Stocks used the upbeat mood of a holiday-shortened week to push prices sharply higher as markets grow more confident that the Fed will pull the trigger on a December rate cut. Tech and retail stocks led the rally, indicating broad risk-on sentiment heading into the holiday season, even though some signs of economic and labor market weakness loom in the background. December is traditionally a good month for equities and investors remain confident that the overall economy is on the right trajectory.
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Market Moves
Weekly Market Snapshot:
- S&P 500: +3.7% – the index delivers its best week in months as the odds of a December rate cut go from questionable to probable.
- Nasdaq 100: +5.0% – tech leadership is a strong sign of positive investor sentiment even though valuation questions remain.
- Russell 2000: +5.5% – small-cap outperformance suggests that investors may be buying more into the long-term growth story than before.
- VIX: 16.4 – a couple weeks of elevated volatility raised short-term caution flags, but last week marked the return of normal market conditions.
- Gold: +3.7% – precious metals managed to defy their safe haven reputation and score a big rally right alongside equities.
- 10-Year Treasury Yield: 4.02% – Treasuries often dip when stocks rally hard, but the higher odds of Fed rate cuts actually helped pull yields slightly lower.
Drivers:
With little new information to work with and many traders on vacation, the simple combination of confidence in the economy and confidence in Fed rate cuts were enough to drive big gains.1 That likely changes in the coming weeks as the government catches up on its data releases and the market gets more information to work with. Outside of pockets of weakness, we don’t really have any major signs that the economy is slowing and that’s provided a baseline of support for equity rallies.
Economic Highlights
A couple of the notable themes that stood out this week:
Soft Retail Sales Point to a Slowing Consumer Ahead of the Holidays
The delayed September retail sales report showed that consumers are still spending but not at the rate the markets are expecting. Sales climbed by 0.2%, missing estimates for a 0.3% improvement.2 Given that several major retailers have already warned about soft spending heading into the all-important holiday shopping season, it raises concerns that consumers may not be able to fuel the next leg of an economic expansion. The K-shaped economy is a real thing. High earners continue to do quite well, while low earnings are still struggling to make ends meet.
Falling Consumer Sentiment Signals Trouble for Holiday Retailers
Consumer confidence continues sinking to near-record lows and remains one of the economy’s biggest red flags. In November, the monthly survey report produced its lowest reading since mid-2022 and one of its lowest readings ever.3 Among the primary reasons cited by the institution’s director were persistent high prices, weakening income and fallout from the government shutdown. With big box retailers, such as Target and Lowe’s, already indicating their own struggles with luring shoppers back into stores, there should be real concern here about how far stocks can rise without much consumer support.4,5
Producer Inflation Slows Unevenly, Keeping Fed on Alert
Producer price inflation shows signs of easing, although it’s happening very unevenly. The headline rate increased by 0.3% month-over-month, but the core rate rose only 0.1%.6 This signals relatively tame inflation growth and could support the Fed’s rate cut case, but goods inflation will be a red flag. That number jumped 0.9% and should be a pretty clear statement that the inflation problem is not solved. The Fed will likely be more concerned about inflation on the consumer side. This may not influence the odds of what the Fed does next month, but it should continue to be monitored.
Year-End Check: Markets Shake Off Tariff Shock and Recession Warnings
As we start to wrap up 2025, it’s a good time to reflect on what has been over the past year. The more dire warnings of an economic slowdown and possible recession have largely failed to materialize. That’s helping push the S&P 500 to its third consecutive year of double digit gains (if this year is able to hold).
The only real shock came in the spring during President Trump’s Liberation Day tariff spree. That sent stocks sharply lower, but a quick walkback of the stiffest levies quickly sent equity prices higher again. There are troubling signs from the labor market and the manufacturing sector is still weak. But support from the Fed and ongoing AI productivity gains present another bull argument for 2026.
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The Week Ahead
A few themes to watch next week:
In Summary
Markets ended the week on a strong note as rate cut optimism fueled big gains. Next week will mark a return to normal featuring much more economic data to digest. Inflation data will probably be front and center, but it’s unlikely to change the calculus for the Fed’s December rate decision.
For now, investors seem re-focused on the Fed rate cut narrative, but it’s starting to feel fully priced in.
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