Week ahead: Fed rate cut all but certain, as UK GDP hopes rise, and US stocks edge towards record

The focus at the start of this week is likely to remain on the Netflix/ Warner Bros deal, after President Donald Trump said that the size of the deal may pose problems. This suggests that the deal could attract regulatory scrutiny, which is to be expected from a tie up of this scale.

Trump said that he would personally be involved in the decision-making process. These comments have pushed back expectations pf when this deal will go through, Polymarket now has is  20% chance of the deal going through by next December, down from 60% before Trump’s comments. This could weigh on Netflix’s share price, and it may also boost Paramount Skydance, one of Netflix’s biggest rivals. It was the weakest performer in the S&P 500 last week, as investors assessed what a colossal deal of this scale could do to Netflix’s competitors.

Elsewhere, Chinese share are also moving higher on Monday, after China’s trade surplus surpassed $1 trillion  in November for the first time. This is symbolic, since it highlights the de-escalation in trade tensions between the two largest economies, after they agreed a yearlong trade truce, which came into effect in October.

Chinese exports to the EU rose sharply last month, and US demand was stable. Shipments to other regions in Asia have also surged in recent months, as trans shipments from China to other Asian destinations are then sent to the US. The US authorities have not clamped down on trans shipments, which is crucial for China. US trade tariffs are having less of an impact on Chinese trade data, as today’s enormous surplus suggests. It also highlights how China’s export powerhouse is resilient to protectionism from elsewhere, and it may continue to grow from strength to strength. China has pivoted towards high value exports like EV batteries and robotics, which are in high demand. The Trump administration may have tried to weaken China’s export machine, but it hasn’t succeeded.

Overall, this is good news for risk sentiment, as it suggests that the wheels of global trade are well oiled as we move into 2026, and the impact of US tariffs are muted so far.

As we start a new week, the focus is squarely on the Federal Reserve meeting on Wednesday, where a rate cut is widely expected. US and European stock indices managed to eke out another week of gains, the dollar was one of the weakest currencies in the G10 FX space, and bond yields were mostly stable.

Slow progress for Santa Rally  

Stocks may have  managed to post a gain last week, however, the S&P 500 is taking its time to reach its record high, and only managed a 0.3% gain, while the Nasdaq fared better and rose by 0.9%. As we get closer to the end of the year, hopes for a Santa rally are still high, but progress is slow.

US stock market rally finally broadens out

There are some positive indicators as we start a new week. The equal-weighted S&P 500 rose at a faster pace than the S&P 500 last week, and the two indices have been tracking each other closely for the past month. This suggests that stock market breadth is improving. This is also reflected in the Philadelphia Semiconductor Index, which rose by more than 3% last week, alongside the KBW banking index. The oil sector also had a good run, and the top performing stocks included Deckers, Dollar General, Estee Lauder, alongside some tech names.

Paramount, the biggest loser from Netflix and Warner Bros deal

In contrast, the weakest performer on the S&P 500 was Paramount Skydance, which lost more than 16%. The news that Netflix would buy Warner Bros Discovery Inc roiled financial markets, it weighed on Netflix’s share price, but Paramount was the real victim. It had also tried to buy Warner Bros, but it was rebuffed as a suitor. The fact that Netflix, the world’s largest paid streaming service, will have an epic back catalogue, as well as access to the best content and content creators if this deal goes through, is spooking investors about the future health of the competition. Netflix could become a colossus, which is giving rise to monopoly fears and poses challenges for its rivals such as  Paramount, as investors fret about how they can compete against this beast of film and television. Netflix will face regulatory hurdles to getting this deal over the line, and if there are any setbacks, then we could see Paramount’s share price stage a recovery.

Stocks priced for a rebound in US growth

The question as we enter the final weeks of the year is where will the S&P 500 go next if it breaches its record high at 6,920? Although the S&P 500 is making slow progress towards this milestone, the market has shifted into a higher gear after it stalled in November. However, underneath the hood, there is something interesting going on in US markets. Investors seem to be positioned for a reacceleration of the economy, which is why sectors such as banks and retail rose sharply last week, and why the Russell 2000 beat the S&P 500 and closed at a fresh record. This suggests that investors are expecting growth to pick up in the coming months.

