After maintaining the federal funds rate at 5.25-5.50% for over 18 months, the Federal Reserve signalled a shift in its forward guidance at the December meeting. While no rate cut was delivered, the updated dot plot suggests three 25bp cuts in 2026, a meaningful dovish tilt from the prior projection of two.
The front end of the yield curve has already priced in much of the anticipated easing. We see the most attractive risk-reward in the 3-5 year maturity bucket, where investors can capture meaningful carry without excessive duration risk.
Investment-grade corporate bonds are particularly well-positioned. Spreads have widened approximately 15bps from cycle tights, offering an attractive entry point for high-quality issuers.
Historically, equity markets have performed well in early easing cycles — provided the rate cuts are driven by normalisation rather than recession fears. The current macro backdrop suggests the former.
We favour quality growth companies with pricing power, high returns on invested capital, and manageable leverage. Small and mid-cap equities, which have meaningfully underperformed large caps, could see a rotation tailwind as financial conditions ease.
The key risk to monitor is whether the Fed's credibility on inflation remains intact. Any upside surprise in CPI or PCE data could quickly reprice the easing trajectory.
Staging