With investors lightly positioned heading into Q4, and sentiment at some of the most bearish levels we’ve seen with markets this close to all-time highs, we think there is a reasonable case for the rally to continue through year-end.
Start with sentiment.
Net bulls fell more than any 2-week stretch in more than three years, pushing investor sentiment to its most bearish reading since the tariff tantrum in early 2025. The AAII numbers make the point plainly: in the week ending September 16 — voting closed the day of the hike — bears hit 53.3% against a long-run average of 31.5%, bulls slid to 28.8%, and the bull-bear spread collapsed 26.6 points in two weeks to −24.5. Even the fence-sitters climbed down, and they all climbed down on the same side: neutral fell to 17.9%. Fewer than 5% of weeks since 1987 have put bears above 50%. In other words, nobody swaggered into this Fed meeting. Investors showed up the way you show up to a dentist appointment — early, quiet, and braced for bad news.
This sort of setup usually results in relatively shallow pullbacks, simply because there isn’t that much positioning left to unwind.
But more importantly, we don’t think the Fed’s overall message was nearly hawkish enough to spark the kind of selloff many investors may have feared heading into the meeting. In fact, we’d argue quite the opposite.
In our last note, we concluded that “if the Fed signals that this is a one-and-done credibility hike, we should expect markets to keep marching higher,” and that “the real paradox may be that a Fed hike is what finally brings down the long end.”
Well… the dots now have a second helping on the menu.
The dots show this pretty clearly. Yes, the medians moved higher. But after another hike this year, the Fed sees rates essentially holding steady throughout next year — 4.1% at the end of 2026 and again in 2027 — before gradually moving lower toward its longer-run rate, which was also bumped up to 3.2%.
Higher for longer? Sure. A new hiking cycle? That’s not what the dots are telling us.
Loose financial conditions are encouraging.
For us, financial conditions are essentially a function of interest rates, oil prices, and the US dollar. With perhaps the exception of the dollar, none of those are anywhere close to suggesting that financial conditions are ultra-loose right now. And the asymmetry here may actually be more interesting than the consensus narrative suggests.
Could financial conditions tighten further from here? Of course.
But they could also loosen a lot more from current levels — and if they do, that would provide a massive tailwind for risk assets. That’s a possibility traditional financial conditions indexes don’t make nearly as obvious, given they already suggest conditions are historically loose. Of course they do — most of them count the stock market as an input, which means they’re grading the market on its own homework. Take the Chicago Fed’s index: at −0.56, the official read is “looser than average.” But even the 2022 hiking cycle only pushed it to −0.10, and the truly loose extremes sit far below today — −0.70 in 2021, −1.10 in 1993. There is room to run in both directions. The consensus only talks about one of them.
Put it together. Positioning is light. Sentiment is washed out. The Fed just told us it’s topping out, not starting a cycle. And financial conditions have more room to become a tailwind than the consensus indexes let on. None of that guarantees the next three months — but the table is set for a year-end rally. The bears did most of the setting. We just don’t think they’ll like what’s served.
— Meridith on the Markets
Data: AAII Sentiment Survey (week ending Sep 16, 2026); Federal Reserve Summary of Economic Projections (Sep 16, 2026); Federal Reserve Bank of Chicago NFCI via FRED (week ending Sep 11, 2026). For informational purposes only. Not investment advice.