Chart 1: US stock indices, S&P 500, equal-weighted S&P 500 and the Russell 2000, normalized to show how they have moved together so far this year. The Russell and the SPW have started to play catch up with the S&P 500.

Golden oldies could shine into year end

The last few weeks of the year could see capital migrate towards the ‘older’ sectors of the US stock market, and this may also favour European and UK indices, which are light on tech. If the stock market is looking for a reacceleration of US growth next year, then it is worth watching the bond market. US stock investors have benefited from hopes of a Fed rate cut, there is now a 95% chance of a cut priced in by the market, this is up from a 66% chance a month ago. However, the reaction in the bond market has been more nuanced. The 2-year Treasury yield has been basically flat over the past month, even though the stock market rally is back on. Added to this, the 10-year US Treasury yield could not hold below 4% last week, and ticked back up above 4.1%, This suggests that the bond market is pricing in a reflationary economic environment, even though the Fed is expected to cut rates this week.

Bond market rally stalls, which is good news for cyclical stocks

The bond market is telling us that there could be road blocks to future rate cuts from the Fed, although there are currently two further rate cuts expected in the next year. A pick up in growth is good news for cyclical stocks, and the next stage of the stock market rally could move beyond AI and finally see US stock market gains broaden out. It would be ironic if AI-linked stocks started to underperform at the same time as the world increases its adoption of AI based technology, however, investors always love to buy the rumour.

Stocks break the link with Bitcoin

There is still a strong case for more upside in stocks, not least ‘don’t fight the Fed’, and the seasonal uplift we tend to see in equities at this time of year. Added to this, stocks and other risky assets seem to have broken the link with Bitcoin. While the crypto currency hovers below $90,000 US stocks are close to record highs. Thus, further downside for the crypto sector may not mean that other risky assets will decline. Since the outlook for crypto remains murky, it was important that this link was broken to ensure that stocks could end the year on a high.

Ahead this week, the Fed will be in focus, however there are also key economic data releases from the US including US job openings and employment cost data. In the UK, monthly GDP data for October will be in focus on Friday. There will also be inflation data for China and industrial production for Germany.

Chart 2: MSCI World Index and Bitcoin

The Fed: What happens after the cut?

Although there has been some pushback from FOMC members about the need for an interest rate cut before year end, and a hawkish message from the Fed chair at the November meeting, the market is fully pricing in a 25bp cut from the FOMC on Wednesday.

A rate cut when inflation remains well above target should be a one-off, yet the Fed Fund Futures market is expecting a further 2 cuts in the coming year. There are also signs that growth will be robust in Q4, defying fears that the Federal government shutdown at the start of Q4 will have dampened growth. Also, fears are rising that tariff related costs will start to get passed through to consumers from next year. Inflation expectations also remain elevated, even though they did drop slightly at the start of this month, according to the University Of Michigan Consumer Sentiment Survey.

This meeting will see revised economic expectations and a revised Dot Plot. We think that the Fed Fund Futures market is underpricing the uncertainty in the outlook for the Fed next year, which could lead to a big market reaction if the Fed does not have the appetite for more cuts. The Fed could push out expectations for their next rate cut to the second half of the year. If this happens, then it could boost the dollar, which has been the second weakest currency in the G10 FX space, and it has lost more than 1.5% vs. the CAD, the AUD and the GBP in that time. A reversal in the dollar could hit these currencies first.

UK: Can GDP surprise on the upside?

GDP fell by 0.1% in September, so the focus for the October reading is whether growth bounced back as we entered Q4. Analysts are expecting a small uptick of 0.1%, however, it all depends on how the car sector performs after the Jaguar Land Rover car cyber-attack  shut down production in September, which weighed heavily on national growth. The recent PMI data was stronger than expected, which noted a rebound in car production. However, we doubt that there was broad-based strength in the economy in October, as we waited for the dreaded Budget, which ended up being as bad, or worse, than feared.

Overall, some good news for the UK economy could be on the cards this week, although we continue to think that the underlying trend is for the economy to stall in the coming months.