Key Wealth Investment Brief

Key Takeaways:

We begin by summarizing three longer-term themes of our Key Wealth 2026 Outlook:

1. The rise of nationalism and “state capitalism,” and the related retreat from globalization.
2. Advancements in artificial intelligence: the promises, challenges, and unknowns.
3. The democratization of private markets and changes in market structure.

2026 Outlook: The Rise of Nationalism

Quoting our 2026 outlook:

“The transition from globalization toward nationalism presents considerable implications for investors. One consequence is that inflation and real interest rates are expected to remain structurally higher as companies prioritize resilience over efficiency.

“Furthermore, elevated costs are often accompanied by increased fiscal stimulus and monetary accommodation, even at the expense of central bank independence. This is a topic that we addressed several times in 2025 and will likely do so again in 2026.”

Lastly, increased nationalism has the potential to create “possible headwinds for U.S.-based assets, and greater geopolitical instability. As a result, building resilient portfolios is increasingly important in this environment.”

Federal Reserve (Fed) Chair Jerome Powell is the subject of a criminal investigation by the Department of Justice.

Powell has not been charged but is facing a criminal investigation over his testimony last summer about the Federal Reserve’s building renovations, according to The Wall Street Journal.

Powell released a statement strongly refuting the investigation, saying, “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions — or whether instead monetary policy will be directed by political pressure or intimidation.” … “Public service sometimes requires standing firm in the face of threats. I will continue to do the job the Senate confirmed me to do, with integrity and a commitment to serving the American people.”

Possible motivation for this action is unclear, but there is risk that the independence of the Federal Reserve is again called into question. In such an environment, possible market implications are a weaker U.S. dollar and/or higher long-term interest rates.

Bottom line: remain diversified and don’t panic if market volatility increases.

The labor market is cooling but not collapsing. The Fed is unlikely to cut rates later in January.

December nonfarm payroll employment data was released last week. The “low to hire, low to fire” dynamic continued with U.S. employers adding 50,000 jobs in December, below the 73,000 forecast. In addition, jobs added in November and October were revised lower to a gain of 56,000 and a decline of 173,000, respectively, mostly due to a decline in the government sector. On the other hand, the unemployment rate improved from 4.6% to 4.4%, and wage growth showed a year-over-year gain of 3.8%, remaining steady.

The 3-month average of nonfarm payroll employment growth is negative, but October’s job losses were largely due to Department of Government Efficiency (DOGE) job cuts. Many federal employees were offered several months of continued pay if they resigned. October was the month they officially lost their jobs. Once this month is removed from the 3-month average, growth will likely reverse higher; however, the true strength of the labor market is unclear.

Market participants are pricing in almost no chance of a rate cut at the Fed’s upcoming meeting on January 28, 2026; betting website Kalshi is pricing only a 5% chance of a 25 basis-point cut (0.25%) at this meeting. The current fed funds rate is the target range of 3.50% to 3.75%.

2026 Outlook: Three portfolio themes we are emphasizing in 2026 – the bottom line.

1. The business expansion should continue (no recession in 2026), supporting top-line growth; earnings will likely be supported by productivity; stock prices will be supported by margins; valuations remain high.
2. Artificial intelligence (AI) investing becomes more discerning, and exuberant expectations leave little room for error if expectations fall short: underweight mega cap and overweight the “forgotten 493;” slight tilt to mid/small caps; emphasize quality.
3. Diversification returned in 2025 yet is still underappreciated. Bonds, international markets, and real assets can all play a role in portfolio diversification. Alternative strategies remain attractive where appropriate.

Equity Takeaways:

Stocks dipped slightly in early Monday trading. The S&P 500 was down approximately 0.1%, to 6956, with the tech-heavy Nasdaq down a similar amount. Small caps fell approximately 0.5%. International shares were generally higher as the dollar weakened. Gold rallied, continuing its strong momentum.

The S&P 500 is off to a good start in 2026. In December, the market experienced some backing and filling. Buying reignited once the calendar turned. Breadth is improving, and the S&P 500 hit a new 65-day high last week. Price action remains very constructive.

Earnings growth continues to power higher, supporting higher stock prices. At approximately 22x, the price/earnings (P/E) ratio of the S&P 500 remains elevated, but as long as earnings continue growing, the stock market will likely do well. Earnings higher = stocks higher.

