Key Takeaways
- In the last two weeks, stocks have rebounded from their November sell-off, buoyed by increased optimism that the Fed will cut interest rates next week.
- Tech stocks, weighed down by concerns about an AI bubble, underperformed the broader market last month in a potential sign of “a change of leadership heading into 2026,” according to Bank of America.
The stock market may not be roaring into the most wonderful time of the year, but it is chugging along. Its next big test, however, is right around the corner.
Investors’ attention has for days largely been fixed on Wednesday’s rate decision from the Federal Reserve. Rising optimism that the Fed will cut at its last meeting of 2025—based on futures market data, it’s viewed as a near-certainty—has helped the major indexes recover most of the ground they lost during the volatile first three weeks of November; the major U.S. indexes are within a few percentage points of fresh records as this week draws to a close.
A lot changed below the surface last month. The Magnificent Seven group of tech heavyweights— Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META) and Tesla (TSLA)—nearly entered a technical correction as investors debated whether big tech was spending too much on artificial intelligence. On Nov. 20, a blowout earnings report from Nvidia failed to put AI bubble fears to rest, and the Roundhill Magnificent Seven ETF (MAGS) closed the day 9% below its record high.
Why This Matters to You
It’s not that long ago that there was serious doubt among investors about whether the Fed would cut rates at its December meeting, the last of the year. Now it’s seen as a virtual certainty. That might increase investor appetite for risk assets, but in the runup to the meeting a broader slice of stocks has been climbing.
This year’s least-loved sectors, meanwhile, including healthcare and energy, became leaders. More than 60% of stocks in the S&P 500 outperformed the index last month, compared with just 33% since the start of the year, suggesting “a change of leadership heading into 2026,” according to Bank of America analysts. Eight of the S&P 500’s 11 sectors outperformed the broader index, they wrote, while tech lagged.
The Dow Jones Transportation Average, an index that tracks the stocks of companies that move goods and people around the country, rose for a tenth consecutive day on Friday. According to Dow Theory, that’s a bullish sign for stocks if observed alongside a rising Dow Jones Industrial Average. (The Dow Industrials rose on Friday, and is up nearly 5% over the past two weeks.)
The Fed Faces a Challenging Decision. Traders Expect a Cut
Fed officials are divided on how to proceed. Some policymakers fear that cutting rates too aggressively will stoke inflation, which has run above the Fed’s 2% target for more than four years and reaccelerated in recent months. Others fear that leaving rates unchanged will harm the weakening job market, potentially tipping the U.S. economy into recession. The government shutdown delayed the release of several vital economic reports, leaving officials no choice but to fly partially blind next week.
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The most recent official labor market data that policymakers have sent mixed signals, but data from private sources suggest the job market has continued to soften. The private sector shed 32,000 jobs in November, according to payroll provider ADP. Employers announced more than 150,000 layoffs in October, the highest number for that month since 2003.
Wall Street generally expects the Fed will prioritize employment over inflation next week, moving to bring rates lower. Investors see an 87% chance the Fed cuts interest rates, according to federal funds futures trading data. Just two weeks ago, that figure was 30%.
Update—December 5, 2025: This article has been updated to reflect the end of trading on Friday.