The Fed Cuts Rate and Freezes Balance Sheet

Good Afternoon. Another week of positive gains for the major market indices, mainly driven by strong mega-tech earnings. As expected, the Fed cut rates by 25bps to 3.75–4.00%. In addition, the Fed announced it would pause quantitative tightening and freeze its balance sheet, sensing some stress in the money markets.

Below are the key things to note this week:
Mega Tech Earnings: 
Five of the Mag 7 stocks reported strong earnings this week, which powered Nasdaq to its longest monthly winning streak since 2017. Overall, a stellar week for earnings, with almost all major companies beating expectations. Microsoft and Apple joined the $4 trillion club.

The S&P 500 has gained $17 trillion since the April lows, following the post-tariff panic. Hence, it's essential to get the macro analysis right. If you followed this newsletter in April, I had provided a detailed analysis of the tariff situation, explaining why the sell-off back then was an overreaction.

The Fed Cut Rate and Stops QT: 
The Fed announced it will end balance sheet runoff on December 1, marking the transition to a steady-state phase of its normalization plan. Policymakers judged that reserves are now comfortably above ample levels, citing rising repo rates, increased Standing Repo Facility usage, and a higher effective fed funds rate relative to IORB.

Over the past 3½ years, the balance sheet has shrunk by $2.2 trillion—from 35% to 21% of GDP. Starting in December, the Fed will hold the balance sheet steady, allow agency MBS to run off, and reinvest proceeds into Treasury bills to more closely align portfolio maturity and composition with the outstanding Treasury portfolio. In 2026, the Fed's increased demand for Treasury bills is expected to push yields lower and stabilize overnight funding rates.

Primal Thesis

For the week:

• The S&P 500 is up 0.71%, the Nasdaq is up 2.24%, and the Dow 30 is up 0.75%.

  

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CNN's Fear & Greed Index now stands at 35 (Fear) out of 100, up 2 points from last week. Details here

The top five trending stocks on Reddit are Meta, SPY, Reddit, Nvidia, and Amazon. Read More

Here is a summary of this week’s key economic releases:

Target Rate Probabilities for Dec 10th FOMC Meeting:

CME FedWatch

OpenAI Restructure: OpenAI has finalized its restructuring into a nonprofit that now controls its for-profit arm, valued at about $130 billion. Microsoft, its key backer since 2019, will hold roughly 27% in OpenAI Group PBC. Read

Mortgage Rates Drop: Mortgage rates fell for the fourth consecutive week, driving renewed activity among homeowners and buyers. Total mortgage applications rose 7.1% from the prior week, according to the Mortgage Bankers Association’s seasonally adjusted index. Read

AI Capex Surges: Tech’s internet giants delivered a clear message this earnings season—AI spending is accelerating. Alphabet, Meta, Microsoft, and Amazon all raised their capital expenditure outlooks, now projecting a combined total exceeding $380 billion this year. Read

The Fed Stops QT: The Fed will halt its balance sheet drawdown starting December 1 as money market liquidity tightens and bank reserves decline. It will roll over maturing Treasuries instead of letting $5 billion run off monthly and reinvest all MBS proceeds—up to $35 billion a month—into Treasury bills. Read

US-China Trade Tension Eases: China will ease its export ban on automotive chips under a new US-China trade deal, the White House said. The agreement follows talks between Xi Jinping and Donald Trump in South Korea this week. Read

Cedence Beat: Cadence reported adjusted EPS of $1.93, above the $1.79 consensus, while GAAP EPS was $1.05 versus $1.19 expected. Revenue rose 10% year over year to $1.34 B, exceeding the $1.32 B estimate. Adjusted operating margin reached 47.6%, ahead of the 45.5% forecast, and backlog grew to $7 B.

Booking Holdings Beat: Q3 Non-GAAP EPS rose to $99.50, beating estimates by $3.58. Revenue reached $9B, up 12.6% year over year and $270M above expectations. Room nights increased 8%, while gross bookings advanced 14% (10% in constant currency) from the prior year’s quarter.

Nextera Mixed: NextEra’s Q3 net profit rose to $2.44 billion ($1.18 per share) from $1.85 billion ($0.90 per share) a year earlier, driven by higher electricity demand from Florida utilities and commercial clients. Excluding one-time items, adjusted EPS of $1.13 beat estimates, while revenue grew 5.3% to $7.97 billion, slightly below expectations.

UnitedHealth Beat: UnitedHealth reported Q3 adjusted EPS of $2.92 on revenue of $113.2B, up 12.3% year-over-year, exceeding estimates. UnitedHealthcare revenue rose 16% to $87.1B, led by Medicare & Retirement and Community & State, while Optum grew 8% to $69.2B, driven by Optum Rx. Both segments surpassed analyst projections.

Visa Beat: Fiscal Q4 adjusted EPS was $2.98, flat from Q3 and up from $2.71 a year earlier, slightly above estimates. Net revenue rose to $10.7B from $10.2B in Q3 and $9.6B last year. Service revenue grew 10% Y/Y to $4.6B, data processing 17% to $5.4B, and international transactions 10% to $3.8B. Client incentives rose 17% to $4.2B. Total payment volume reached $3.73T, up from $3.62T in Q3 and $3.41T a year ago.

