Fed December Rate Cut Expectations: Market Reactions & AI Investment Implications

San Francisco Fed President Mary Daly’s dovish statement supporting a December rate cut due to sudden job market deterioration [1] has driven market expectations, with CME FedWatch showing an 84.9-85.1% probability of a 25bps cut—up from Reddit’s cited 81% [7]. This has fueled risk-on sentiment, with major indices (S&P500, NASDAQ, Dow Jones) rising over the past 10 days [4], and small-cap Russell 2000 leading gains (+0.82% Nov 26) [4]. Contrary to Reddit’s AI investment focus, cyclical sectors like Energy (+1.76%) [5] and Financials (+1.10%) [5] have outperformed Tech (+0.149%) [5], indicating rate-sensitive cyclicals are the primary beneficiaries.

1. Probability Divergence
   : Rate cut expectations have risen from Reddit’s 81% to ~85% [2,3], reflecting growing confidence from Fed rhetoric and labor data.
2. Sector Misalignment
   : Market reaction favors cyclicals over AI/tech, contradicting Reddit’s focus on AI investment impacts.
3. Small-Cap Outperformance
   : Russell 2000’s strong gains highlight higher sensitivity to rate changes among smaller companies [4].

• Risks
  : A 15% chance of no rate cut [3] could trigger market corrections, validating Reddit’s panic sell-off thesis.
• Opportunities
  : Cyclical sectors (Energy, Financials) present near-term opportunities amid rate cut optimism [5].
• Info Gaps
  : Missing NVIDIA (NVDA) price data limits assessment of AI sector impacts [4].

• Fed Timeline
  : The Dec 10 policy meeting is critical, with the SEP report indicating this as the second planned cut of 2025 [6].
• Market Context
  : US markets closed Nov 27 for Thanksgiving, leading to thinner liquidity [2].
• Sector Trends
  : Energy (+1.76%) leads, Healthcare (-0.11%) lags [5].