Investors looking for the typical festive boost in US stock markets are instead navigating significant volatility that may persist until the end of the year. While major indexes are poised for robust gains in 2025, the benchmark S&P 500 has dipped in December, defying its historical reputation as a strong month for equities.
AI Spending Scrutiny and Fed's 2026 Path Drive Swings
Recent weeks have seen US stocks whipsawed by two dominant themes. The first is intense scrutiny of massive corporate expenditures on artificial intelligence infrastructure. The second involves shifting expectations about the Federal Reserve's potential interest rate cuts in 2026. This week, concerns over a data-center project from Oracle pressured technology and other AI-linked stocks. However, stocks found support on Thursday following the release of tame inflation data.
Angelo Kourkafas, senior global investment strategist at Edward Jones, stated that the recent economic data reinforces the view that the Fed will maintain a bias towards cutting rates. He suggested that while some investors might sell to lock in profits after a solid year, the data likely provides a green light for the traditional "Santa Claus rally" to occur this year.
Investors Parse Delayed Economic Data
The market this week digested a backlog of economic reports delayed by the recent 43-day federal government shutdown. Employment data indicated a rebound in job growth for November, but the unemployment rate rose to 4.6%, marking its highest level in over four years. A separate delayed report showed the US Consumer Price Index rose less than anticipated in the year to November.
While the cooling inflation data brought optimism, analysts caution about distortions, as data collection was pushed late into November when retailers offered holiday discounts. The Fed has already cut rates three times consecutively, leaving markets to dissect every data point for clues on when the central bank might ease policy again in 2026.
Trevor Slaven, global head of asset allocation at Barings, highlighted the uncertainty, pointing to data distortions from the shutdown and an unsettled debate on the direction for major central banks and inflation, alongside emerging softness in labor market figures.
Sector Rotation as AI Trade Cools
The focus in the holiday-shortened trading week ahead will also remain on the AI trade, a major driver of this year's stock gains. The S&P 500 is up more than 15% so far in 2025, heading for its third straight year of double-digit percentage gains. Recently, however, worries about the returns from huge AI infrastructure spending have dented the high-flying tech sector, which holds the largest weight in indexes like the S&P 500.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, noted a growing skepticism around AI spending, which is putting pressure on the broader market due to tech's disproportionate index representation. This has led to a sector rotation, with previously lagging areas like transportation, financials, and small-cap stocks picking up the slack and rising in December.
Kourkafas confirmed this shift, observing that money has moved away from tech, but other sectors have stepped up to keep markets mostly range-bound. Key economic reports due in the coming week include third-quarter GDP, durable goods orders, and consumer confidence data.