Caterpillar Beat: Q3 revenue rose 10% to $17.6 B, driven by stronger end-user equipment demand. Non-GAAP EPS was $4.95, beating estimates by $0.43.

Alphabet Beat: Q3 results topped expectations, with revenue surpassing $100B for the first time—up 16% year-over-year to $102.3B (15% in constant currency) versus $100.1B expected. Cost discipline drove a 33% jump in net income to nearly $35B, while EPS rose 35% to $2.87, beating the $2.27 consensus.

Meta Beat: Meta projected Q4 revenue between $56B and $59B (midpoint $57.5B), with forex adding a 1% tailwind. Q3 costs rose 32% to $30.71B, driven by higher R&D spend. Daily Active People across its apps reached 3.54B in September, up 8% year over year, while ad impressions rose 14% and average ad prices increased 10%.

Microsoft Beat: Q1 revenue rose 18% to $77.7B, beating estimates by $2.3B, while Non-GAAP EPS of $4.13 topped forecasts by $0.47. Microsoft Cloud revenue grew 26% to $49.1B, with commercial remaining performance obligations up 51% to $392B.

Apple Beat: Apple reported earnings of $1.85 per share for the quarter ended Sept. 27, with revenue up 7.9% year-over-year to $102.47 billion. iPhone sales were $49.03 billion (below $50.3 billion estimate), while total product revenue reached $73.72 billion (slightly above $73.49 billion forecast). Mac sales rose 13% to $8.73 billion, exceeding expectations of $8.55 billion.

Amazon Beat: Q3 results beat expectations with EPS of $1.95 (+$0.37) and revenue up 13% Y/Y to $180.2B, led by strong growth in online and physical stores, third-party services, subscriptions, and a 20% rise in AWS sales to $33.01B; ad revenue reached $17.7B. Operating income of $17.42B and a 9.7% margin missed estimates amid heavy spending, as management highlighted an aggressive AWS and AI expansion, with CapEx projected at ~$125B in 2025 and higher in 2026.

Eli Lilly Beat: Eli Lilly reported Q3 adjusted EPS of $7.02 on revenue of $17.6 B, up 54% Y/Y, driven by strong demand for Mounjaro and Zepbound. Key products generated $11.98 B, with Mounjaro contributing $6.52 B (+109% Y/Y) and Zepbound $3.59 B (+185% Y/Y). Breast cancer drug Verzenio added $1.47 B, up 7% Y/Y.

Mastercard Beat: Q3 adjusted EPS rose to $4.38, above estimates of $4.31 and up from $4.15 in Q2 and $3.89 a year ago. Revenue reached $8.60B, exceeding the $8.53B consensus and rising from $8.13B in Q2 and $7.37B last year. Gross dollar volume held at $2.75T, in line with consensus, up from $2.63T in Q2 and $2.50T a year earlier.

Merck & Co Beat: The Rahway-based company raised its 2025 outlook, projecting sales of $64.5B–$65B and adjusted EPS of $8.93–$8.98, versus prior guidance of $64.3B–$65.3B and $8.87–$8.97. Analysts expect $8.89 EPS on $64.81B revenue. Third-quarter results beat estimates, with adjusted earnings of $2.58 per share on $17.3B revenue, up 3.6% year over year. The firm maintained its full-year adjusted gross margin near 82%.

Abbvie Beat: AbbVie delivered strong Q3 results with double-digit revenue growth across key franchises. Skyrizi rose ~47% to ~$4.7B and Rinvoq grew ~35% to ~$2.2B. Neuroscience sales advanced 20% to ~$2.8B, led by Vraylar (+7% to ~$934M), Botox (+16% to ~$985M), Ubrelvy (+32% to ~$354M), and Qulipta (+64% to ~$288M).

Chevron Beat: Q3 net profit declined to $3.54 billion ($1.82 per share) from $4.49 billion ($2.48 per share) a year earlier, with revenue easing to $48.17 billion from $48.93 billion, driven by lower crude prices and costs tied to the Hess acquisition. Adjusted profit rose to $3.6 billion ($1.85 per share), beating expectations, while the company recorded a $235 million net loss from severance and transaction expenses.

Linde Mixed: Q3 net profit declined to $3.54 billion ($1.82 per share) from $4.49 billion ($2.48 per share) a year earlier, with revenue easing to $48.17 billion from $48.93 billion, driven by lower crude prices and costs tied to the Hess acquisition. Adjusted profit rose to $3.6 billion ($1.85 per share), beating expectations, while the company recorded a $235 million net loss from severance and transaction expenses.

Exxon Beat: Q3 net profit declined to $7.55 billion ($1.76/share) from $8.61 billion ($1.92/share) a year earlier, with revenue down 5.2% Y/Y to $85.29 billion due to weaker crude prices, low chemical margins, higher depreciation, growth expenses, and divestment-related volume loss—partly offset by volume gains in Guyana and the Permian Basin and further structural cost savings. Adjusted profit rose to $8.1 billion ($1.88/share), above estimates.

Berkshire Beat: Berkshire’s operating profit from its wholly owned businesses, including insurance and railroads, rose 34% year over year to $13.5 billion in Q3, driven by a more than 200% surge in insurance underwriting income to $2.37 billion. Buffett again chose not to repurchase shares despite the stock’s recent decline.