Stocks Edge Up as Investors Tread Carefully Ahead of Fed Decision Week

Stocks edged slightly higher as the new week began, with traders turning their attention to fresh signals on the Federal Reserve’s potential 2026 rate path. With a rate cut at the Fed’s final meeting of the year essentially guaranteed, investors are focusing on what comes next rather than the near-term move.

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S&P 500 futures ticked up 0.1% after the index ended Friday just 0.3% below its all-time closing high. Europe’s Stoxx 600 hovered near the flat line, showing little direction. Across Asia, mainland Chinese equities led regional gains after the Communist Party’s Politburo announced that strengthening domestic demand will be its primary economic priority for 2025. Futures tied to the Nasdaq 100 also gained, rising about 0.2%.

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US equities have staged a notable comeback in recent weeks, climbing close to their October peak as several Fed officials signaled a willingness to deliver a rate cut on Wednesday. But the rally has come with bouts of volatility. Investors remain unsure about how quickly the Fed will ease policy in 2026, and some are beginning to question how sustainable the AI-driven surge in tech stocks really is.

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Concerns about inflation are adding another layer of uncertainty. Persistent pricing pressures have created growing divides among policymakers, a challenge made worse by the lack of meaningful new data during what has become the longest US government shutdown on record. After what is widely expected to be a single cut this week, money markets are now pricing in two additional cuts by the end of 2026 a shift down from expectations of three cuts just a week earlier.

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Despite these concerns, several factors continue to underpin the equities market. A resilient US economy, supportive seasonal trends, and investors rebalancing portfolios after being underweight risk assets have helped keep stocks afloat.

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Still, these tailwinds do not erase the major risks still confronting the market, according to Daniel Murray, deputy chief investment officer and global head of research at EFG Asset Management.

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One of the biggest threats, Murray noted, is the possibility that the Federal Reserve turns out to be “less dovish than investors currently assume.”

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He also highlighted the potential for tariffs to exert delayed upward pressure on inflation, which could leave price growth elevated longer than markets expect. Additionally, early signs of weakening in the labor market could later become more pronounced, creating another drag on sentiment.

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Bond markets offered their own signals on Monday. European bonds led the global retreat after European Central Bank Executive Board member Isabel Schnabel became the first senior policymaker to acknowledge clearly that euro-area rates have likely reached their lower bound. Her comments sparked selling across the region’s sovereign debt markets.

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In the US, Treasuries extended last week’s decline. The yield on the benchmark 10-year note edged up by one basis point to 4.15%, reflecting the market’s reassessment of the Fed’s longer-term policy path.

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