Fed's Next Move: Betting on Goldilocks While Tariffs Loom

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🧠 Corporate Overview

The market closed this week within striking distance of all-time highs, powered by a narrative Wall Street desperately wants to believe: inflation is tame, the Fed will cut in December, and we'll glide into 2026 without a recession. It's a beautiful story. The only problem? The data keeps throwing curveballs.

Friday's delayed PCE reading showed core inflation at 2.8% year-over-year for September—better than the 2.9% feared, but still 40% above the Fed's target. Initial jobless claims hit 191,000, the lowest since 2022, while the ADP report shocked with a 32,000 job loss in November. So which is it—labor resilience or weakness? Nobody knows, and the market is pricing perfection anyway.

At Daly Asset Management, we don't believe in fairy tales. We believe in data, structural trends, and positioning for asymmetric outcomes. The consensus is pricing two Fed cuts in 2025. We think that's optimistic. Tariffs are back on the table, rare earth supply chains remain fragile despite the October Trump-Xi deal, and bond vigilantes are waking up. The 10-year yield closed the week around 4.11%—up sharply from September lows despite two rate cuts. That's not what soft landings look like.

This is a market for strategic allocators, not momentum chasers. We're long defense, short duration, and skeptical of consensus. If you're tired of high-fee advisors telling you to "stay the course" while they collect 1.5%, you're in the right place.

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💡 Stock of the Week: RTX Corporation (NYSE: RTX)

Sector: Aerospace & Defense | Market Cap: ~$160 billion | Dividend Yield: ~2.1% | YTD Performance: +54% as of November 28

Defense spending isn't a trade—it's a supercycle. Global defense budgets are projected to exceed $2.4 trillion, with Europe's spending growing at 6.8% annually through 2035. RTX sits at the nexus of this structural shift: missile systems, air defense platforms, hypersonic tech, and classified programs that never hit earnings calls.

The company's backlog is swelling. The U.S. just approved a $849.8 billion defense budget for FY2025, and that's before you factor in NATO modernization, Indo-Pacific tensions, or the Middle East. RTX doesn't need a hot war to print money—it just needs persistent tension. And tension is the only thing in abundant supply.

Macro Tailwinds

The Trump administration's October trade deal with China suspended rare earth export controls for one year, but left tariffs in place. That means U.S. defense contractors with domestic supply chains have a structural advantage. RTX's diversified revenue streams—commercial aerospace recovery, defense modernization, and space—provide downside protection if one segment wobbles.

Risks to Watch

Valuation is frothy. The defense sector P/E is at 38.9x, well above historical norms. If geopolitical tensions ease—say, a Ukraine peace deal or Trump-Putin summit—defense multiples could compress fast. Also, margin pressure from tariffs on inputs like aluminum and rare earths remains a wildcard.

Verdict

We're long. RTX is essential infrastructure for a fragmenting world. It's not cheap, but nothing good is right now. This is a 3-5 year structural play, not a Q4 momentum trade. Buy dips below $120 if they materialize.

📉 Market Snapshot (Week of December 1-5, 2025)

Sources: Bloomberg, CNBC, Yahoo Finance | *** Approximate EOW closes.

Small caps outperformed—the Russell 2000 gained 1.2% on Thursday alone as rate cut odds firmed. That's classic late-cycle behavior: money rotating into domestically-focused names on the bet that cheaper credit will juice growth. It's also what happens when investors front-run a Santa Claus rally that may not come.

Treasuries had their worst week since June, with the 10-year yield climbing despite soft labor data. That's vigilantes pricing in either sticky inflation or a Fed that stays hawkish longer. Either way, it's not bullish for duration.

📊 Market Commentary

The Labor Market Paradox: Weak or Resilient?

This week gave us contradictory signals so stark it's almost comical. ADP reported a 32,000 job loss in November—the weakest print since 2023. Meanwhile, initial jobless claims fell to 191,000, a three-year low. The Challenger report showed 71,321 job cuts, the highest November tally since 2022, pushing 2025 layoffs to 1.17 million—54% above last year.

