A Photo Finish
The battle for the Formula 1 (F1) drivers’ championship went down to the season’s final day this past weekend after 24 Grand Prix races. Even after a third-place finish in the Abu Dhabi race on Sunday, Lando Norris of team McLaren beat the four-time champion, Red Bull’s Max Verstappen, to claim the 2025 title by total points. Similar to the economy, races move at varying speeds. The race in Monaco, for example, is famous for being the slowest circuit in terms of average speed because of its narrow streets and numerous tight corners. Drivers often drive conservatively to manage tires and avoid incidents. The fastest Formula 1 race is usually the Italian Grand Prix at Monza, won this year by Max Verstappen at a record-breaking average of 156 mph. Teams choose their tires strategically based upon track conditions, speed, longevity, and race goals. Reduction of drag, though, is as important as choosing the right Pirelli tires. Similarly, under differing economic conditions, course corrections may be required, as the Fed noted yesterday.
The Fed Is Reducing Drag
The Fed fulfilled expectations of a “hawkish cut” yesterday, further reducing interest rate drag on the economy. The central bank’s Federal Open Market Committee cut its key overnight borrowing rate by a quarter percentage point for the third time this year, putting it in a range between 3.5%-3.75%. The vote to cut rates was not unanimous, however, with nine Fed Committee members voting to cut rates, 2 voting for no rate cut, and 1 voting for bigger cuts. On the economy, the Fed raised its collective view of gross domestic product for 2026 by half a percentage point to 2.3%. The Fed continues to expect inflation to decline over time, but to hold above its 2% target until 2028.
While the investment portion of the U.S. economy is being fueled by AI capital expenditures, the U.S. consumer also continues to spend at a solid clip overall. At the Fed’s news conference, Chairman Powell noted that goods inflation should peak in the first quarter of 2026 from tariffs. Meanwhile, services inflation is coming down. Longer term, the Fed expects the Fed Funds rate to be cut to 3.4% by the end of next year and to 3.1% by the end of 2027. The Fed is concerned about pushing too hard on the accelerator due to potential inflation, but is not exactly hitting the brakes either.
Waving the Yellow Flag
Oracle# reported quarterly results last night that were mixed. Expectations for the quarter were for 15% revenue growth and 12% EPS growth. Results showed 14% revenue growth and 10% operating income growth. It has been a rollercoaster year for Oracle as investors try to assess the strength of the company’s position in the artificial intelligence boom. In recent months, Oracle has emerged as a more central player in AI, largely due to a $300 billion deal with OpenAI, which came to light in September. The OpenAI deal involves the AI startup buying computing power over about five years, starting in 2027. Indicative of this deal and AI spending, Oracle reported a backlog in the recent quarter of $523 billion and a 34% gain in its Cloud revenue. However, funding Oracle’s compute buildout is going to require significant amounts of debt, which is a concern. In late September, Oracle raised $18 billion in a bond sale, one of the largest debt issuances on record in the tech industry. The company is now the biggest issuer of investment grade debt among non-financial firms, but noted that it is committed to maintaining its investment grade rating. Oracle’s stock is indicated lower pre-market, but has traveled a circuitous path to a 30% gain this year. Oracle is no longer in pole position in the AI race as upside growth expectations have been deflated.
Overtaking The Backmarker
Black Friday sales reached a new record this year, with e-commerce fueling the holiday event. Digging deeper into spending patterns, total U.S. credit and debit card spending per household grew by 1.3% year-over-year in November, according to Bank of America. However, large gaps persist between both higher and lower income household spending and wage growth. Higher-income households increased spending by 2.6% over the prior year, while lower-income groups lagged behind with a gain of just 0.6%. After-tax wage growth ticked up to 4% year over year for higher-income households but only 1.4% for lower-income households. Overall, consumers’ finances appear to remain healthy, with little indication that people have become overly reliant on credit cards or alternative payment methods like buy now, pay later, but affordability remains an issue.
The S&P 500 finished at a new high yesterday, up 17% for the year, while the 10-year Treasury yield remains stuck around 4.1%. Lowering longer term interest rates is a more difficult task. The Fed is hitting the apex as we enter 2026 by continuing to lower short term rates, but will probably pause for a while as new data rolls in and Powell’s term comes to a close. Fiscal spending and the tax climate should add to the economic growth backdrop next year as well, which markets appear to be already discounting. The forward 12-month P/E ratio for the S&P 500 is at 22.4, above the 5-year average of 20 and above the 10-year average of 18.7. Assuming interest rate trends and earnings growth remain favorable, the checkered flag for this economic expansion and bull market is not being waved just yet.
Singer Brenda Lee turns 81 today, Rita Moreno turns 94 and Jermaine Jackson turns 71. Formula One driver and World Champion Lando Norris turned 26 just last month.
Christopher Crooks, CFA®, CFP® 610-260-2219