Through Friday, January 9, U.S. small caps have already risen 5.3% year-to-date (YTD). International stocks have also done well, with developed non-U.S. markets rising 2.9% YTD and emerging markets rising 4.4% YTD. Gold is up 4.0% YTD, continuing its momentum from 2025, when it rose more than 60%.

Cyclical sectors have led the market advance, with materials, consumer discretionary, industrials, and energy as the top four performing sectors YTD. Interestingly, the technology sector has risen just 0.1% YTD, compared to the S&P 500’s 1.8% gain.

Fixed-Income Takeaways:

The broader context around the Powell subpoena relates to Federal Reserve independence. Loss of Fed independence would likely result in a steeper yield curve, with long-term rates rising relative to short-term rates, all else equal. Uncertainty around monetary policy has risen.

In early Monday trading, the overall bond market reaction to the Powell subpoena news was muted. Yields were 2-3 basis points higher across the curve, with 2-year Treasuries yielding 3.54%, 5-year Treasuries 3.77%, 10-year Treasuries 4.19%, and 30-year Treasuries 4.85%.

Even before the Powell news, a January rate cut was considered highly unlikely, and it now seems even more unlikely. In general, market participants are expecting approximately 50 basis points of rate cuts by December 2026, according to data from Bloomberg. The current fed funds rate is the target range of 3.50% to 3.75%.

Credit spreads moved tighter last week in conjunction with higher equity prices. Investment-grade (IG) supply was approximately $90 billion last week, one of the highest weekly volumes on record. Deals continue pricing into strong demand.

When a Rate Cut Comes with Cracks in Consensus

Key Takeaways:

• The Fed cut rates by 0.25%; federal funds rate target range is now 3.50% to 3.75%
• Three dissents (Goolsbee/Schmid/Miran) highlight a split Committee
• Forecasts point to gradual cuts ahead
• Powell stressed data dependence
• Balance sheet stays steady with focus on liquidity
• Markets responded cautiously

What the Fed Did

The Federal Reserve lowered the federal funds rate by 0.25%, bringing the target range to 3.50 - 3.75%. The move reflects the Committee’s view that inflation has made enough progress to allow a modest easing of policy, even as economic activity cools unevenly. The cut is framed as a “step toward normalization,” not a continuation into an aggressive cutting cycle.

A Rare Split Vote

Three members – Austan Goolsbee, Jeffrey Schmid, and Stephen Miran – dissented. Their objections were not aligned, making the split even more notable.

• Goolsbee dissented because he expressed unease about “front-loading too many rate cuts” and thought it was bad timing with limited economic data. 
• Schmid dissented on the opposite side, likely believing the Fed should have waited for more data before easing, given still-elevated underlying inflation measures.
• Miran also objected because he favored a larger 0.50% cut, placing him in the camp that sees greater risk in keeping policy too restrictive for too long.

This unusual “split-in-three-directions” vote is rare at the front-end of an easing cycle and highlights not just disagreement about timing, but disagreement about the magnitude of easing at this stage of the cycle.

What the New Forecasts Show

The Summary of Economic Projections (SEP) provides a clearer view of how policymakers see the path forward. Inflation is expected to continue easing toward target, the labor market is projected to soften gradually, and economic growth is seen as slowing but remaining positive. The updated federal funds rate projections imply additional cuts ahead, but at a careful, measured pace consistent with the Fed’s desire to maintain flexibility as the data evolve.

The dot plot now forecasts only one rate cut in 2026, with a wide range of views across the Committee. It’s another sign that policymakers agree inflation is easing but remain divided on how quickly policy should normalize.

Balance Sheet: What Changed and Why It Matters

While the interest rate decision drew more attention, the Fed’s balance sheet strategy remains an important part of its policy stance. The Fed announced that it will resume balance sheet expansion by purchasing Treasury securities, starting with $40 billion in Treasury bills later this week. The Fed emphasized that the move is to ensure ample reserves in the banking system and maintain money market stability. Powell emphasized that this is a technical tool, separate from rate policy. The Committee continues reducing its holdings of U.S. Treasury and Agency securities, but Powell emphasized that the Fed stands ready to adjust the pace of runoff if needed to support smooth market functioning.

