U.S. stock indexes are poised to end 2025 with solid gains, but the benchmark S&P 500 has taken an unusual detour in December, moving lower against its historical reputation as a strong month for equities. This shift comes as investors grapple with two dominant themes: the sustainability of enormous corporate investments in artificial intelligence infrastructure and changing expectations for when the Federal Reserve might cut interest rates again in 2026.
Data Deluge and Fed Policy Shape Investor Sentiment
Markets digested a heavy batch of economic data this week, much of which was delayed by the recent 43-day federal government shutdown. A report on Thursday showed the U.S. consumer price index increased less than expected in the year to November, offering a sign of cooling inflation. However, analysts caution that the data may be distorted, as collection was delayed into late November when retailers offered holiday discounts.
Employment figures revealed job growth rebounded in November, but the unemployment rate climbed to 4.6 per cent, marking its highest level in over four years. This mixed picture leaves investors parsing information for clues on the central bank's next moves. The Fed has already cut rates at three consecutive meetings.
"This week’s economic data solidifies expectations that the Fed will have a rate-cutting bias," said Angelo Kourkafas, senior global investment strategist at Edward Jones. He added that while profit-taking after a strong year could create selling pressure, the latest data "likely provide a green light for the Santa Claus rally to take place this year."
AI Enthusiasm Meets Mounting Skepticism
The technology sector, which has powered the market's advance for much of the year, has recently shown signs of fatigue. Questions this week about a data-center project from Oracle weighed on tech and other AI-related stocks. The core concern for investors is when the massive capital expenditure on AI infrastructure will begin to generate tangible returns.
"You’re starting to just see this skepticism around the AI spend becoming more prominent," noted Mark Luschini, chief investment strategist at Janney Montgomery Scott. He pointed out that tech stocks' "disproportionate representation in the cap-weighted index at large is helping to put some pressure on the tape."
Despite the recent pressure, the S&P 500 remains up more than 15 per cent for 2025, on track for its third consecutive year of gains exceeding 10 per cent.
Sector Rotation and the Santa Claus Rally Watch
As money has rotated away from the high-flying tech sector, other areas of the market have stepped up. Economically sensitive sectors such as transportation, financials, and small-cap stocks have all moved higher in December, helping to keep the broader market range-bound.
"We’ve seen money move away from tech," confirmed Kourkafas. "Other areas have stepped up and have helped keep markets mostly range-bound."
All eyes are now on the potential for a "Santa Claus rally." According to the Stock Trader’s Almanac, since 1950, the S&P 500 has risen an average of 1.3 per cent during the last five trading days of the year and the first two in January. This year, that period runs from Wednesday, December 31st, through Monday, January 5th.
Looking ahead, the holiday-shortened trading week will see focus remain on the AI trade and upcoming economic reports, including third-quarter gross domestic product, durable goods orders, and consumer confidence data. The key question, as framed by Trevor Slaven of Barings, is the path ahead for the Fed amid data distortions and an "unsettled argument" between the direction of major central banks and inflation trends.
