US Stocks Rise as Fed Cuts Rates; Meta Faces Major Tax Charge

US stocks experienced a notable increase last week, buoyed by a quarter-point interest rate cut from the Federal Reserve. The Morningstar US Market Index climbed by 0.6%, influenced by President Donald Trump‘s claims of success in trade negotiations with China and positive earnings reports from major tech companies, collectively referred to as the Magnificent Seven. This trend suggests a potential for significant upward movement in stock prices as the year draws to a close.

Mixed Results for Major Companies

Despite the overall market growth, the performance of individual companies reveals a more complex picture. Notably, while Alphabet, Amazon, Apple, and Microsoft reported strong financial results—largely driven by advancements in artificial intelligence (AI) and cloud computing—Meta faced challenges. The company disclosed a staggering $15.93 billion tax charge linked to the One Big Beautiful Bill Act, leading to a significant 12.2% drop in its stock price over the week. Investor concerns about Meta’s future AI investment strategy further compounded the company’s difficulties.

The disparity in performance among large-cap stocks compared to mid-cap and small-cap companies was evident. Large-cap stocks rose by 1.2%, while mid-cap stocks declined by 1.1% and small-caps saw a drop of 1.5%. This trend underscores the market’s reliance on a select few companies for growth. The technology sector stood out with a 2.6% increase, contrasting with a 3.9% decline in consumer defensive stocks. Such variations highlight the importance of understanding market dynamics, presenting unique opportunities for investors willing to navigate volatility.

Valuation Anomalies and Interest Rate Speculation

Among the largest players, valuation discrepancies are also apparent. The consumer cyclical sector rose by 2.2%, largely driven by Amazon’s strong performance, which surged by 8.9%. Tesla also contributed positively, increasing by 5.3%. Collectively, these companies represent 49% of the sector’s value. However, their investment profiles differ significantly. Analysts at Morningstar view Amazon as having a sustainable competitive advantage, while Tesla’s market valuation currently stands at 188 times its expected earnings, compared to Amazon’s more modest 32 times.

Regarding interest rates, the Federal Open Market Committee’s actions had a nuanced impact. Following the rate cut, the US dollar rose by 0.9%, as market expectations for further cuts in December diminished significantly, dropping from 91% to 65%. This shift led to an increase in Treasury bond yields, with the 10-year yield reaching 4.1% by the week’s end.

The concept of a neutral interest rate—one that neither stimulates nor restrains economic growth—is currently a topic of debate among economists. Sarah Hansen, a senior reporter at Morningstar, notes that this issue has gained attention due to limited data availability amid the ongoing government shutdown. Investors are cautioned against overestimating the central bank’s influence on market dynamics, as such beliefs have historically led to misguided strategies.

Emerging markets also displayed mixed results. Developed markets outside the US saw a decline of 0.6%, affected by the strengthening US dollar. In contrast, emerging markets rose by 0.9% in dollar terms, with notable gains in South Korea (6.3%) and Taiwan (3.1%). Both regions are heavily influenced by semiconductor manufacturing, illustrating the ongoing concentration of returns within the AI and technology sectors.

Looking ahead, the latest Morningstar Markets Observer for Q4 provides a comprehensive overview of market developments. As the earnings season progresses, investors can keep track of releases and consensus estimates through dedicated resources, although the anticipated excitement surrounding “jobs Friday” may be tempered by the continuing government shutdown.