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Investing.com -- U.S. equities remain well supported by robust economic growth and continued AI-driven optimism, even as the Federal Reserve adopts a more hawkish tone, Capital Economics said in a new note.
“While the Fed will not ease policy by as much as is currently discounted, the equity market rally has further to run,” said Capital Economics’ Deputy Chief Markets Economist Jonas Goltermann and Head of Markets Asia-Pacific Thomas Mathews.
Goltermann and Mathews believe that recent volatility tied to higher Treasury yields and a stronger dollar has not derailed risk appetite.
They expect another 25-basis-point rate cut in December but argued that “the money market still discounts too much easing overall.” The economists share Chair Jerome Powell’s assessment that fears about U.S. labor market weakness are “overblown” and that the economy “is doing just fine.”
Although other central banks such as the ECB and Bank of Canada remain cautious, they are likely to take “a more dovish path than is now discounted, strategists said.
In the U.K., a “sizeable fiscal tightening” expected in the upcoming budget could reinforce the case for additional policy easing in 2026 and further weigh on gilt yields and sterling.
On equities, the AI rally continues despite a narrowing market. “We doubt recent jitters around the funding of the data centre build-out, or the continued narrowing of the stock market rally, presage a major setback,” the strategists wrote.
They noted that the surging costs of AI infrastructure are leading firms to rely more on debt financing but that “there are few signs that tech earnings or AI demand are faltering.”
The team also commented on geopolitical developments, noting that the Trump-Xi meeting delivered the de-escalation markets had anticipated.
While the underlying rivalry remains, strategists believe “the truce will hold, at least for a while,” reducing a key risk for global equities and potentially boosting China’s stock market performance.