Market Summary
Markets closed the week on steadier footing after a volatile start, as a late-week rebound in mega-cap tech and AI-related stocks helped offset earlier weakness. Sector leadership shifted repeatedly, underscoring investors’ sensitivity to valuation, earnings quality, and macro confirmation.
Defensive sectors struggled during the late-week rally, while growth regained leadership just as major indexes reclaimed key moving averages.
Despite choppiness, the market closed the week technically stronger, setting the stage for positioning adjustments as investors look toward year-end flows, earnings follow-through, and ongoing developments in AI and inflation trends.
The Economy
Economic data reinforced a narrative of slowing – but orderly – momentum. Payroll growth surprised modestly to the upside, though prior revisions and a rising unemployment rate signaled cooling beneath the surface.
Retail sales were flat overall but showed resilience in discretionary categories, while housing activity benefitted from lower mortgage rates despite persistent affordability constraints.
Inflation readings were encouraging as year-over-year CPI continued to decelerate, supporting confidence that disinflation remains intact even as growth moderates.
The Fed
This week’s data did little to alter expectations for near-term Fed policy. Officials maintained a balanced tone, acknowledging progress on inflation while remaining attentive to labor-market softness.
Falling short-term yields reflected confidence that policy is no longer restrictive, but not yet decisively accommodative. Overall, markets interpreted the backdrop as supportive of stability rather than a catalyst for renewed easing expectations.
Geopolitics
Geopolitical developments influenced select sectors rather than broad risk sentiment. Energy markets were pressured early in the week by optimism around a potential Russia-Ukraine ceasefire, weighing on oil prices.
Later headlines involving sanctions enforcement and Middle East tensions helped crude stabilize, though energy stocks still lagged for the week. Elsewhere, options-expiration dynamics and positioning into year-end added to short-term volatility without undermining the broader trend.
Company Specific
Corporate news drove much of the week’s volatility. Early weakness in several large technology and AI-linked names extended post-earnings pullbacks, fueling concerns around the pace and profitability of large-scale AI infrastructure spending.
That narrative shifted mid-to-late week after a strong earnings report from Micron Technologies (MU) reignited confidence in AI demand, triggering a sharp rebound across chipmakers and mega-cap tech.
Outside of technology, earnings reactions were mixed, with strength in select consumer, travel, and health-care names offset by disappointment in housing-related and retail stocks.
Year-end Thoughts / 2026 Outlook
As 2025 ends, the market has largely delivered on last year’s optimism. Despite early-year volatility triggered by aggressive tariff announcements, equity markets rebounded strongly once those measures were scaled back.
Notably, valuations look much like they did a year ago. The S&P 500 trades at roughly 22x forward earnings – the same multiple as at the start of 2025 – highlighting that strong earnings growth has justified a premium valuation.
Looking ahead to 2026, earnings expectations remain high, with consensus forecasts calling for roughly 15% growth. This outlook is supported by AI-driven productivity gains, continued strength in mega-cap earnings, active IPO and M&A markets, Fed rate cuts, easing tariff pressures, and resilient consumer spending.
However, momentum has cooled somewhat as investors grow more cautious about AI-related excesses, valuation risk, and heavy concentration in mega-cap technology. Rather than exiting equities, investors have begun rotating into other sectors and into small- and mid-cap stocks—a trend expected to continue in 2026.
The central theme for 2026 is likely rebalancing. Mega-cap tech may still perform, but returns are expected to be more measured, with sharper downside risk if growth expectations disappoint. Broader sectors and smaller-cap stocks could outperform even if index-level gains appear modest.
Risk considerations heading into the new year include the potential for rising interest rates, geopolitical shocks, weaker consumer spending, or a slowdown in AI investment that could derail expectations. Ultimately, earnings growth will determine whether 2026 delivers more of the same or marks a meaningful shift in market performance.
While we give a nod towards expectations, consensus forecasts, and outlooks in terms of understanding the market – We, as long-term investors, are much more focused on adhering to our financial plans and goals.
This year has reminded us, yet again, that it does not pay to try to guess what the market will do. Instead, we maintain confidence in our diversified portfolios and our long-term investment philosophy – the market tends to fluctuate, but over time, it rewards patient and disciplined investors.
Happy holidays and, as always, thank you for your trust.
Respectfully,
Michael Neill, CFA