• Federal Reserve easing cycle expected to support equities and credit in a non-recessionary environment.
  • AI-driven productivity gains are viewed as a structural tailwind for corporate earnings and market valuations.
  • Near-term volatility looms from labor-market data and potential U.S. government shutdown, prompting investor caution.

Investors are increasingly betting that the Federal Reserve's shift toward interest-rate cuts will bolster risk assets like equities and high-yield bonds, with AI advancements adding a layer of optimism to the outlook. According to people familiar with the matter, market participants have been pricing in additional 25 basis-point reductions, reinforcing expectations that easier monetary policy will underpin asset prices into 2026. Shannon Saccocia, Chief Investment Officer at Neuberger Berman, highlighted this view in recent comments, noting that a combination of Fed easing and AI-driven productivity could create a constructive backdrop, though she warned of heightened volatility from macroeconomic uncertainties and political standoffs in Washington.

The Fed has already begun lowering the federal funds target range in late 2025, balancing still-elevated but moderating inflation against clear signs of labor-market softness and rising unemployment. Futures markets, such as CME FedWatch (CME) as of early December, reflect a high probability of further cuts, with officials emphasizing a data-dependent approach rather than targeting market movements. In this environment, Saccocia argued that non-recessionary growth paired with easing typically benefits risk assets, but she urged investors to remain cautious amid uncertainty from a potential government shutdown, which could sap sentiment and introduce short-term disruptions.

Efforts to gauge the impact of AI on productivity have gained traction, with sectors like semiconductors and data-center REITs seeing sustained investor interest. Analysts point to AI as a potential driver of margin expansion and earnings growth, though some caution that past tech-led booms have sometimes led to asset prices overshooting fundamentals. Meanwhile, the broader economic backdrop shows growth slowing but not collapsing, giving the Fed room to cut without triggering a deep recession. Labor-market weakness, including job losses and higher unemployment, has been a key factor behind calls for multiple cuts to stabilize demand, according to sources close to the discussions.

In the short term, markets will focus on the pace and total size of Fed cuts, along with incoming data on inflation and employment. A Neuberger Berman spokesperson, when reached for comment, reiterated the firm's stance that risk assets can perform well in such conditions, but noted that volatility is likely to persist. Other central banks, including the ECB and BoE, are also navigating similar transitions toward easing, creating a global bias that could support risk assets internationally. For households and borrowers, rate cuts may eventually lower borrowing costs for mortgages and credit cards, though savers could face pressure from reduced yields on cash deposits.

As negotiations over budget resolutions in Congress continue, the risk of a government shutdown remains a wildcard, potentially complicating the Fed's task and injecting volatility into markets. Historical precedents suggest that equities often advance during early easing phases if cuts are seen as 'insurance' rather than recession-driven, but deep downturns like those in 2001 or 2008 have led to selloffs despite lower rates. Looking ahead, if AI delivers sustained productivity gains, it could raise trend growth and support higher valuations over the long term, though policy missteps or regulatory backlash pose risks. For now, investors are advised to stay nimble, with many strategists maintaining a cautiously constructive view on risk assets amid the evolving landscape.