Markets Digest Mixed Signals After Fed & AI Earnings
U.S. equities moved unevenly last week as investors cheered a rate cut from the Federal Reserve that came with a more relaxed tone than expected alongside growing skepticism around the durability of AI-driven enthusiasm. The S&P 500 slipped modestly on the week, weighed down by late-week weakness in mega-cap technology following mixed earnings and cautious guidance from key AI-linked firms. While headline indices softened, market internals told a more nuanced story, with improving relative performance from small-caps, value, and non-tech sectors, hinting at a gradual broadening beneath the surface.
Early-week volatility was driven by shifting expectations around future Fed leadership, AI-related geopolitical headlines, and mixed economic data. Sentiment stabilized midweek after the Fed delivered a -0.25% rate cut and surprised markets with short-term Treasury bill purchases, reinforcing liquidity conditions into year-end. However, optimism faded again Friday as semiconductor earnings raised questions about near-term AI capital expenditure returns, prompting renewed selling pressure in growth-oriented names.
Overall, price action suggests investors are increasingly differentiating between sectors rather than embracing a broad risk-on stance. Recent pullbacks appear more consistent with rotation and consolidation than the start of a sustained downturn, particularly as non-tech segments continue to attract incremental flows.
Rates, Dollar & Commodities
Longer term Treasury yields edged higher last week, with the 10-year yield hovering just above 4.15% following the Fed’s signal that rate cuts are likely on pause while the U.S. Dollar Index weakened modestly despite generally in-line economic data. Investors took comfort in Chair Powell’s reassurance that rate hikes are not under consideration. The softer dollar offered limited support to select commodities, though broader risk-off flows weighed on industrial metals and energy.
Gold was a notable outperformer, breaking above key resistance levels and attracting defensive inflows amid rising questions about growth momentum and AI-related capital efficiency. In contrast, crude oil continued to struggle, sliding toward 52-week lows on expectations of a 2026 supply surplus and easing geopolitical risk. Industrial metals, particularly copper, pulled back after failing to sustain a breakout above recent resistance.
Takeaway
Last week’s market action reflects a shift from headline-driven optimism toward more selective positioning. The Fed’s decision removed some uncertainty but also diminished a key tailwind that has supported equities since mid-2024. At the same time, AI enthusiasm, while far from dead, has clearly cooled, forcing investors to reassess valuations and return expectations across tech and tech-adjacent sectors.
Gold’s strength, combined with relative resilience in value and small-cap equities, suggests capital is rotating, rather than exiting, risk altogether. While energy and industrial metals remain under pressure, broader financial conditions remain supportive enough to frame recent volatility as repositioning rather than reversal.
With yields elevated, but contained, and the dollar holding within a neutral range, markets appear to be transitioning toward a more balanced leadership structure heading into year-end.
Source: stockcharts.com
This Week- What Matters for Markets
This week marks the final heavy stretch of economic data for 2025, with a strong focus on labor, growth, and inflation trends as markets close out the year. An important release will be the delayed November jobs report, with investors looking for continued, modest job growth that supports a soft-landing narrative without reigniting inflation concerns.
Beyond employment data, November Retail Sales and December flash PMI (Purchasing Managers’ Index) will offer updated insight into consumer spending and business activity. Stability remains the key expectation, as any sharp deterioration could challenge the Fed’s pause stance and unsettle the markets.
Inflation will also be in focus with the release of CPI (Consumer Price index) and Core PCE (Personal Consumption Expenditures). Chair Powell recently downplayed tariff-driven inflation risks, and markets will be looking for confirmation that price pressures remain contained. Absent negative surprises, the data could help support a continued grind higher into year-end, particularly for non-tech sectors.
Broad Overview
Markets are entering the final weeks of the year, navigating a more complex backdrop. Confidence in economic resilience seemingly remains intact, supported by recently stronger employment data, steady consumer demand, and easing inflation pressures. However, the sources of market leadership are evolving.
AI-driven growth has sustained meaningful damage as investors increasingly question whether massive capital expenditures will translate into acceptable returns. While technology remains a critical long-term driver, the tailwinds that propelled outsized outperformance in 2024 and 2025 have moderated. Meanwhile, expectations for additional Fed rate cuts have diminished, removing another layer of stimulus that markets had leaned on.
The bond market continues to signal gradual cooling rather than recession, and the dollar’s neutral range suggests limited currency-driven disruption ahead. As 2026 approaches, the strongest case in years is emerging for broader participation from the “rest of the market,” including value, small-caps, and non-tech sectors.
We’ll continue to monitor these evolving dynamics closely. If you have any questions about your portfolio or the markets, please contact your CIAS Investment Adviser Representative.
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