The market's focus has shifted from inflation (2022-23) to a softening labor market. Softer employment provides for lower interest rates, which is positive for equities due to their inverse correlation. This dynamic is what's needed to broaden the market and economy into sectors like manufacturing, transportation, and housing.

The recent rally needs context: it recouped 2022 bear market losses, driven by AI earnings for large caps. The Russell 2000's recovery to highs is all P/E expansion, fueled by lower inflation. The silver lining of labor market softening is that interest rates peaked two years ago and are now ~200 bps lower.

The labor market will remain sluggish into 2026, allowing rates to continue drifting lower and the Fed to keep cutting. This will drive a broader improvement in housing, manufacturing, and transportation.

The simple narrative is that interest rates peaked two years ago, stabilized, and are now at the low end of a range. The Fed has been cutting for over a year. These changes in rates help normalize the economy.