The combination of strong earnings growth and the prospect of lower rates is simply too good for investors to jump off a running bull. On the Fed and rate cuts, many expect a total of 100 bps over the next four meetings.

So if you think there’s a mismatch between the S&P 500’s outlook and the broader U.S. economy and Fed outlook – you’re not alone. That’s because the S&P 500 doesn’t represent the US economy. Roughly a third of the index is made up of Big Tech. Nvidia alone accounts for about 8% of the benchmark. These companies have deep pockets and support each others’ business. This ecosystem, combined with global demand for US tech, has kept the major US indices – the S&P 500 and Nasdaq in particular – in demand despite signs of economic weakness elsewhere. For the rest of the S&P 500, earnings growth last quarter was around 3–4%. You can see this divergence in the equal-weight S&P 500, which continues to lag the market-cap-weighted version.

The weak economic outlook and deteriorating jobs market are not necessarily a concern for US Big Tech, but the prospect of lower rates is clearly positive because it makes valuations look juicier – simple math. As such, the week kicked off at fresh record highs for the S&P 500, while the US 2-year yield – which captures Fed expectations – remained under pressure. Google jumped more than 4% and hit a $3 trillion valuation, fueled by the news (earlier this month) that the company doesn’t need to sell its Chrome browser. That, combined with AI momentum, is pushing Google higher with a slight delay. We’ve long argued that Meta and Google would be the next leg of the AI rally, given these data-rich companies are well placed to benefit from the technology.

Nvidia, the icon of the global AI rally, opened lower but closed flat above its 50-DMA, despite reports that China is going after it for violating antitrust laws in a high-profile 2020 deal. The timing is noteworthy, as US and Chinese officials are simultaneously discussing trade terms, TikTok and US concerns about Chinese purchases of Russian oil. Meanwhile, there are also rumours that the trade truce with China could be extended, and that India could strike a trade agreement with the US as well. The good news: trade headlines no longer dent market sentiment as they once did.

So, does that mean everything is rosy? Well, the correction I was expecting over the summer hasn’t materialized, and underlying fundamentals have turned more positive in the meantime. US debt concerns have faded into the background, the trade war’s negative implications have been digested, the Trump administration’s interventions in private companies and the Fed have been absorbed. And now, the Fed appears convinced that cutting rates is indeed the right course.

Inside the Fed, Stephen Miran has been confirmed as a voting member just in time for this week’s Fed meeting, while Lisa Cook will likely participate despite Trump’s efforts to oust her. Beyond the policy rate decision, we’ll also get an update on the so-called dot plot, giving insight into Fed members’ expectations beyond this month. As I wrote earlier, many analysts think there could be four 25-bp cuts on the horizon in the coming months – a scenario that would likely give a fresh boost to equity markets. Small and mid-cap companies, as well as non-tech and non-U.S. names, are also enjoying the ride. A gauge of Asian equities hit a fresh all-time high this morning.

Looking back, some sectors have outperformed others under different rate-cutting scenarios. According to Ned Davis Research, the median gain after four or more cuts (following a six-month pause) was ~20% for health care, nearly 20% for consumer staples, 18% for energy and just 1.6% for tech – suggesting that heavy cutting cycles mostly happen in weak economic conditions, which favour defensives. By contrast, two or fewer cuts tend to support cyclicals such as industrials, energy and financials. We’ll see how many cuts the Fed puts on the menu in the coming months and how markets react.

Still, note that some, like JPMorgan’s chief strategist, warn that investors could lose appetite once the Fed actually starts cutting, if they believe the move is politically rather than economically motivated. That risk would rise if the Fed cut by 50 bps or signaled more cuts over the next 6–12 months than warranted. For now, though, dovish Fed expectations remain supportive of risk appetite. The US dollar is under pressure, gold and silver are pushing higher, and US crude is consolidating gains near the middle of the $62–65pb range, awaiting fresh direction.