21 Jan 2026
Post the event, Fed Chair Jerome Powell stated that a December cut was not a ‘foregone conclusion’ and per Fed Fund Futures the probability of a December cut fell from 100% in late October to under 40% by mid-November.
Secondly, the recent round of mega cap tech earnings reports has shown that while businesses are generating huge revenues, the scale of their artificial intelligence (AI) investments is causing some concern. The market appears to be becoming more discerning on the size of capital expenditure, with more scepticism emerging over the likely returns on investments. Equally, the shift from cashflow-funded investment to a mix including additional borrowing appears to have impacted sentiment.
While the overall move lower is relatively minor in the broader scheme of things, the pause and subsequent reversal serve as a reminder that markets do not go up in a straight line. As with every other market theme, winners and losers will emerge. While AI may well be transformative over time, not every company investing billions will reap the rewards for which they strive.
Overall, we remain constructive on the basis that economic fundamentals are benign, earnings growth expectations are solid and even if we do see a Fed ‘pause’ in December, the direction of travel for US interest rates is still lower.
Equities
We remain mildly positive on equities. The recent earnings season was positive, with a broadening of growth in US equities, strong growth in Japan and an improvement in emerging markets. We remain mindful that, even with the recent slowing in momentum and mild pullback in markets, valuations are still towards the ‘rich’ end of the spectrum. Given our positive economic outlook, likely lower interest rates and expectations for positive earnings growth, we still see the strongest opportunities in equities.
Fixed income
We maintain a neutral stance on bonds. We continue to see some volatility in government bonds – moves triggered by heightened concerns over debt levels and fiscal deficits. The monetary policy backdrop remains supportive as interest rates gradually come down, though we note that at some point rates in Japan will go the other way. Valuations are not compelling across investment grade and high yield segments, which alongside emerging market bonds offer spreads at the very bottom of historical ranges.
European equities
We remain neutral on European equities but are cognisant that the direction of travel appears more positive as we look towards next year. The asset class performed strongly in the first half of 2025 with excitement around potential fiscal stimulus. Optimism was led by developments in Germany as reforms to the ‘debt brake’ looked set to unleash significant spending on defence and infrastructure. However, by mid-year market patience had worn thin and the outperformance of stocks was eroded. All the same, we believe that patient investors may well be rewarded in 2026 as stimulus begins to have an impact. Any improvement in German growth would also likely have a positive ‘halo effect’ on wider Europe, and earnings expectations are moving higher as a result.
Source: Columbia Threadneedle Investments, as at 11 November 2025.
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