The Fed Has Stopped Being the Main Story. That Is the Risk.

For two years the Federal Reserve was the only variable anyone modelled. Now it barely features in daily market commentary, which has been replaced almost entirely by AI capital expenditure. That shift in attention has not changed the arithmetic underneath: the discount rate applied to long-duration cash flows is still set in Washington.

What is priced

Futures markets imply a slow, uninterrupted glide lower in policy rates with inflation converging towards target. That is a reasonable central case. It is also a narrow one — it leaves very little room for a services-inflation surprise or a fiscal shock to be absorbed without a repricing.

The compression in the equity risk premium is the mechanism. When investors accept a smaller premium over government bonds for holding equities, small changes in the bond yield produce large changes in justified equity multiples. That asymmetry is greatest for the longest-duration assets in the index, which today are the same megacap technology names driving the record.

Europe is not following the same script

The European Central Bank and the Bank of England are running visibly different cycles, with different inflation compositions behind them. For investors in FTSE 100 and DAX constituents, that divergence shows up directly in bank net interest margins and in the currency translation of overseas earnings — which, for the UK index in particular, is most of the earnings.