Investors have been told to worry if Kevin Hassett becomes Fed chair, but the market doesn’t appear concerned.
Many assume that the market’s success hinges on the Magnificent 7 stocks, but five lagged the S&P 500 so far this year.
Will rate cuts lower mortgage rates? The US 10-year Treasury, fed funds, and mortgage rates suggest that they may stay over 6%.
“I love when they drop the ball in Times Square. It’s a nice reminder that we all dropped the ball at some point this year.”1 Hopefully, Above the Noise didn’t drop it too often. In fact, we spent some time looking back to see what we focused on most throughout the year.
Here’s what rose to the top, and what we said about each theme along the way:
Macro signals, including tight credit spreads2 and loose lending standards,3 point to low near‑term recession risk.
A moderating US dollar4 and shifting global cycles favor diversification into non‑US assets, with Europe and emerging markets offering relative value.5
Tariffs and policy uncertainty could create a one‑time price shock and dampen sentiment and business investment, but are unlikely to trigger a recession in our view. Trade policy clarity plus US Federal Reserve (Fed) easing may be the remedy.
Anchored inflation expectations6 and the Fed’s easing bias provide a supportive backdrop for risk assets.
Should we pause for a long-distance dedication?
Finally, the biggest focus for Above the Noise in 2025 (drum roll):
Artificial intelligence (AI) spending is substantial, in our view, but not a dot‑com replay;7 valuations are elevated, yet poor timing tools,8 and market breadth is broadening beyond megacaps.9
Not bad. To paraphrase Casey Kasem, we’ll keep our feet on the ground and keep reaching for the stars.
…the market doesn’t appear particularly concerned about the next Fed chair. Investors have been told to worry about Kevin Hassett stepping into the role. After all, he would be the first to come directly from a senior White House position without prior service as a Fed governor. That sounds unprecedented, but remember that Ben Bernanke and Janet Yellen both chaired the Council of Economic Advisers before serving as Fed governors and then chairs.
So, is the market worried? Stocks are near record highs.10 Inflation expectations have remained contained.11 The dollar stabilized months ago.12 In short, there’s not much anxiety.
Why?
This isn’t to say that Fed independence isn’t critical. It is. But this may end up being little more than a tempest in a teapot.
Much has been made of a recent MIT study claiming AI can replace 12% of US jobs.14 Sounds terrifying, right? But it doesn’t mean AI is about to wipe out 12% of the workforce tomorrow. What it really means is that AI has the capability to perform roughly 12% of the tasks in your job. That’s not doom and gloom. That’s efficiency. AI can help me write paragraphs, edit my work, and even run analysis. But it doesn’t share my opinions or replicate my incredible wit (my mom swears I have it). It doesn’t hop on planes to meet clients. It certainly doesn’t flash my dazzling smile on TV (again, mom’s words). So, does AI have the skills to do 12% of my job? Sure. But that headline was way scarier than reality.
Investors often view the Magnificent 7 stocks as a single, unified force, assuming they move in lockstep and that the broader market’s success depends on their leadership. This perception is understandable given their outsized weight in major indexes,15 but it oversimplifies reality. In fact, the narrative doesn’t match the numbers. Most of these stocks are underperforming the S&P 500 this year.16 Meanwhile, the Bloomberg S&P 500 ex-Magnificent 7 Index has gained more than 16%,17 underscoring that market strength has been far broader than the story suggests.
“The word ‘affordability’ is a con job by the Democrats.”18
– President Donald Trump
“A lot of that is not the current rate of inflation. A lot of that is just embedded higher costs due to higher inflation in 2022 and ’23”19
– Fed Chairman Jerome Powell
I think they’re saying the same thing. President Trump would be right to remind voters that inflation spiked during the Biden administration, though in fairness, both parties contributed by pumping money into the system during and after the pandemic. Powell is also correct that inflation peaked in 2022.20 It’s the embedded higher costs that are the crux of the issue.
Policymakers focus on the inflation rate, while American consumers tend to focus on actual prices. And prices have remained elevated, about 10% higher than when inflation peaked.21 That translates to roughly 3% a year, which the nation’s central bankers are considering, for the most part, to be price stability. The challenge for politicians is that driving prices lower can’t be the goal. Deflation would be disastrous, triggering falling wages, collapsing demand, and further declines in prices. That’s a vicious cycle. Instead, what we need is for wages to keep pace. The data suggests they have, at least in aggregate,22 but many Americans clearly don’t feel it.
