Markets have leaned into expecting the Federal Reserve to lower interest rates materially over the next year. Short-dated U.S. Treasury yields have moved lower, and investors expect the Fed to cut 25bps at its December meeting with near certainty (as of 4 December 2025). Further out, markets anticipate two to three additional cuts, with the effective Fed funds rate settling near 3% by end-2026.
Before the government shutdown-related data blackout, there were signs of a softening in the labor market, e.g., fewer job vacancies. Other jobs indicators also remain weak, with the latest U.S. ADP survey pointing towards 32,000 jobs lost in November. That said, not all U.S. activity data has been negative, with the latest S&P Global services PMI data – a measure of business spending intentions – surprising to the upside.
While the shutdown likely weighed on Q4 growth a little, this should reverse in Q1 2026 as delayed spending resumes. Impacts from President Trump's budget reconciliation bill are expected to flow through in 2026, while trade policy – previously a headwind – will become less of a drag. Outside the U.S., other economies like Japan and Germany have also turned more expansionary. Even in the U.K., where the Chancellor tightened fiscal policy to raise the fiscal headroom, most of the drag will be felt later in the budget horizon. Overall, the global growth backdrop looks positive for 2026.
The big U.S. hyperscale's – Amazon, Alphabet, Meta, and Microsoft – have spent hundreds of billions of dollars on AI infrastructure in 2025 and have continued to raise their investment guidance for next year. The ultimate economic impact of this massive spending could be much larger as multiplier effects ripple through the broader economy.
We believe risks tilt toward the Fed easing less than markets are pricing in, which could put upwards pressure on short to intermediate Treasury yields in 2026. Near-term monetary easing, fiscal support, and a booming AI-led capex cycle could push U.S. growth above expectations. Inflation may also not fall as quickly as forecast, given stronger demand and supply-chain strains from the capex surge, limiting the Fed's scope to cut
| Title | File Type | File Size |
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| Global Markets Overview: December 2025 | .4 MB |
David is the Global Head of Asset Research at WTW, responsible for economic and capital market research. He also is a member of the Investment Assumptions Committee, who help guide investment policy globally.
