December 15, 2025

“May your days be merry and bright”

Bing Crosby

Last week did not end well but so far, the rally has continued. Here are the numbers, The S&P 500 finished down .70%, the Dow Jones Industrial Average managed a gain of 1.01%, the Nasdaq lost 1.87%. Internationally, the FTSE 100 surrendered a slight .19% and the MSCI-EAFE managed to make a gain up .06%. The 2-year treasury paid 3.524%, and the 10-Year yield was 4.186%.

So, what happened? The main event of the week was the final Fed meeting of the year last Tuesday and Wednesday. As expected, the FOMC cut by 25 bps, and also as expected, not everyone agreed. There were three public dissents: (could this be political?) Goolsbee and Schmid opposed the cut (can’t let Trump get what he has been screaming for.), and Miran wanted a 50-bps cut (because of course he did). But beneath the surface, the dissension was even more pronounced. President Donald Trump said Friday that Kevin Warsh has moved to the top of his list as the next Federal Reserve chair, though Kevin Hassett also remains in contention, according to the Wall Street Journal. Powell’s term expires in May, having been reappointed to the position by former President Joe Biden.

The two earnings disappointments led to a bad week for tech. The Nasdaq Composite finished the week down after last Friday’s 1.1% slide. And yet, in a reversal of 2025 trends, much of the rest of the market is doing just fine. The blue-chip Dow Jones Industrial Average gained 503 points, or 1.01%, last week. Its top three contributors were financial services names Goldman Sachs, Visa, and American Express. The recent strength boosted by the Fed’s rate cut and a promise of relaxed regulations from the Trump administration, sent Bank of America to its first record close since 2006, banking’s halcyon days before the bursting of the housing bubble.

As the year winds down, the narrative underlying the markets is shifting, at least for now. For example, the only thing on people’s minds the last few quarters has been the Magnificent Seven stocks and the AI theme. The market capitalization of NVIDIA ballooned, and investors seemed to turn a blind eye to what we might charitably call ‘creative’ vendor financing schemes. But over the last two to three weeks momentum has shifted. Granted, international stocks have performed well all year, but lately small-caps and value stocks have started to outperform. Global markets outside the US showed mixed performance last week, with gains in Japan amid anticipation of a Bank of Japan rate hike, flat results in Europe, and modest declines in China amid profit-taking after earlier 2025 gains. The week was influenced by the US Federal Reserve’s third consecutive rate cut and commentary seen as less hawkish than expected, supporting broader risk sentiment but with regional variations.

There’s also been a change of sentiment in bonds. Most of the year, all tenors of fixed income have performed pretty well. Short-maturities, long-term bonds, high-yield, emerging market – they’ve all done well. But there was a notable rotation in the fixed income markets last week, especially after the Fed meeting on Wednesday. Long-term rates went noticeably higher while short-term rates continued their decline. With Fed credibility on the line next year, policy decisions may need to get more ‘creative’ if lower yields are the ultimate goal.

Looking ahead to 2026 (a mere 2 weeks away), the U.S. economy is on a straightaway full of potholes. (meaning no end to the volatility) AI capital spending and wealthy consumers have kept growth resilient despite a softening labor market. The path toward a healthy economy in 2026 is clear. The Fed is easing, fiscal policy will become more accommodative, and corporate earnings are strong. But risks from policy, housing, and labor remain. The other force unaccounted for is the tremendous new investment in US manufacturing brought by the tariff wars since President Trump took office and the effect of the tax cuts in the “Big Beautiful bill”. Needless to say, the administration and especially Treasury Secretary Scott Bessent and team of economic advisors can’t seem to wait for the second quarter of next year, when they expect the effects to be felt.

Fixed income faces risks on multiple fronts. The Fed has lowered short-term interest rates substantially over the past 15 months. Strong growth and the potential for delayed-onset tariff-driven inflation introduce risks to further easing, while a new Fed chair will inject uncertainty into the central bank’s communications and independence. Expect volatility rate and curve steepening.

Three years into the AI trade, stocks head into a new phase. The S&P 500 has gained more than 80% since ChatGPT’s launch three years ago, with AI-related names driving nearly three-quarters of the return. While the earnings backdrop remains quite healthy overall, surging capital expenditures (capex) is set to pressure the cash flow generation of many tech giants. This is likely to make for a choppier, less unified AI trade. Investors are dumping stock market winners and buying almost everything else. Why that’s a good sign. As Market Watch’s Joseph Adinolfi reports, “The latest Fed rate cut is reigniting a ‘rotation trade’ out of trendy AI-linked names. It is a sign investors are feeling more confident about the economy.”

A word on the Housing market. Mortgage rates have remained relatively stable in recent weeks, hovering in the low-to-mid 6% range for most fixed-rate products. This follows a period of slight declines earlier in the year, influenced by Federal Reserve rate cuts, but rates have held steady amid resilient economic data and balanced housing market conditions. The housing market shows signs of balance: inventory is up modestly, but demand remains resilient. Experts forecast rates to stay in the low-to-mid 6% range through late 2025 and into 2026.

Finally, as smiles are all around for 2025 and the completion of the trifecta of 3 solid positive years for the market, we are cautiously optimistic that 2026 may continue the good news.

Mike