He reiterated the importance of maintaining ample reserves, signaling that the Fed aims to avoid the kind of liquidity strains seen in past episodes. For market participants, the message is continuity: balance sheet reduction is proceeding, but the Fed remains flexible and attentive to funding conditions.

Powell’s Message

Powell delivered a measured, steady message, emphasizing that this rate cut is part of a gradual shift away from restrictive policy, not the acceleration into a rapid easing cycle. He noted inflation continues to improve but remains above target, making it important for the Fed to proceed carefully.

He stressed data dependence, clarifying that future cuts will hinge on continued progress in inflation and labor-market conditions. Powell acknowledged the dissents but framed them as reasonable differences of judgment during an uncertain period, rather than evidence of deep division.

Throughout the press conference, he avoided signaling a preset pace for easing. His tone conveyed cautious confidence: inflation is moderating, the labor market is cooling gradually, and policy can adjust in measured steps – provided the data supports it.

Why It Matters

Short-term yields may drift lower but will remain sensitive to incoming data. The unusual split vote reinforces that the policy path may be less predictable than in past cycles. Powell’s tone tempers expectations for aggressive easing and underscores the Fed’s desire to maintain optionality.

The Fed delivered a rate cut, but the story of the meeting was the three-way dissent, signaling genuine uncertainty about the right pace and magnitude of easing. Powell struck a careful balance, beginning to adjust policy while keeping the Fed’s options wide open.

Key Takeaways:

The Federal Reserve (Fed) is expected to cut the fed funds rate another 25 basis points (bps) on Wednesday, December 10, 2025.

The current fed funds rate target range is 3.75% - 4.00%, and another cut would bring the top end of the target range below 4.00%. Betting market Kalshi and Futures Markets both predict a cut of 25 bps (0.25%) in December, prior to a Fed pause in January.

The impetus for another interest rate cut is a cooling but not collapsing labor market. Indicators such as initial unemployment claims, ADP private employment, and Challenger Grey job cuts all paint the picture of a “low to hire, low to fire” labor market, according to data from Evercore ISI. Delayed traditional labor market data will be released next week (recent data has been delayed due to the government shutdown) and should illustrate further employment weakness due to layoffs in the government sector.

On the other hand, typically, in a rate cutting cycle, 10-year Treasury yields drop, according to Bianco Research, citing the 1989, 2000, 2007 and 2019 rate cutting cycles. The current cutting cycle began in September 2024; and since that time, 10-year yields have risen, suggesting market participants remain worried about inflation or perhaps concerns that the Fed may be cutting prematurely.

Declaring a stock market bubble is a difficult exercise, at best.

From December 1994 to December 1996, the S&P 500 rose 69% and technology stocks rose approximately 103%. In December 1996, then Fed Chair Alan Greenspan made his famous “irrational exuberance” speech regarding “unduly escalated asset values” (he was worried about a bubble in stock prices).

In the period after Greenspan’s speech, from December 1996 to March 2000 (the peak of the tech bubble), the S&P 500 rose another 112%, and technology stocks rose an astounding 435%, before a peak and sharp fall.

From March 2000 to September 2002, the S&P 500 fell 44% and technology stocks fell 81%. Other sectors, like emerging markets and small cap value stocks, fared much better in the downturn and, in particular, bond prices rose offering some support as well. One lesson: bubbles can be tough to spot, and staying diversified remains paramount.

We don’t believe the current situation is a bubble (yet). Current market valuations are below prior bubble peaks, and underlying fundamentals remain strong. Investor sentiment is not yet significantly extended, and leverage remains moderate for most players involved. Finally, “new paradigm” thinking has not yet become mainstream.

The residential housing market is softening after very sharp post-COVID price appreciation. Multi-family (apartment) supply is set to drop sharply.

Despite recent weakness, the median home has risen more than 50% in price (7.5% annualized) since 2020, according to data from Case Shiller and Redfin. Housing comprises a substantial portion of the average person’s net worth. The housing market impacts economic growth, household wealth, consumer spending and employment.

