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MARKET COMMENTARY

December 12, 2025

Fed Rate Cut Fuels Record Highs, AI Stocks Lag

The Santa Rally picked up steam this week on the Fed’s December rate cut with hopes for more easing to come in 2026. The Dow Jones Industrial Average, S&P 500, and Russell 2000 Index all hit record highs as the great rotation out of tech stocks and into undervalued corners of the market accelerated. Bonds ended the week with modest losses as Treasury yields moved higher in anticipation of the Fed pausing its rate-cutting cycle with the central bank forecasting just one rate cut next year.

Key Data: 

  1. The Federal Reserve lowered interest rates for the third straight time, bringing the benchmark range to 3.50% and 3.75%. The move comes as the Fed pivots in order to focus on boosting the jobs market and away from the inflation fight, believing that conditions are restrictive enough that pricing pressure will ease further in 2026. The central bank also announced it would start buying short-term bonds, expanding its balance sheet once again (easing). The move is aimed to head off recent bouts of pressure in short-term lending markets. The goal is to minimize strains in the overnight repurchase agreement market (“repo”) by bolstering banks’ access to reserves—a cash-like currency that banks keep on deposit at the Fed and can trade among themselves. Banks have been hesitant to tap the Fed’s repo facility due to concerns over being stigmatized by regulators and the market at large. The Fed’s bond buying should enable a steady supply of reserves and keep interest rates aligned with the central bank’s interest rate benchmark level.

  2. Small businesses were feeling more optimistic in November. The NFIB Small Business Optimism Index increased 0.8 points to 99, above its 52-year average of 98. The increase was driven primarily by businesses expecting real sales to be higher and for plans to increase employment over the next three months. Overall, 64% of small businesses reported good or excellent conditions on solid consumer spending as well as the massive level of AI investment.

  3. Gold shrank the U.S. trade deficit in September to a five year low of $52.8 billion. Earlier in the year, dealers had rushed to purchase gold bars abroad and store them stateside amid concerns the Trump administration’s tariffs would apply to gold. On August 11, the administration announced gold would be exempted from tariffs. That lead investors to reverse course, moving gold back overseas and driving the deficit lower (higher export value due to gold inventory redistribution abroad). On the month, $6.1 billion in gold shipments were exported, making up most of the $8.4 billion increase in total exports. Consumer goods, including pharmaceuticals, accounted for the remainder of the sales to international partners. The bottom line is that gold distorted the headline figure and the U.S.’s demand for imports continues unabated while true export growth has not materially narrowed the gap. 

Fed Rate Cut Fuels Record Highs, AI Stocks Lag

Wall Street bells were ringing as the Federal Reserve gifted investors with a December rate cut and left hopes for more easing in the year ahead. The Dow, S&P 500, and Russell 2000 indexes all rallied on the news and scored record highs on Thursday. The Nasdaq Composite, however, slipped on Thursday as the AI trade lost momentum once again on disappointing earnings from Oracle which dragged down AI peers Nvidia and Broadcom. Friday brought more bad news for AI bulls as investors grew concerned over margin compression at Broadcom despite the company having posted stellar earnings growth the day prior. A light week on the economic front meant markets were firmly focused on the Federal Reserve’s interest rate moves. The December rate cut was widely expected and markets are now expecting more easing next year. Fed Chair Powell in his post-FOMC press conference tried to temper expectations, however, suggesting a slower pace of cuts ahead as the central bank remains data dependent. Markets broadly dismissed the comments as Powell is expected to be on the way out with his term expiring in May. The new Fed Chair is likely to be handpicked to lean more dovish and be more closely aligned with the administration’s desire to lower borrowing costs. Lower rates should go a long way in helping folks feel better about their financial situation as midterm elections loom. More spending should lead to more hiring, lifting the jobs market for millions of Americans struggling to find work. With a Fed pivot in hand and 12 trading days left in the year, it seems little stands in the way for the Santa Rally to continue into year-end. 

The Week Ahead

Key reports include non-farm payrolls, CPI, and retail sales. 

‘Tis the Season

In the spirit of the season, the Probity Advisors family, including our team members, children, and spouses, gathered once again for a heartwarming and memory-making holiday celebration. Our office transformed into a festive hub of cheerful merriment.

This year, one of our conference rooms became a bustling wreath-making workshop. A classic Christmas movie played in the library, and a variety of games kept guests of all ages entertained—including a new favorite: the claw machine, which quickly became a huge hit. Throughout the evening, we enjoyed meaningful conversations, deepened connections with colleagues and friends, and reflected on the individual and collective accomplishments that made this past year so special. The warmth and camaraderie were a powerful reminder of how fortunate we are to be part of such a caring and committed team.

Our celebration also featured a fabulous dinner prepared by the incredibly talented Chef Jeff Qualls of Roots Table, delighting everyone with a memorable culinary experience. And of course, no holiday gathering would be complete without a touch of magic—Santa Claus made a special appearance, delivering gifts and filling the room with excitement and plenty of holiday cheer.

As we prepare to welcome 2026, we want to express our deepest gratitude to our clients and our community. We wish you a holiday season filled with joy and happiness, and a new year overflowing with peace, prosperity, and meaningful moments.

We look forward to continuing to be of service to you in the year ahead and beyond.

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