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Here's The Main Driver Of Equity Performance
The Macro Institute's Weekly Economic Primer
The Macro Institute
December 01, 2025
The process of normalizing data releases continues this week, though it still appears unlikely that we’ll see the November payroll report anytime soon. However, we will get some consequential releases, including the September personal income report, which includes the Fed’s preferred measure of inflation.
Based on what we’ve learned from the PMI data published during the shutdown, and the ISM Services Index in particular, both Core and Headline PCE seem likely to remain well above the Fed’s official target. Keep a close eye on the ISM Services PMI coming out Wednesday as it will likely offer valuable real-time insights into the direction of inflation trends.
The Macro Week In Review
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The Macro Week Ahead
👀 All Eyes Are On The Fed
In the short run, one of the biggest challenges in equity strategy is identifying which factors investors will care about, and how long their run will last. These themes can fundamentally alter the trajectory of GDP and earnings, but in the near term, their effect on asset prices tends to ebb and flow.
Over the past month, the expected path of monetary policy has been a primary driver of performance trends. This is because of the unusual uncertainty about the path of policy and extraordinary volatility in the odds of a December 10th rate cut. A month ago, markets priced in a roughly 90% chance of a cut before year-end. Two weeks ago, those odds collapsed to 22%. As of last Friday, expectations had surged back to around 90%.
A key reason behind these swings is the bond market’s reaction to comments from Fed officials and the lack of clear consensus inside the FOMC. The hawks point to inflation readings still sitting roughly 100 bps above the Fed’s target alongside declining labor supply and rising wages. Both pose upside risk to inflation. The doves focus instead on labor demand. Falling job openings and a higher unemployment rate suggest restrictive policy.
Given the recent tilt toward easing, it’s not surprising to see strong performance from rate-sensitive Growth sectors, including Technology, Communication Services, and Consumer Discretionary. Precious metals such as gold and silver have also rallied as investors gravitated toward hard assets in a declining real-yield environment.
However, over a slightly longer time frame, the picture shifts, with Value sectors outperforming Growth. This flip between risk-on and risk-off behavior underscores the elevated uncertainty as markets await clearer guidance from policymakers.
📆 The Week Ahead
We begin the week with the ISM Manufacturing Index for November, released at 10:00 am. Consensus expects a headline reading of 49. For the past year, the index has been confined to a tight 48–51 range, signaling very weak growth across the cyclical parts of the economy.
Wednesday brings the ADP Employment Survey for November. Consensus sits around 42.5k job gains, roughly in line with October. Such a print would be consistent with the 2025 pattern of soft job growth but low terminations. Typically, the BLS follows two days later with the Employment Situation Report, but due to the shutdown, the November release has been pushed to December 16th.
Wednesday also brings the ISM Services PMI at 10:00 am. The services sector has been relatively more resilient in this cycle, with October’s New Orders component jumping six points to 56.2. While the shutdown may introduce some short-term noise, the component to watch is Prices Paid, one of the most important inflation indicators at this stage of the cycle. October’s reading of 70 was the highest since October 2022, with 16 of 18 industries reporting higher prices. This matters because Prices Paid tends to lead headline PCE, a core Fed input, by a couple of months. Any fresh inflationary signals would likely reduce the perceived odds of a rate cut and shift market leadership away from rate-sensitive Growth stocks, thereby pressuring a Tech-heavy S&P 500.
Finally, Friday brings the University of Michigan Consumer Sentiment Index for December at 10:00 am. Pessimism remains elevated, with both the current and expectations components hovering near levels consistent with past recessions and inflationary episodes. The data reflects a consumer squeezed by weakening incomes and persistently high prices.
This dynamic exemplifies what is being referred to as “K-Shaped Monetary Policy” where consumers experience rising prices in absolute terms, while the Fed evaluates inflation in terms of its rate of change. The Fed sees a slowing rate of inflation and is considering easing while consumers simply see elevated prices relative to recent history. To the extent the Fed views policy as restrictive and effective at curbing inflation, that has not been the experience of most households.
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