Nationally, the supply of homes on the market is up 15% year-over-year, and the number of buyers applying for a home mortgage is up approximately 31% from the same period last year, also according to data from Case Shiller and Redfin. New listings are up 0.9% year-over-year, while pending sales are down 2.6%; it is taking slightly longer for the median home to sell.

Many new apartments were delivered in recent years, with supply peaking in 2024 according to CoStar. This supply has put downward pressure on rents. The national median rent of $1,367 per month has fallen approximately 5.2% from its 2022 peak, according to CoStar. New apartment supply is expected to fall sharply in the coming years.

Bottom line – how to invest now.

Key Wealth’s 2026 Economic and Market Outlook National Client Call was held on Wednesday, December 3, 2025.

Key Wealth Institute National Client Call - Managing Wealth in an Age of Disruption and Change - Recording - (December 3, 2025)

We discussed Three Forces of Disruption (concurrent and interconnected):

1. The rise of nationalism and “state capitalism," and the related retreat from globalization.
2. Advancements in artificial intelligence (AI): the promises, the challenges and the unknowns.
3. The democratization of private markets and changes in market structure.

Key Wealth’s investment philosophy is premised on committing capital to areas that are starved for funds and avoiding areas where capital is abundant. AI remains the dominant theme in the economy. As money pours into AI-themed investments, we continue to recommend a diversified approach.

Since Labor Day, we have been advising investors to revisit equity exposures and rebalance where appropriate. This view still holds as the labor market continues to cool, AI exuberance heats up, and credit markets exhibit some shakiness. Widely used indices remain concentrated, potentially leaving investors over-exposed to concentration risk. Diversification remains an attractive strategy, in our view.

Equity Takeaways:

Stocks were quiet in early Monday trading. The S&P 500 fell approximately 0.1%, to 6862, while small caps rose approximately 0.1%. International shares were also generally unchanged.

November was a choppy, flat month. The first week of December saw the S&P 500 rally back towards its all-time high. Earnings growth remains very strong – a fundamental tailwind for stock prices that is expected to continue into 2026.

Encouragingly, participation has broadened outside of the technology sector, with other sectors picking up the baton. The S&P 500 ex-information technology index broke out to a new interim high last week. A broadening market is a healthy sign.

Quality stocks (generally companies with strong balance sheets and consistent earnings) have significantly underperformed riskier, higher-beta stocks in 2025. We believe quality companies tend to outperform over a full cycle, and that quality stocks are attractive at current levels.

The dividend yield of the S&P 500 continued to fall in 2025, to near historic lows. The strong performance and increasing market share of high growth, low-to-no yielding technology companies has driven the yield lower. Income-oriented investors should look elsewhere.

Fixed-Income Takeaways:

Investors are expecting a “hawkish cut” of 25 basis points (0.25%) this week. The Fed remains concerned about inflation, and market participants will be parsing their language closely for clues regarding the Fed’s 2026 outlook.

Last week, 10-year Treasury yields rose as investors remain concerned about the impact of rate cuts on future inflation. Prior support for the 10-year yield has been between 4.15% and 4.20%. Buyers have stepped in at those levels over the past few months.

In early Monday trading, Treasury yields were up another 2 - 4 bps across the curve. In summary, 2-year Treasuries were yielding 3.60%, 5-year Treasuries 3.77%, 10-year Treasuries 4.18%, and 30-year Treasuries 4.83%.

Over the intermediate term, market participants are expecting 75 bps to 100 bps of cuts to the fed funds rate by the end of 2026, which would bring short-term rates down to approximately 3.00%. The current fed funds rate is the target range of 3.75% to 4.00%.

Credit spreads tightened modestly last week. Spreads had drifted slightly wider since the start of November, but on an absolute basis, spreads remain narrow relative to historic levels. Continued inflows into corporate credit have helped keep a lid on spreads.

Key Takeaways:

How will the economy perform next year?

We believe investors should watch what consumers do, not what they say. Consumer spending remains solid as rising retirement assets and higher home prices are lifting consumer net worth, creating a wealth effect. Consumer confidence is weakening, but overall spending and net worth remain robust, according to data from Evercore ISI.

Artificial intelligence (AI)-related spending, including investment in data centers and infrastructure, has exploded in recent years and continues to support economic growth. Much of this new capital spending has been financed with debt, in contrast with prior years, when most AI spending was funded from cash flow. Debt-funded spending needs to be managed more carefully than spending funded from cash flow, but debt is not always a less favorable funding structure.

