December 2025 Market Commentary
The rally in risk assets stalled in November. Equity markets experienced their largest drawdown since April. Bubble concerns around AI investment and a repricing of a December rate cut were the key drivers behind the retracement. Despite this, global equities finished the month flat.
Market Overview
The S&P 500 eked out a 0.2% gain in November, bringing its year-to-date return to 17.8%. From an all-time high in late October, the S&P 500 declined over 5% before recovering most of the losses over the final week of the month. Concerns around AI-related valuations and ongoing spending hit growth stocks resulting in the Russell 1000 Growth Index falling 1.8%. Value stocks (Russell 1000 Value) outperformed with a return of 2.7%. Small-cap stocks (Russell 2000 Index) fared relatively better than large-cap stocks with a return of nearly 1% in November.
Foreign developed stocks (MSCI EAFE Index) gained 0.6% in the month, modestly ahead of domestic stocks. Emerging-markets stocks (MSCI EM Index) fell 2.4% in November. The U.S. dollar has remained range bound since the summer, which has had a minimal impact on international returns in recent months. The large decline in the dollar at the start of the year and into Liberation Day was where the majority of year-to-date outperformance for international stocks occurred.
Investment-grade core bonds (Bloomberg US Aggregate Bond Index) rose 0.6% in November as the 10-year Treasury yield drifted lower towards 4%. Lower-quality high-yield bonds (ICE BofA US High-Yield Index) gained 0.5%. Despite equity market volatility, credit spreads remain historically tight, suggesting that the bond market doesn’t see a recession on the horizon. Tight spreads leave coupons as the main driver of credit returns going forward.
Fed Watching
Expectations around a December rate cut shifted meaningfully throughout November. Immediately following the Fed’s 25 basis point rate cut in late October, the market started pricing in a two-third’s probability of a end-of-year cut. However, those odds feel below 30% following hawkish Fed commentary and the release of the October Fed meeting minutes, which showed a sharply divided Fed. Some members supported additional cuts while others wanted to hold rates steady amid higher-than-target inflation. Ultimately, dovish comments, a cooling labor market, and souring consumer sentiment changed the narrative late in the month, and the probability of another 25 basis point rate cut is highly likely (nearly 90%) in December.
The labor market continues to send mixed messages. While October data will likely be omitted from history due to the government shutdown, the unemployment rate continued to creep higher in September, hitting nearly a four-year high at 4.4%. ADP’s jobless claims continue to show hiring in somewhat of a standstill. Private employment in the U.S. has shown losses in four of the last six months. Only July and October have shown payroll gains dating back to the summer. Labor market data seems to reinforce further easing from the Fed despite an inflation rate that currently sits above their long-term 2% target.
Wrapping Up Third Quarter Earnings Season
Earnings season for S&P 500 companies has just about concluded with 96% of companies having reported. Earnings continued their robust trend. Trailing 12-month GAAP earnings jumped 17.5% from the previous year, notching their third straight double-digit growth rate. A solid 81% of S&P 500 companies beat earnings expectations, which exceeds the average beat rate of closer to 75% over the past decade. Based on FactSet data, the S&P 500 is expected to report its highest sales growth rate in three years. The current FactSet estimate is for 8.4% year-over-year sales growth in the third quarter. All GICS sectors had positive sales growth.
Looking forward, earnings growth estimates are for mid-teens growth for 2026. It is likely that these estimates get lowered throughout the course of next year, however, with market valuations as high as they currently are, earnings growth will need to do much of the heavy lifting for the market to achieve double-digit returns.
Overall, corporate America remains healthy despite an uncertain macro and geopolitical environment. Revenue growth continues its positive trend, margins continue to expand and at all-time highs, and overall profitability remains healthy.
Concluding Comments
The economic backdrop remains complicated, but the U.S. economy continues to show an ability to absorb shocks. Policy direction is still in flux, global tensions linger, and certain areas of the market look overly enthusiastic, but the broader economy has proven steady. Corporate results have generally been solid, the labor market, while cooling, has not yet frozen over, and the Federal Reserve has started cutting rates after having been on pause for a couple years. Taken together, these elements point to a slowdown, not a slide into recession. Typically, a Fed easing cycle that does not coincide with a recession is a tailwind for risk assets.
We continue to believe that the current climate calls for a balanced approach. There are positives to point out such as strong corporate fundamentals, continued capital expenditures, easier monetary policy, and fiscal thrust from the One Big Beautiful Bill. However, this is balanced against geopolitical uncertainty, historically high valuations, and narrow market leadership from a handful of companies. With the optimism currently priced into assets, we continue to maintain our measured and diversified stance, not leaning too much in either direction. As always, we are assessing the market environment for opportunities to take advantage of.
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