Wall Street didn't expect to enter mid-November grappling with a suddenly hawkish Federal Reserve, parsing the implications of a spy case linked to its hottest tech company, and monitoring a worrying rise in Treasury yields heading into the final weeks of the year.
And yet here we are, with stocks hovering at levels last seen in early June, 10-year Treasury note yields testing the 5% mark once again, and investors introducing bets on a 50-basis points rate hike from the Fed next month, as inflation accelerates and deepens its hold on the broader domestic economy.
That sets up, in some ways, a familiar questions for markets with just 33 trading days left in the year: Can stocks fight the Fed?
The case for equities is compelling, of course, with the S&P 500 trading at around 18 times the earnings that its constituents are expected to generate over the next year. That's one of the cheapest valuations since 2023, and right around its average for the past ten years.
It's also an attractive entry point for investors looking at the likely impact of AI technologies, and the boost to broader earnings growth expected beyond the tech sector as investments ramp up and adoption rates accelerate.
Market participation has been broadening, as well, with healthcare, consumer staples and energy stocks posting solid three-month gains, offsetting a slide in the two main tech-focused sectors and a pullback in industrial stocks.
Fourth-quarter earnings growth is also striking, with LSEG estimates suggesting another 30% advance from last year's levels, taking the expected fourth-quarter tally to around $809 billion and marking an impressive full-year gain of around 36.6% for 2026.
But the valuation story faces headwinds from the recent jump in Treasury yields, which has 10-year notes back near 5%, and the sudden bets on Fed hawkishness on the back of sustained inflation.
Inflation pressures, meanwhile, have gone from lingering to, in the words of Chicago Fed president Austan Goolsbee, "borderline disturbing," with October data suggesting a three-month average for headline CPI of 5.72%.
"We continue to believe that inflation will come down as tariff, energy, and AI inputs fade," says Krishna Guha, head of economics and central bank strategy at Evercore ISI. "But right now, the recent trend in inflation is simply running too hot against a backdrop of current growth above the potential growth rate of the economy."
That's why investors are now sketching out more rate hikes, including the odds of a 50 basis point move from the Fed next month. Goldman Sachs economists now expect the Fed to raise rates again in March, after hiking in December.
The bond market's impact on stock performance this year simply cannot be ignored.
The S&P 500 is trading roughly at levels seen in mid-May, when 10-year note yields resumed their long march higher following Fed Chairman Kevin Warsh's Senate confirmation and concerns tied to his inflation-fighting tactics.
Since then, 10-year yields have risen by nearly a full percent, while the S&P 500 has gained less than 1%, despite barnstorming quarterly earnings in early summer and mid-autumn, the much-vaunted transition of AI technology into the broader economy, and better-than-expected readings for job and GDP growth.
Bond markets are closed Wednesday, in the traditional fixed income observance of Memorial Day.
But after the biggest move in 2-year yields since April of last year earlier this week, and the sharp march higher in 10-year yields that followed, it's safe to assume we'll hold those levels until markets get clarity from the Fed early next month.
"What's striking is that the Fed seems relatively calm about the inflation picture even though it's nowhere close to target and doesn't even look like it's heading there anytime soon," says Sonu Varghese, chief macro strategist at Carson Group.
"The longer the Fed waits, the greater the chance it ultimately inflicts more economic (and market) pain to bring inflation down," he adds, meaning that "what looks supportive for markets today can therefore create the conditions for a much tougher policy response later."
And that could leave stocks in a difficult spot.
CoreWeave is seeing strong gains following better than expected earnings, improving margins, and robust outlook that have calmed at least some concerns over the neo-cloud group's financing needs. This, plus positive signs about OpenAI's revenue and demand for Anthropic's upcoming IPO, is boosting the AI trade as a whole.
Even Nvidia is finding a bid this morning, after shedding nearly $500 million in value over the past two days amid allegations tied to CEO Jensen Huang's relationship with a suspected Chinese spy.
Seasonality is also worth noting, as November is traditionally the strongest month for stocks, with a 2.3% gain over the past 100 years. That improves in midterm years, with an average advance of 2.7%.
But fighting a hawkish Fed, while navigating a bond market that's refocused on inflation risks, is difficult enough.
Doing so while asking serious questions over the leadership of the market's most-important company, which sits at the epicenter of its most important trade, is quite another.
Adding in the reality of a new Congress, as well as new Democratic governors intent on slowing the AI advance, makes it almost Herculean.
Nvidia reports third quarter earnings next week, with the Fed closing out it last meeting of the year on Dec.9.
Both will need to go very smoothly indeed.
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