Stock markets declined yesterday as we approach the Fed’s two-day policy meeting, with a widely expected 25 basis-point interest rate cut. Despite the expected cut, investors are cautious about a potential “hawkish cut,” where Chair Jerome Powell might signal prudence or caution on the path for further easing in 2026. This uncertainty is tempering sentiment. What could cause a stock market decline at this stage of the cycle? A rise in bond yields is one scenario, we see a rise in the US 10-year yield, this is a concern.
While a 25 bps rate cut is widely expected, a more conservative “dot plot” signalling fewer than 50–75 bps of easing in 2026 (due to sticky inflation or robust growth) could dash hopes for aggressive support. This might spike long-term yields further, pressuring high-valuation growth stocks. Recent premarket jitters and yesterday’s mild dip reflect this anxiety. I don’t think inflation will be the issue in the long term, in a world where AI replaces human inflation will fall. But GDP will grow strongly in 2026 and beyond, this is bullish for yields. Cutting rates in a growing economy is bullish for yields and bearish for stocks.
Extreme valuations in the tech sector is another scenario causing a stock market decline. So far investors are not too concerned, the pullback in November has been retraced. Inflation could rise in the short term and fall in the long term as AI adoption spreads. Massive investment in AI infrastructure (via demand surges and bottlenecks) can indeed contribute to upward pressure on inflation in the short term. This would reinforce fears that the economy is “too hot” for deep cuts, leading to a bond selloff and equity rotation out of tech. Yields are already creeping up on similar worries, and a surprise upside could amplify that. In the US markets pulled back after a strong rally which is normal but there is a risk the rally will resume after the FOMC meeting tomorrow, if the Fed signals more cuts in 2026. The FTSE 100 appears to have turned down after reaching 9745.