Markets Brief: Could the Fed Still Cut Rates in 2026?

With the failure of peace talks over the weekend and a renewed surge in oil prices, investors face the continued impact of the damage to Middle East energy infrastructure and limits on shipping through the Strait of Hormuz. In other words, it will be a wait before markets and the global economy return to normal.

After last week’s Consumer Price Index report, markets will hit a lull in major economic news. Instead, investors will get a first glimpse of first-quarter earnings as big banks start reporting on Tuesday.

In this week’s Markets Brief, we look at what the tea leaves say about the outlook for Federal Reserve rate cuts, a step-back view on the troubles in private credit, and a way for investors to play the continuing artificial intelligence buildout.

“Most” Vs. “Many” on Rate Cuts

Just a couple of weeks ago, some bond traders were beginning to think that the Fed’s next move could be to raise interest rates, reversing the expectation of one or two cuts that had been in place before the Iran war. As news of the ceasefire allowed oil prices to fall back from recent highs, the market now shows a 73% chance of no rate cuts in 2026, with almost no chance given to hikes. However, the bond market assigns 24% odds of one rate cut this year.

Some analysts point to the past week’s release of minutes from the March Federal Open Market Committee meeting as suggesting that the Fed seems to be in a two-sided position where the next move in rates could be up or down, but the bias is toward cutting.

“The minutes from the Fed’s March meeting make it clear that policymakers are grappling with elevated uncertainty for both parts of its mandate, with a small but growing minority favoring a two-sided framework for the next policy move in which rates could come down or go up,” writes Christopher Hodge, chief US economist at Natixis. “However, that minority is outnumbered by those concerned about AI-related downside risk to hiring and the current fragile equilibrium in the labor market. This latter group is larger in both size and in influence, which is why we think the FOMC will be disproportionately responsive to joblessness this year, despite sticky inflation.”

Economists at UBS did a deep dive into the wording of the FOMC minutes and came up with the same conclusion. The key was a dissection of the number of times the word “many” was used compared with the word “most” when it came to the economic and policy outlook. “Although ‘many’ thought there might be a reason to raise rates in the future, more, or to be specific, ‘most,’ thought they might need to cut rates more than previously assumed,” UBS economists wrote. Meanwhile, “some” were favoring the two-sided outcome. Out of 12 voting members, “the word ‘some’ would reflect 5 to 7 participants. While 7 might be ‘many,’ 8 or 9 participants almost certainly would no longer be ‘some,’” they explain.

The Private Credit Cycle Unfolds

It wasn’t hard to be cynical about private credit markets likely being at a top when money managers pitched the asset class to individual investors by pointing to years of reliably solid returns. These markets boomed in the wake of the 2008 financial crisis as banks, under pressure from regulators, pulled back from lending to smaller, lower-quality business borrowers. The asset class was further fueled by years of lower interest rates, which made its higher yields especially attractive.

All that is in the rearview mirror now, with private credit hit by worries that software companies of different stripes—which have been big borrowers in private credit—will see their business models undercut by AI. Now, where there once was hype, there is a lot of handwringing. But Brian Moriarty, principal of fixed-income strategies at Morningstar, wrote recently that private credit is facing its first redemption cycle. Here’s what investors and advisors need to know.

Morningstar’s Top Tech Hardware Picks for Optical Networking

The Iran war may have rightly diverted investor attention, but the AI infrastructure buildout continues in the background. Morningstar senior analyst William Kerwin recently attended a key fiber optic industry conference, and his takeaway is that companies in the fiber optic space will be growing beneficiaries of the AI boom.

We attended OFC 2026 (formerly the Optical Fiber Communications Conference) and came away bullish on optical connectivity across data centers and artificial intelligence infrastructure. Optical connectivity is a significant bottleneck to, and enabler of, data center and AI model performance. We believe advances in optical technologies will be a key driver to enabling the next generation of generative AI models, and a key driver of stock appreciation throughout technology hardware.

We see the primary debate for investors playing the optics trend centering around co-packaged optics, and whether it will fully displace copper connectivity. We came away from OFC with conviction in our long-term thesis that co-packaged optics will be complementary to copper connectivity, rather than displacing it.

William Kerwin

These are Kerwin’s top picks for the optics trend:

• Broadcom AVGO
• Marvell Technology MRVL
• Arista Networks ANET
• Amphenol APH

“We see all four as beneficiaries in a transition to CPO, and strong plays on our complementary optical/copper thesis. For Marvell, Arista, and Amphenol, this is the primary driver of our stock calls, while it’s a minority driver for Broadcom,” he explains.