So what's real? Both, probably. The government shutdown delayed October payrolls data, so we're flying partially blind. But the pattern is clear: hiring has slowed, layoffs are rising (thank you, AI automation and tariffs), but firings haven't spiked. It's a gradual cooldown, not a cliff.

The Fed wants this—enough weakness to justify cuts, not enough to spook markets. But the line between "soft landing" and "we miscalculated" is thinner than Powell will admit. September unemployment was 4.4%, up from 4.1% a year ago. That's not a disaster, but it's also not a victory lap.

Tariffs: The Elephant That Never Left

Wall Street spent 2024 pretending tariffs were dead. They're not. The Trump administration has imposed cumulative tariffs of 145% on many Chinese goods through Section 301, IEEPA, and reciprocal measures. In October, Trump threatened a 100% tariff after China restricted rare earth exports—then walked it back after the October 30 deal with Xi.

But here's what didn't change: baseline tariffs remain elevated. The effective tariff rate on Chinese imports is 40%, up from 3% pre-2018. That's a structural tax on goods that feeds through to consumer prices and corporate margins. It's also a gift to domestic producers in strategic sectors—semiconductors, EVs, critical minerals, defense.

Investors need to bifurcate: tariffs hurt importers and margin-light retailers. They help onshore manufacturers, defense contractors, and anything with pricing power. This isn't 2018. Tariffs are policy, not posturing.

Inflation: Cooling, But Not Fast Enough

Core PCE came in at 2.8% for September, down from 2.9% in August. That's progress, but it's also stale—this data was delayed two months due to the shutdown. The September reading tells us where we were, not where we're going.

The Fed's target is 2.0%. We're 40% above that, and goods prices surged 0.5% in September as Trump's tariffs worked through supply chains. Services inflation cooled to +0.2%, but that's one month—not a trend. If tariffs stay elevated and the labor market stabilizes, inflation could re-accelerate in Q1 2026.

Markets are pricing 87% odds of a December rate cut. Fine. But the dot plot projections shifted to just two cuts in 2025, down from four in September. The Fed is dovish in words, hawkish in deeds. Watch the deeds.

Tech Concentration Risk: AI Euphoria Meets Reality

The S&P 500 is up 16% YTD, the Nasdaq up 20%. But strip out the Magnificent Seven, and gains shrink to low single digits. That's not breadth—that's a handful of stocks doing all the work.

Meta jumped 4% this week on reports it might slash metaverse budgets by 30%. Translation: investors cheered cost discipline because growth is slowing. Nvidia fell on reports Meta is considering Google chips for 2027 data centers. That's 18 months away, but it spooked the hyperscalers' hyperscaler.

AI capex is real. AI profits are mostly theoretical. At some point, valuations demand evidence. We're not calling a bubble, but the margin for error is shrinking. If earnings disappoint in Q4 or guidance wobbles, tech could give back gains fast.

Credit Markets: The Bond Vigilantes Are Back

The 10-year yield rose to 4.11% despite two Fed cuts and soft labor data. That's not supposed to happen. Historically, yields fall 100+ basis points in the 100 days after the first rate cut. This cycle, they're up 103 bps.

Why? Three reasons. First, growth expectations are stronger than feared—GDP growth was revised to 1.6% for 2025, not the 1.2% initially forecast. Second, term premium is rising as fiscal deficits stay elevated. Third, inflation expectations are sticky—the 10-year TIPS breakeven is at 2.40%, well above the Fed's target.

Translation: bond investors don't trust the soft landing narrative. Neither do we. Duration is dead money until inflation convincingly breaks below 2.5%.

Geopolitics: The Détente That Isn't

The U.S.-China trade deal in October suspended rare earth export controls and paused retaliatory tariffs for one year. Markets rallied. But read the fine print: baseline tariffs stay. China committed to buy 12 million metric tons of U.S. soybeans in late 2025, plus 25 MMT annually through 2028. That's nice for farmers. It doesn't fix the structural competition.

