Weekly Recap:

by Michael Reinking, CFA & Eric Criscuolo

Published on 12/12/25

The two primary topics in market circles recently have revolved around AI and the Federal Reserve. This week there were major catalysts on both fronts, making it a pivotal week for the rest of 2025. After the volatility of November, equity markets have been trading in a tight range in anticipation of this week’s FOMC policy decision. Traders didn’t want to get too far out over their skis ahead of this catalyst. There were plenty of conversations about taking down risk for the remainder of the year or how to best ride the hoped for Santa Claus rally.

As the market tends to do it didn’t give a straightforward answer. In the aftermath of the Fed’s highly anticipated rate cut equities moved higher as Chair Powell wasn’t quite as hawkish as feared and there was a dovish shift in the central bank’s balance sheet management. This sent most major indices to fresh YTD highs yesterday. However, the bigger story of the week was the violent rotation. The central bank action was partially behind that, but the other big factor was the building concern around the AI trade while some year end flows, think Dogs of the Dow theory, were likely at play as well. 

This week there were a ton of headlines around this topic and we had a front row seat at the New York Stock Exchange for one of them. Yesterday, Time Magazine announced 2025 Person (or People) of the Year - the Architects of AI. From a market perspective AI has been the biggest driver of US market performance over the last couple of years. The AI trade has been evolving since Open AI’s Chat GPT burst onto the public scene at the end of 2022. It initially drove performance in the “picks and shovels” of the industry namely chips with the primary beneficiary being Nvidia. However, over the last year and change it has had a broader impact not only within markets but also helping to drive economic growth as capital spending levels have gone parabolic. This has fueled gains across companies that are impacted by the buildout of datacenters and the energy infrastructure needed to power them.

Up until the last couple of months that capex spending has primarily come from cash flow at the hyperscalers, but we’ve increasingly seen companies start to tap credit markets. In addition, there were many more circular funding arrangements and partnerships being announced within sector. Investors increasingly drew parallels to the late 1990’s as valuations have gotten stretched with the S&P 500 coming off of back-to-back years of >20% gains and within striking distance of extending that streak this year.

The AI trade is starting to evolve again as the rising tide is no longer lifting all boats. As competition heats up (Nvidia chips vs. Google’s TPUs or Chat GPT vs. Gemini) investors are increasingly looking for the winners and losers. We’ve also hit a tipping point where increasing investment levels are no longer being blindly applauded with the focus shifting to returns on that investment and risks involved if spending slows down or the expected end demand doesn’t fully materialize.

It is somewhat ironic that on the week of the Time announcement the AI trade came under siege, or maybe there is something to the Barron’s/Madden Football cover curse. The other headlines this week included the administration approving the export of Nvidia H200 chips to China which is apparently being met with strong demand but reticence by local regulators. Chat GPT 5.2 was released after Alphabet’s Gemini 3.0 received rave reviews over the last few weeks. The two biggest earnings reports within the space (ORCL/AVGO) were met with disappointment partially related to sky high expectations and continued concerns that investment to increase capacity is not flowing to the bottom line yet.  

We’ll briefly cover this week’s Fed meeting but for a broader discussion check out our Fed Recap. This has been an overhang for markets over much of the last two months as the members of the Committee publicized their varying opinions for the path of monetary policy going forward. This drove quite a bit of volatility during the month of November up until November 21st when NY Fed President Williams speech signaled to traders that a cut would be forthcoming which kickstarted a rally in equity markets in the final week of the month reversing the earlier losses. The expectation was that Committee would deliver a hawkish cut whereby they cut rates but signaled that the bar for further easing would be significantly higher.

We did get that rate cut but Chair Powell wasn’t quite as hawkish as feared and there was a dovish surprise in the central bank’s balance sheet management as the committee concluded that reserves balance had declined to ample levels and as such the Fed would begin purchasing $40B a month of primarily T-Bills starting at the end of this week through April, at which point the purchases are expected to be reduced. So just on the heels of QT winding down the balance sheet will start to grow again. This was not meant to be a stimulative measure but rather to ensure that the financial plumbing continued to work properly as some strains had begun to show up in the system. The impact of that added liquidity is heavily debated within financial circles.

During his press conference Chair Powell noted that with the dual mandates in tension “there is no risk-free policy path” and the Committee decided to cut as the labor market was softening a bit more than they had previously expected. He believes the Committee is well positioned to wait and see how the economy evolves from here now that the policy rate is within the plausible range of neutral which is a hawkish shift. He once again maintained optionality not outright taking anything off the table and noting there will be a lot of data before the Fed meets again in January including next week’s delayed government jobs, inflation and retail sales reports. However, he did de-emphasize that data as he warned there will likely be large distortions. 

Over the last year the AI trade has seemingly crowded out investment dollars in other areas of the market (see the chart below looking at performance since Chat GPT hit the mainstream. The increased scrutiny of AI along was probably the biggest driver of this week’s rotation. The second factor is the growing hopes for an economic re-acceleration next year due to a mix of supportive monetary and fiscal policy as the impact of the OBBB start to kick in. The last factor which is also playing out is positioning as we approach the end of the year as tax loss selling runs its course and investors begin to position for mean reversion of underperforming assets. Below we’ve broken down performance of stocks within the S&P 500 into quartiles through the end of November and since the start of December highlighting this dynamic. 

