Ever have that feeling when the market finally does exactly what you’ve been hoping it would do for months, but you’re still not quite sure whether to trust it?
That’s where I find myself this morning. Futures are pointing higher again, the S&P is less than 1% from another all-time high, and for once the rally isn’t being dragged uphill by the usual seven suspects. Small-caps, cyclicals, even some beaten-down value names are doing the heavy lifting. It feels… different.
A Real Rotation or Just Window Dressing?
Let me paint the picture as it stands right now.
Overnight, S&P futures are up a gentle 0.1-0.2%, Nasdaq futures roughly flat, but the Russell 2000 futures – the small-cap benchmark – are quietly outperforming again. That index is now within spitting distance of its own record high while the Nasdaq 100 still sits 2% below its peak. If you’ve been waiting for “broadening” since 2023, this is the closest we’ve come in a long while.
And the catalyst feels pretty straightforward: the labor market is cooling just enough to keep the Federal Reserve in play for a December cut, but not collapsing in a way that screams recession. Yesterday’s ADP private payroll report showed an unexpected decline (the biggest drop since early 2023), Challenger layoffs eased month-on-month yet remain elevated year-on-year, and the ISM services employment component stayed in contraction. Bad news was good news, classic late-cycle goldilocks behavior.
Add in falling bond yields (10-year Treasury touched 4.06% yesterday before bouncing a few basis points this morning) and a softer dollar, and suddenly everything that isn’t mega-cap tech looks attractive again.
Who’s Actually Winning Right Now
In pre-market trading the leaderboard tells the story:
- Salesforce +1.9% after beating revenue estimates and talking up AI adoption
- Dollar General +4% after raising full-year guidance – value retail is back, baby
- Guidewire +5%, UiPath +8% – enterprise software outside the Mag7 is alive
- Tesla still +0.9% because… well, because it’s Tesla
- Costco -1.1% and Snowflake -8% reminding us not everything works
But the really interesting action is sector-wide. Defensive areas that spent most of 2024 lagging – utilities, staples, healthcare – have stopped bleeding. Cyclicals like industrials and materials are posting the biggest gains in Europe and Asia overnight. Even financials, which usually love higher yields, are hanging in there because lower rates help the real economy more than they hurt net interest margins in the current environment.
I’ve been saying for months that the moment 10-year yields sustainably break below 4.20%, money would start flowing down the market-cap ladder. We’re not quite there yet, but 4.06% yesterday felt awfully close.
Rate Cut Math – How Many and When
Markets are currently price in roughly 70-75 bps of cuts over the next twelve months, with a near-certain 25 bps move next week. The open question is 2026. Goldman still sees only two cuts next year; others are drifting toward three or even four if labor data keeps softening.
Personally, I think the terminal rate debate is going to dominate Q1. If we really do get a “Trump trade” that is pro-growth but also potentially inflationary because of tariffs, the Fed might pause after a couple of insurance cuts. On the flip side, if the labor market rolls over faster than expected (and private payroll indicators have been noisy but consistently softer), we could easily see the dot plot shift dovish again.
“We’re expecting a broadening of the rally for sectors that have so far been lagging. The Russell is very sensitive to interest rates, so the figures reinforced the market’s idea that the Fed will be able to lower rates, in a non-recessionary context.”
Amelie Derambure, senior portfolio manager at Amundi SA
That quote pretty much sums up the bullish base case right now.
Bitcoin Quietly Holding $93,000
While stocks grab the headlines, crypto continues its slow grind higher. Bitcoin spent yesterday consolidating just under $94k and is back around $93k this morning. The rebound from last week’s mini-flash-crash (down almost $10k in a few days) has been remarkably orderly.
Two things strike me: first, spot ETF inflows remain robust even after the post-election euphoria faded; second, the correlation with risk assets is re-asserting itself. When small-caps and cyclicals rip on rate-cut hopes, Bitcoin tends to tag along these days. Interesting shift from the “digital gold” narrative we heard all last year.
Europe and Asia Catching the Bug
Overnight leadership actually came from overseas. The Nikkei jumped almost 2% (partly weaker yen, partly tech catching up), European Stoxx 600 is up another 0.3-0.4% with autos and industrials in the driver’s seat after Bank of America upgraded the sector.
Even China looked a little less terrible, although liquidity drains by the PBoC continue to cap upside. The narrative there remains “stable but not exciting” until we get concrete stimulus lands.
What Could Derail the Party
Look, I’m enjoying this as much as anyone, but a few yellow flags are waving.
- Labor data remains the make-or-break. Today we get weekly claims and factory orders. Any upside surprise in claims could dent the dovish story fast.
- Valuations in small-caps have run hard in three weeks. The Russell forward P/E is now above 20× again – not crazy, but not the bargain it was in October.
- Geopolitical noise. Talks about Ukraine, tariffs, H-1B visa changes – none of it matters day-to-day, but a real escalation or policy surprise could shift sentiment overnight.
- Year-end positioning. A lot of this move feels like portfolio rebalancing into under-owned areas. January could bring profit-taking if tax-loss harvesting reverses.
None of these are screaming “sell everything,” but they remind us this isn’t 2023’s straight-line melt-up either.
My Current Playbook
For what it’s worth, here’s how I’m positioned into year-end:
- Overweight small mid-caps versus large-cap growth (especially anything non-tech)
- Long financials on the theory that lower rates help the real economy more than they hurt from lower rates
- Selective AI exposure but only where the company actually sells the picks-and-shovels (think Salesforce, Palantir, enterprise software) rather than pure hype
- Keeping some dry powder because January seasonality after a strong December is rarely kind
- Bitcoin as a small satellite position – it’s acting like a high-beta equity again and I’m fine riding that wave
Nothing heroic, just trying to lean into the rotation without getting caught if it reverses violently.
Bottom line? The market finally feels like it’s rewarding patience. After two years of the same handful of stocks carrying everything, seeing breadth improve and rate-sensitive areas come alive is genuinely refreshing. Whether it lasts into 2026 is anyone’s guess, but right now the path of least resistance still points higher.
Enjoy it while it lasts, keep an eye on today’s claims number, and maybe – just maybe – we’re setting up for a proper Santa rally that actually includes the other 493 stocks in the S&P.
Here’s to hoping.