Operational use of AI is still modest, but paid subscriptions are higher, according to Ramp, citing Census Bureau data. In other words, companies are exploring AI tools even if they’re not integrated into their processes yet.

Conversely, 50% of Americans say they are more concerned than excited about the increased use of AI, while only 10% say they are more excited than concerned, according to a recent Pew survey. This sentiment appears to have deteriorated in 2023, which followed the launch of ChatGPT in 2022. Consumer sentiment around AI may need to improve to justify the massive planned future AI infrastructure spending.

Bottom line – how to invest now.

Key Wealth is hosting our National Client Call on Wednesday, December 3, 2025, where we will discuss our 2026 Market and Economic Outlook. We will cover Three Forces of Disruption (concurrent and interconnected):

1) The rise of nationalism and state capitalism, and the related retreat from globalization

2) Advancements in artificial intelligence: the promises, the challenges, and the unknowns

3) The democratization of private markets and changes in market structure

Key Wealth’s investment philosophy is premised on committing capital to areas that are starved for funding and avoiding areas where capital is abundant. AI remains the dominant theme in the economy. As money pours into AI-themed investments, we continue to recommend a diversified approach.

Since Labor Day, we have been advising investors to revisit equity exposures and rebalance where appropriate. This view still holds as the labor market continues to cool, AI exuberance heats up, and credit markets exhibit some shakiness. Widely used indices remain concentrated, potentially leaving investors over-exposed to concentration risk. Diversification remains an attractive strategy, in our view.

Equity Takeaways:

Stocks fell in early Monday trading after rising sharply late last week. The S&P 500 fell approximately 0.7%, to 6801, while the tech-heavy Nasdaq fell approximately 1.1%. Small caps fell approximately 0.6%. International shares were generally lower.

Sentiment has come off the boil over the past few weeks, setting up the markets for a bounce-back rally. Markets had become too bullish a few months ago, and that condition has been worked off. We believe the setup is favorable for a year-end rally.

The AI trade has separated into two camps over the past few weeks and months. The rising tide lifts all boats narrative has changed. On one side are the OpenAI-related names, and on the other side are the names in the Gemini ecosystem. The recent version of Gemini was received very favorably, which has put some pressure on stocks associated with OpenAI (creator of ChatGPT, a competing AI model).

Fixed Income Takeaways:

Treasury yields rose 4–7 basis points in early Monday trading after falling last week. In early Monday trading, 2-year Treasuries were yielding 3.53%, 5-year Treasuries 3.66%, 10-year Treasuries 4.09%, and 30-year Treasuries 4.75%.

President Trump recently stated that he has made his choice to lead the Federal Reserve (Fed), although nothing is official. Kevin Hassett has become the clear favorite to become the next Fed chair, according to Kalshi.

Initial market reaction to Trump’s announcement was positive, as Hassett is expected to continue the Fed’s current rate-cutting cycle. The Fed is widely expected to cut the federal funds rate by another 25 basis points (0.25%) in December. The current federal funds rate is the target range of 3.75% to 4.00%.

Key Takeaways:

Stocks were volatile last week. Bonds rose slightly last week, providing some diversification.

In a choppy week of trading, the S&P 500 fell approximately 2.2% last week, with small caps faring slightly better, dropping 0.8%. International shares fell 3-5%. Gold, copper, and oil also fell, while bonds and the dollar both rose slightly.

Since the start of November, we’ve seen sector rotation beneath the surface of the stock market. Health care and energy have been the two best performing sectors over that timeframe, while consumer discretionary and technology have been the two worst performing sectors. On a year-to-date (YTD) basis, technology remains the best performing sector, so it remains to be seen if the recent rotation is a blip or a true reversal.

Diversification remains paramount. The S&P 500 has become more concentrated in recent years, increasing the potential for volatility. Diversification across sectors, size and geography creates more resilient portfolios, in our view.

The September nonfarm payroll report was finally released last week after a delay due to the government shutdown. The report was stronger than expected, creating more confusion about future Federal Reserve (Fed) policy.

