Weekly Market Report: December 19th, 2025
Equity markets took in a full calendar of economic reports to kick off Santa Claus rally season last week, struggling early but rallying toward the week’s end. Markets enjoyed a revival in AI momentum while non-U.S. developed and emerging markets dealt with a strengthening dollar to close the week down 1%. Bond yields and commodity markets both fell slightly on the week with oil prices closing down 1.4% to $56.66/barrel.
Financial Market Highlights
- U.S. equity markets remained buoyant entering Santa Claus rally season with positive AI sentiment combining with economic reports feeding into the Fed accommodation narrative.
- The S&P 500 stands a mere 1.24% below its record high but bond yields have been more stubborn than expected despite Fed rate cuts, falling inflation, and little financial stress. A simple OLS model from Bianco Research suggests 10yr yields should be closer to 3.22%, not 4.15%.
Economic Highlights
- A busy economic calendar last week brought indications of cooling inflation, retail sales, and labor markets, offset by expansionary readings from PMI surveys.
Bullish Asset Allocation Narratives
- Strong consumption with ample room for the consumer to re-lever and market related wealth effects.
- Growth conducive policies including an incrementally less restrictive Fed, OBBB fiscal stimulus, and business friendly deregulation.
- Robust U.S. corporate earnings growth, profit margins, and forward guidance.
- An AI boom including substantial capex and longer-term productivity gains/earnings potential.
Bearish Asset Allocation Narratives
- Risks to consumption due to lower/middle class price fatigue (cumulative inflation), higher interest rates (sluggish housing market), and slowing labor markets.
- Reliance on AI stock momentum, questionable circular AI transactions, unknown AI monetization potential, and a transition to debt financed capital spending and asset intensive business models.
- Tariff and immigration policies introducing longer-term structural headwinds on aggregate demand, trade, and hiring alongside shorter-term goods inflation and sectoral level labor inflation.
- Fed policy mistake of being too restrictive (or accommodative) given labor and inflation dynamics.
- Fading U.S. fiscal thrust beyond Q3’26 with constraints on continuing elevated deficit spending.
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