Market Structure Stronger Than 2000.

Happy Friday. As expected, markets showed some caution this week. Less about fundamentals and more about the absence of news. With no earnings, no investor conferences, limited macro data, and buyback windows closing, there’s been little room for positive catalysts and only space for volatility.

This dynamic may persist until earnings season picks back up in a couple of weeks. But beneath the surface, the backdrop hasn’t changed: inflation is subdued, jobs remain stable enough, and the real opportunity continues to sit in small and mid caps. Same story different week from me.

Let’s get into the data!

Here is the summary if you want just that:

• Inflation: Real-time at 2.0%

• Fed Path: 1% cuts priced in

• Jobs: Growth rebound into 2026?

• Bubble?: Higher quality, lower leverage

• Valuations: Small caps historically cheap

• Positioning: Record Russell shorts

• Shutdowns: Markets shrug them off

Let’s start with the only thing still holding back sentiment around rate cuts. Drumroll… inflation.

The good news: inflation looks good. Real-time data from Truflation shows prices holding right at 2.0%, comfortably within the Fed’s target band.

Let’s flip to rates. It’s now been a week since the Fed officially cut rates. Time to check how markets have digested the path forward.

Futures remain locked in on roughly 1% in cuts over the next 12 months, taking Fed Funds to just above 3.1% by September 2026. Importantly, about half of that easing is expected between now and January, underscoring how front-loaded this cutting cycle may be.

That easing may come just as growth picks up or perhaps it becomes the catalyst for growth itself.

Goldman is projecting a steady rebound in hiring, with net job gains expected to climb back toward 100k+ per month by mid-2026. Pairing a Fed easing cycle with accelerating job growth would be a welcome combination for both markets and the economy.

Some argue we’re back in bubble territory. I’ve said before… there are certainly pockets of “bubbleness,” particularly in parts of AI where many companies won’t accrue lasting value. But there will also be durable long-term winners, and it’s important to separate hype from real structural opportunity.

What’s often missed in the 2000 comparisons is just how different today’s market is. The S&P 500 is now higher quality,. Leverage is lower, non-financials’ net debt to equity has been cut in half since the mid-2000s. And perhaps most importantly, more than 80% of corporate debt is fixed and long-term, limiting refinancing risk.

Put simply: this isn’t 2000. Valuations may be stretched in some places, but the foundation is much stronger.

The pockets of opportunity continue to sit in small and mid caps. As we have expressed throughout the year.

On valuations, both trade at the low end of historical percentiles, far cheaper than mega-caps that sit near record highs. Pair that with positioning, hedge funds and asset managers are sitting on a record -$8B net short in the Russell 2000.

We’ve already seen over the past two months what happens when markets price in cuts on top of a stable macro backdrop: small caps rip. The setup remains firmly in place.

I’ll leave with this. Government shutdown fears are swirling again, but the data doesn’t support being overly concerned.

Looking back, the average S&P 500 return during shutdowns is flat (0.0%), with markets often bouncing +0.6% the week after. Treasuries show a similar pattern, with modest dips after the fact.

Have great weekend!

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Disclaimer: Not a recommendation to purchase or sell any securities mentioned. This is for educational purposes only.