Decoding the Fed’s November Stability Report
The Federal Reserve's November 2025 Financial Stability Report (FSR) provides the central bank's twice-yearly assessment of the US financial system's resilience. Unlike previous reports focusing heavily on inflation and high rates, this edition highlighted an increasing concern over **policy uncertainty** and the emerging risk posed by the **AI sentiment-driven equity market.**
Key Findings & Vulnerabilities
The report, based in part on a survey of financial professionals, analyzed four main vulnerabilities:
1. The Top Cited Risk: Policy Uncertainty 📈
The FSR survey noted a significant increase in financial professionals citing **Policy Uncertainty** ($\text{61\%}$) as the top risk, up from the spring. Concerns centered on the stability of trade policy, central bank independence, and the availability of economic data (likely referencing issues like the recent US government shutdown and trade tensions).
- **The Threat:** Unpredictable government action makes corporate and financial planning difficult, potentially leading to abrupt pullbacks in investment and hiring.
2. The New Risk: AI Sentiment Correction 🤖
A new, prominent risk cited by survey participants (up from $\text{9\%}$ to $\text{30\%}$ in the fall) was that a **turn in the prevailing positive sentiment toward AI** could trigger a major correction in risk assets. AI-related stocks have been a main driver of recent US equity performance, meaning a shift in investor confidence could disproportionately impact the overall market.
- **The Threat:** A steep decline in AI-fueled tech stocks could lead to large losses in public and private markets, tightening financial conditions, and slowing the labor market.
3. Commercial Real Estate (CRE) Stabilization 🏢
In a cautious positive sign, the report noted that transaction-based prices for commercial properties, particularly the struggling office sector, showed signs of stabilization. However, the underlying vulnerability remains high:
While prices are steadying, a **sizable number of borrowers will still need to refinance maturing loans** in the next few years, forcing them to take on higher interest rates. This refinancing risk could still trigger significant distress, particularly among regional banks heavily exposed to CRE debt.
4. Household & Business Debt: Moderately Stable
The Fed's assessment of non-financial sector borrowing was relatively subdued:
- **Households:** Debt levels remain moderate. Mortgage delinquency rates are low due to large home equity cushions. However, **auto and credit card loan delinquencies** were noted as remaining somewhat above their average levels over the past decade.
- **Businesses:** The ability of publicly traded firms to service debt remains robust, even as gross leverage remains high. The key weakness lies in the capacity of some **small businesses and risky privately held firms** to manage increasing debt service costs.
Impact for US Investors: What to Do Now
The November FSR serves as a playbook for risk management heading into 2026. Investors should prioritize resilience:
- **De-Risking AI Exposure:** If your portfolio is heavily concentrated in the handful of tech stocks driven primarily by AI sentiment, consider trimming positions to reduce vulnerability to a sharp correction.
- **Focus on Diversification:** Given the policy and geopolitical uncertainty, broad diversification across sectors and asset classes (including high-quality fixed income) is essential protection against sudden market-moving events.
- **Banking Sector Focus:** While the overall banking system is deemed resilient, exposure to regional banks with high CRE loan concentrations warrants close scrutiny due to the looming refinancing wall.
Our analysts can assess your portfolio's exposure to AI correction risk and CRE debt exposure.
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