Over the last year the AI trade has seemingly crowded out investment dollars in other areas of the market. See chart below looking at performance since Chat GPT hit the mainstream.

The increased scrutiny of AI along was probably the biggest driver of this week’s rotation. The second factor is the growing hopes for an economic re-acceleration next year due to a mix of supportive monetary and fiscal policy as the impact of the OBBB start to kick in. The last factor which is also playing out is positioning as we approach the end of the year as tax loss selling runs its course and investors begin to position for mean reversion of underperforming assets. Below we’ve broken down performance of stocks within the S&P 500 into quartiles through the end of November and since the start of December highlighting this dynamic. 

For the week value value outperformed growth and small outperformed large. With the backdrop we discussed above you won't be surprised to see info tech and communication services as the worst performing sectors with Netflix also weighing down the latter amidst the ongoing Warner Bros.saga. Yield oriented REITs and Utilities also closed lower with the back up in long dated Treasuries. Utilities also got pulled lower with the AI downdraft.

Materials led to the upside. Fertilizer stocks moved sharply higher after a report that Ukraine struck Russian facilities. There was also strength in chemical and metals stocks. Financials also outperformed with insurance higher after some takeover rumors and generally positive corporate updates at conferences this week. Within Industrials airlines and freight and logistics stocks traded well. GE Vernova also raised guidance at its Investor Day sending the stock to fresh all-time highs.

Beyond the Fed meeting, employment data headlined the macro calendar during a relatively quiet week. Weely initial claims jumped from 192k to 236k, well above expectations. However, continuing claims showed a sharp decline. Thanksgiving could be affecting both series’ as it’s a part of the prior week data for initial claims, and this week’s data for continuing claims. Averaging the two initial claims reports gives you 214k, a little below the 4-week average of 216.75k. The JOLTS data for October showed job openings unexpectedly jumped to 7.67ml from 7.227ml. Layoffs and discharges ticked up very slightly to 1.2% but remains at historically low levels.

The weekly ADP employment report showed 4.75K jobs/week were added during the four weeks ending November 22. This was better than the last weekly report on 11/25 that showed a decline of 13.5k/week. It was also an improvement from the Monthly report on 12/3 showing a loss of 32k jobs in November (the weekly isn’t published the weeks that the Monthly numbers come out).

Inflation expectations in the NY Fed Consumer Expectations survey were unchanged across the 1,3 and 5y time horizons (3-3.2%). The mean perceived probability of losing one’s job in the next 12 months decreased slightly to 13.8%, the lowest since December 2024.

The Fed Blackout Window ended, allowing for the first batch of public appearances post-meeting.  KC Fed President Schmid published his Dissent Statement, and the following sentence sums up his stance: “Inflation remains too high, the economy shows continued momentum, and the labor market—though cooling—remains largely in balance.”

Chicago Fed President Goolsbee was the second dissenter that preferred no cut. In his comments, he focused on the opportunity to let disinflation play out in the data before resuming cutting in Q1, saying, “we don’t take a lot of risk by waiting…”  

Philly Fed President Paulson, who will be a voter in 2026, said she was a little more concerned about labor market weakness than upside inflation risk, but also underscored that “it is really, really important that we bring inflation all the way back to 2%.” Cleveland President Hammack, another 2026 voter, said she would prefer policy to be a little more restrictive than the current level.  

Speaking of the Fed, the board of governors voted to reappoint 11 reserve bank presidents to new five-year terms. The 12th Fed President, Atlanta’s Bostic will be retiring at the end of the current term. That’s normally not a big, newsworthy event but in light of the highly politicized environment currently surrounding the Fed, it’s attracting more attention.

That brings us to a more broader look at rates. Global yields have backed up during December. US, Germany and France have seen 10 and 30y yields rise 15-20bp. The short end has also backed up ex-US by around 10bp across several major geographies. However in the US, the 2y has only moved about 3bp higher MTD, and this week saw the 2y decline 4bp on the heels of the Fed cut, pushing the curve steeper by ~10 more bp, reaching YTD highs.

The US Dollar Index saw further declines following the latest Fed rate cut. The index was unable to regain the 200d and 50d ma and ended the week testing support at the 100d. The Dollar’s weakness versus the Euro was the primary driver as central bank rate paths evolve post-FOMC (cut) and upcoming ECB (moving hawkish) decisions. The Dollar saw modest gains versus the yen while weakening against the Swiss Franc.

Next week is the last full trading week of the year, only 11.5 more trading days in 2025. The week will be full of economic data including the delayed government data and the December flash PMIs. There are also multiple central bank rate decisions including the BoE, ECB and BOJ. Next Friday is the last big liquidity event of the year with Triple Witch Expiration and the S&P Quarterly Rebalances while the CRSP rebalance begins on Wednesday. Happy Chanukah to those who celebrate. Have a great weekend!

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