A: The demand for AI intelligence is accelerating at an unprecedented pace. Consider this: ChatGPT reached 100 million users in just two months, far faster than platforms like Facebook, which took four and a half years to hit that milestone.23
Businesses, including hyperscalers such as Amazon, Alphabet, and Meta, are pouring capital into building the computing power needed to fuel AI innovation. Fortunately, most of these companies, Oracle being a notable exception, maintain net debt (cash minus debt) to EBITDA ratios close to zero.24 In short, they have the capacity to borrow to fund investment.
The challenge, over time, will be balancing massive capital expenditure against the uncertain timing of revenue. That challenge will likely be even greater for businesses without the cash reserves hyperscalers enjoy. Timing will matter. Ultimately, it’s a race to command the most computing power.
A: Unfortunately, I wouldn’t count on it. Let’s do the math.
That math still puts mortgage rates north of 6%, give or take a few basis points. And be careful about wishing for the fed funds rate and 10-year US Treasury rate to plunge, because that would likely suggest a significantly worse economic outcome than is currently expected.
How concerned should investors be about the amount borrowed by US businesses? I posed the question to Matt Brill, Head of US Investment Grade Credit at Invesco. His response:
“We’re starting from a position of strength. Banks remain fundamentally sound and continue to improve their balance sheets,29 and the US economy is on a solid footing.30 That’s an encouraging backdrop. Most businesses in the post-COVID-19 period have been cautious. They’ve been holding back on borrowing amid waves of uncertainty, including the pandemic, the inflation surge, and higher rates in 2022, the Silicon Valley Bank failure in 2023, and tariffs in 2025. In each case, recession fears never truly materialized, but prudence prevailed. Today, companies are feeling more confident. Some are even increasing leverage to pursue acquisitions and strategic growth. Still, a general sense of caution persists when it comes to borrowing.”
Above the Noise is heading about 1,250 miles south, where it’s about 60 degrees warmer, to celebrate the holidays. Wishing you all a joyful season, and here’s to a healthy, happy, and prosperous 2026!
For investors looking to diversify their mega-cap technology exposure, improving growth and falling interest rates may be good reasons.
A rate cut, which markets are pricing in despite Fed member differences, and an expected improving economy in 2026, could support stocks.
We believe global equities may continue to rise in the new year, and we expect new opportunities to be unlocked as market leadership evolves.
Get the latest information and insights from our portfolio managers, market strategists, and investment experts.
Important information
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All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Artificial intelligence (AI) technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there’s no guarantee these protections will be sufficient. Significant R&D spending does not ensure product or service success.
A basis point is one-hundredth of a percentage point.
The Bloomberg 500 ex Magnificent 7 Net Return Index is a market-cap weighted benchmark that tracks the performance of the largest US companies, but specifically excludes the Magnificent 7 (Mag 7) stocks: Apple, Amazon, Alphabet, Nvidia, Microsoft, Meta, and Tesla.
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.
Cash flow is the net amount of cash and cash equivalents generated by a business.
The Consumer Price Index (CPI) measures the change in consumer prices and is a commonly cited measure of inflation.
Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.
Deflation is a decrease in the price level of goods and services.
Diversification does not guarantee a profit or eliminate the risk of loss.
The fed funds implied rate is the difference between the spot rate and the futures rate, which is an interest rate that can be calculated for any security with a futures contract.
The federal funds rate is the rate at which banks lend balances to each other overnight.
Inflation is the rate at which the general price level for goods and services is increasing.
Breakeven inflation is the difference in yield between a nominal Treasury security and a Treasury Inflation-Protected Security (TIPS) of the same maturity.
Leverage measures a company’s total debt relative to the company’s book value.
Market breadth is a concept used in technical analysis to gauge the direction of the overall market by examining the number of companies advancing relative to the number of companies declining.
The MSCI Emerging Markets Index captures large- and mid-cap representation in emerging market (EM) countries.
The MSCI Europe Index captures large- and mid-cap- representation across a universe of developed market countries in Europe.
Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.
Net debt/EBITDA is a comparison of debt levels to earnings.
The price-to-earnings (P/E) ratio measures a stock’s valuation by dividing its share price by its earnings per share.
Relative value refers to the value of one investment as compared to another.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
Spread represents the difference between two values or asset returns.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic, and political conditions.
The US Dollar Index measures the value of the US dollar relative to the majority of its most significant trading partners.
The opinions referenced above are those of the author as of Dec. 18, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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