Europe is rearming at the fastest pace since the Cold War. Germany's 2025 defense budget hit $110 billion, making it the world's fourth-largest spender. European defense spending is growing at 6.8% annually through 2035—faster than the U.S., China, or Russia.

This isn't a blip. This is structural reallocation. Defense, critical minerals, energy security—these are 5-10 year themes, not Q4 trades.

🧭 Tactical Map: Where to Lean In

• Defense Contractors: RTX, General Dynamics, Northrop Grumman. Elevated valuations, but earnings momentum is real. Buy dips.

• Onshore Industrials: Companies with domestic supply chains and pricing power. Think reshoring beneficiaries, not tariff victims.

• Energy Infrastructure: Nat gas hit $5.046/MMBtu—highest since late 2022. Cold winter + export demand = structural tailwind.

• Short Duration Bonds: If yields keep rising, own floaters or short-term Treasuries. Avoid 10-30 year paper until the Fed proves it can kill inflation.

• Gold (Selectively): Gold is near $2,640, up modestly. It's a hedge, not a trade. Keep 5-10% allocation as geopolitical insurance.

🔍 Theme to Watch: The Reshoring Supercycle

Tariffs, rare earth vulnerabilities, and supply chain paranoia are forcing a decades-overdue reckoning: the U.S. can't outsource everything to China. China controls 60% of global rare earth production and 85% of refining. That's a national security problem, not just an economic one.

The CHIPS Act, Inflation Reduction Act, and defense spending bills are funneling capital into domestic semiconductor fabs, EV battery plants, and critical mineral processing. It's expensive. It's inefficient short-term. And it's unstoppable.

Winners: Domestic manufacturers, capital goods providers, engineering firms. Think companies building the factories, not just the products. This is a multi-year capex boom that doesn't show up in headlines—yet.

Losers: Margin-light importers, retailers with China-heavy supply chains, and anyone who bet globalization was permanent.

Alpha generation here is about identifying second-order beneficiaries. Don't buy the obvious picks—everyone owns those. Find the companies supplying the tools to onshore.

📅 Forward View: December 9-13, 2025

Key Events

• December 10 (2:00 PM ET): FOMC rate decision. 87% odds of a 25 bps cut. The decision matters less than the dot plot and Powell's press conference. Watch for hawkish language on 2026 cuts.

• December 16 (8:30 AM ET): November jobs report. First clean read post-shutdown. Consensus: 153,000 jobs added, unemployment steady at 4.2%. If we miss by 50k+, expect volatility.

• Mid-December: Earnings from Kroger, Dollar General, and other retailers. These will tell us if the consumer is cracking or still spending.

Technical Levels

• S&P 500: Support at 6,770 (prior resistance turned support). All-time high at 6,920. A break above confirms continuation. A rejection sets up a test of 6,600.

• 10-Year Yield: Resistance at 4.20%. If we break that, bond bears take control and equities suffer. Support at 3.90%—a break below signals Fed dovish pivot is working.

💬 Final Words

Markets are pricing a Goldilocks scenario: inflation cooling, growth stable, Fed dovish. It's a beautiful narrative. But PCE is still 40% above target, bond yields are rising despite rate cuts, and tariffs are structural policy—not transient noise.

We don't bet on perfection. We bet on asymmetry. Defense, reshoring, and short duration bonds offer convexity in a fragile macro setup. The consensus owns mega-cap tech and prays for Santa Claus. We'll take the other side.

Daly Asset Management doesn't charge hidden fees, doesn't sell you yesterday's playbook, and doesn't pretend to know the future. We use data, we manage risk, and we respect your capital. If that sounds better than paying 1.5% for a 60/40 portfolio, join the waitlist.

Disclosures: This newsletter is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Always conduct your own due diligence or consult with a financial advisor before making investment decisions.