a “sticky” environment where shelter and service costs refuse to revert to pre-pandemic norms.
The Federal Reserve responded on November 6 with a 25-basis-point cut, bringing the federal funds rate to a range of 3.75 to 4.00 percent. This was the second cut of 2025, following a similar move in September. Markets are currently pricing a 55 percent probability of a third cut in December, though Chair Jerome Powell cautioned that the path is not a foregone conclusion. The 10-year Treasury yield responded by settling at 4.14 percent on November 14, indicating that fixed-income investors are still demanding a significant term premium due to fiscal uncertainty.
The Zezas Constant and Executive Overreach
Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy at Morgan Stanley, has introduced a contrarian framework for the 2026 midterm cycle. While conventional wisdom suggests that a Democratic takeover of the House (currently a 70 percent probability in prediction markets) would paralyze the market, Zezas argues that legislative gridlock has become a secondary factor. In a recent policy briefing, Zezas noted that the most significant market-moving variables (tariffs and regulatory shifts) have moved from the legislative branch to executive authority.
This “Executive Constant” means that even if the 2026 midterms result in a divided government, the administration’s ability to utilize section 232 authorities for tariffs or executive orders for AI regulation remains intact. For investors, this shifts the risk from “What will Congress pass?” to “How will economic actors react to existing executive choices?” The real volatility lies in the reaction function of corporate America to the so-called Liberation Day tariffs and the One Big Beautiful Act’s fiscal incentives.
Technical mechanics of the TCJA sunset
The technical structure of the 2026 tax cliff is often misunderstood. It is not a single tax hike but a comprehensive reversion of the individual code. If Congress remains in a state of paralysis through the 2026 midterms, the top marginal income tax rate will automatically revert from 37 percent to 39.6 percent on January 1. Furthermore, the standard deduction (currently 30,850 dollars for married couples) will be cut nearly in half, and the 10,000 dollar cap on state and local tax (SALT) deductions will vanish.
For the equity markets, this is a direct hit to consumer discretionary spending. Quantitative analysis suggests that 62 percent of tax filers will experience a net tax increase in 2026 if no extension is reached. This creates a “Fiscal Fatigue” scenario where the AI-driven productivity gains of 2025 must compete with a shrinking pool of household disposable income. Corporate earnings are relatively insulated as the 21 percent corporate rate was made permanent, but the secondary effects of reduced consumer demand are not yet fully baked into 2026 forward multiples.
Strategic positioning in a high-yield environment
Data from market reports on November 14 shows that institutional capital is rotating into mid-duration fixed income. With the 2-year Treasury yielding 3.62 percent and the 10-year at 4.14 percent, the yield curve is no longer inverted, but it is remarkably flat. This “Higher for Longer-ish” stance by the bond market suggests that the Fed’s easing cycle may bottom out sooner than expected, potentially near the 3.25 to 3.50 percent neutral rate.
Sector exposure must be recalibrated. Technology remains the primary growth engine, with AI capital expenditure projected to reach 3 trillion dollars over the next three years. However, the manufacturing and industrial sectors are facing headwinds from the rising cost of debt financing, which now accounts for roughly 1.5 trillion dollars of that total AI buildout. Investors should prioritize companies with high pricing power that can offset the potential 2026 tax drag on their customer base.
The road to January first
The next major data point for this thesis occurs on December 10, 2025, during the final FOMC meeting of the year. Investors must watch the Summary of Economic Projections (the dot plot) to see if Fed officials revise their 2026 terminal rate higher in response to fiscal expansion. If the Fed signals a pause in the cutting cycle, the 10-year yield could breach the 4.50 percent level, creating a significant headwind for equity valuations as we enter the transition year. The primary milestone remains the January 1, 2026, deadline for the TCJA sunset, a hard data point that no amount of political signaling can obscure.