The September nonfarm payroll report showed an increase of 119,000 jobs, the largest rise since April, vs. consensus estimates for a rise of 51,000. The unemployment rate ticked higher, to 4.4%. Wage growth continues to soften. This report was an improvement over recent months and seems to have stabilized concerns about the slowing jobs market.

The Atlanta Fed’s GDPNow estimate for Q3:2025 real GDP rose to more than 4.0% based on the recent batch of data releases. The economy seems to be holding steady, even if the labor market continues its slow cooling.

The Fed remains divided and recent data has done little to clear the picture. Inflation hawks are more worried about inflation vs. growth and prefer to hold rates steady in December. The doves highlight the cooling labor market as justification to cut rates further in December. The current fed funds rate target range is 3.75% to 4.00%.

Five voters have signaled they do not want to cut interest rates in December, while another five have signaled rate cuts are appropriate. Two voters’ opinions are unknown. The Fed’s decision will be announced on December 10.

Bottom line – how to invest now.

Key Wealth’s investment philosophy is premised on committing capital to areas that are starved for funds and avoiding areas where capital is abundant. Artificial Intelligence (AI) remains the dominant theme in the economy. As money pours into AI-themed investments, we continue to recommend a diversified approach.

Since Labor Day, we have been advising investors to revisit equity exposures and rebalance where appropriate. This view still holds as the labor market continues to cool, AI exuberance heats up, and credit markets exhibit some shakiness. Widely-used indices remain concentrated, potentially leaving investors over-exposed to concentration risk. Diversification remains an attractive strategy, in our view.

Equity Takeaways:

Stocks rose in early Monday trading. The S&P 500 rose approximately 0.9%, to 6662. The tech-heavy Nasdaq rose approximately 1.7%, while small caps rose approximately 0.6%. International shares were mixed.

Despite a bounce back rally on Friday, the S&P 500 remains below its 50-day moving average of 6711. The next major support level is the rising 65-day low of 6360. It would not surprise us to see the S&P 500 test its rising 65-day low.

Overall, we believe the market remains in an uptrend as corporate earnings continue to power higher. The forward earnings estimates for the S&P 500 continue to rise. If earnings continue rising, the intermediate- to long-term outlook for the stock market remains favorable.

For context, with 95% of companies reporting, Q3:2025 S&P 500 earnings growth was 13.4%, vs. initial

expectations for 7.9% growth according to FactSet. Revenue growth also exceeded expectations. Approximately 83% of companies beat earnings estimates in the third quarter vs. the long-term average of 76%, according to FactSet.

The VIX futures curve briefly inverted last week, with 1-month implied volatility trading at a premium to 3-month implied volatility. VIX futures curve inversion is a sign of panic. By Friday’s close, the volatility curve had normalized, and the stock market was increasing.

To form an interim price low, the S&P 500 will often undergo a washout where 20-day lows will exceed 50% of issues traded. Recent data shows approximately 24% of issues at a 20-day low – we have not seen a true washout.

The US dollar has been strengthening in recent weeks. A materially higher dollar would be a headwind to equities.

Fixed-Income Takeaways:

Late last week, NY Fed President, John Williams, signaled that he is in favor of a December rate cut, which caused a rally in Treasuries. Short-term yields, which are more sensitive to Fed policy, fell slightly more than long-term yields. Two-year Treasury yields fell approximately 10 basis points on the week, while 10-year Treasury yields fell 9 basis points.

Williams’ comments caused market participants to increase the odds of a December cut. Early on Monday, market participants were pricing approximately a 70% chance of a 25-basis-point rate cut in December, according to Bloomberg data. The current fed funds rate target range is 3.75% to 4.00%.

In early Monday trading, Treasury yields were stable. 2-year Treasuries were yielding 3.52%, 5-year Treasuries 3.62%, 10-year Treasuries 4.05%, and 30-year Treasuries 4.69%.

Credit spreads remain narrow on an absolute basis but have been drifting wider in recent weeks. AI-related companies have increased their borrowing in recent months to help fund the AI infrastructure buildout. Overall leverage at most large AI-related companies remains relatively low but is expected to increase (and bears watching).

Within private credit, investors should carefully examine the liquidity terms, valuation metrics, and redemption policies of any semi-liquid investment. Key Wealth’s Investment Center places strong emphasis on this type of analysis