November CPI Could Upend December Rate Cut Expectations Traders in fed-funds futures currently place an 85% chance on the Federal Reserve cutting rates by 25 basis points at its December policy meeting. This level of confidence aligns with historical norms during the Fed’s “blackout” period, when officials refrain from public comments on monetary policy ahead of a meeting. As of Tuesday, market expectations for a December rate cut remain steady, supported by data from the CME FedWatch Tool. This optimism has fueled a strong stock market rally, with the S&P 500 and Nasdaq Composite reaching record highs last week and the Dow Jones Industrial Average crossing the 45,000 milestone for the first time. Inflation Data Looms as a Potential Game-Changer This week’s release of the November consumer price index (CPI) on Wednesday and producer price index (PPI) on Thursday could still shift market sentiment. Economists surveyed by The Wall Street Journal expect CPI to rise by 0.3% month-over-month for both headline and core readings. Year-over-year, headline inflation is forecasted to tick up to 2.7% from 2.6% in October, with core inflation steady at 3.3%. A sharper-than-expected increase in CPI—such as a 0.4% monthly gain—could raise questions about the Fed’s plans, said Jay Hatfield, CEO of Infrastructure Capital Advisors. However, most analysts see little likelihood of such an outcome, given policymakers’ confidence that inflation is on track toward the 2% target. Fed’s Gradual Approach and Market Sentiment Minutes from the Fed’s November meeting highlighted officials’ preference for a more measured pace of rate cuts, with Chair Jerome Powell emphasizing the importance of avoiding undue haste. Although a December rate cut appears likely, the Fed may strike a “hawkish” tone, signaling slower rate reductions in the future. Recent economic data has bolstered expectations for a December easing. November’s stronger-than-expected jobs report reinforced this view, and remarks from Fed officials, including Powell and Governor Christopher Waller, have not challenged the market’s outlook. Waller, in particular, indicated he supports a rate cut unless inflation data surprises significantly. The Role of the Dot Plot The December meeting will also include an updated Summary of Economic Projections, known as the dot plot, which outlines individual Fed officials’ rate forecasts. A projection showing only modest rate cuts in 2024 could help balance the more hawkish voices within the central bank, according to Hatfield. Key Takeaways With inflation data as the final major input before the December meeting, the market is poised for a rate cut. However, any significant surprise in the CPI could disrupt these expectations, underscoring the Fed’s delicate balancing act as it navigates its monetary policy path.

The stock market is at record highs, but declining profit projections for S&P 500 companies suggest a potential pullback is on the horizon. Wall Street analysts have lowered their 2025 earnings per share (EPS) estimates by 0.5% over the past six months, dropping from $276 in June to $273, according to FactSet. Sales estimates also fell by 0.3% during the same period. The sharper decline in EPS versus sales indicates pressure on profit margins, as fixed costs limit companies’ ability to cut expenses in response to revenue drops. This trend extends across the S&P 500, excluding the “Magnificent Seven” tech giants—Nvidia, Microsoft, Amazon, Meta, Alphabet, Apple, and Tesla. These seven companies have largely resisted the downturn due to early gains from rising artificial intelligence investment. For the rest of the index, 2025 EPS estimates have fallen 5.5% this year, according to Citi. The energy and materials sectors have seen the largest cuts, with EPS forecasts down 18% and 6%, respectively. Oil prices have declined as global economic growth slows and production outside OPEC increases. Materials producers, including chemical and steel makers, are similarly affected by weaker demand tied to slowing economic activity. The consumer discretionary sector has also faced a 2.4% drop in earnings estimates, reflecting diminished consumer spending and broader economic challenges. While downward revisions are typical—historically averaging 6% for the next year’s estimates—this trend is more concerning against the backdrop of a softening economy. Signs of a slowdown include a weaker labor market, easing consumer spending, and persistently high interest rates. Although the Federal Reserve recently lowered rates, they remain far above the near-zero levels seen in 2021, continuing to weigh on growth. Even if earnings projections stabilize, current forecasts signal trouble for the stock market. Analysts note a strong correlation between earnings revisions and S&P 500 performance. With upward and downward revisions now evenly balanced, compared to a previous trend favoring upward adjustments, valuations appear stretched. At 22.5 times forward earnings, the S&P 500 is trading at its most expensive level in three years. A correction—a decline of 10% or more—seems increasingly likely. Morgan Stanley estimates that the S&P 500 could fall to around 5,300, a 16% drop from its current level of 6,095. However, the depth of any decline would depend on a specific catalyst, such as disappointing earnings from a major company, unexpected Federal Reserve policy changes, or economic setbacks. That said, market pullbacks rarely happen without warning. Investors should remain cautious, particularly with economic growth slowing and stock prices increasingly disconnected from earnings fundamentals. As Morgan Stanley’s chief U.S. equity strategist Mike Wilson points out, “There is room for modest valuation compression from current levels.” In summary, while the market remains elevated, the risk of a meaningful decline is growing. Prepare for potential volatility and don’t be caught off guard by a pullback.