Equities Rally Into Year-End as Investors Balance Opportunity and Risk

December 29, 2025

Financial Markets

The “Santa Claus rally” was in full force this past week, with all of the major equity indexes finishing the week higher. The S&P 500 logged consecutive record closes on Tuesday and Wednesday, with Wednesday marking the index’s 39^th record close of the year. Equity strength was broadly supported by improving sentiment around economic growth and a perception that late-year conditions remain constructive.

The macro surprise of the week came from the long-delayed third-quarter GDP report. Real GDP growth materially exceeded consensus expectations, reinforcing the soft-landing narrative that has underpinned market optimism for much of the year. Stronger-than-expected consumer spending, supported by a stock-market-driven wealth effect among the affluent, was a key contributor, helping offset lingering uncertainty about consumer strength amid ongoing signs of labor market weakening.

At the same time, cross-asset signals were notably more nuanced. Despite rising equity prices, the U.S. dollar weakened and both gold and silver surged to record highs. This divergence suggests investors are simultaneously participating in risk assets while maintaining hedges against medium- and longer-term concerns, including sovereign debt sustainability, uncertainty around the future path of Federal Reserve policy, and ongoing geopolitical conflicts, most notably Russia-Ukraine.

Interest rates reflected this push-and-pull dynamic. Treasury yields spiked early in the week following stronger economic data and a modest repricing of Federal Reserve rate-cut expectations, with markets assigning only a low probability to a January rate cut. However, yields retreated as the week progressed, as investors concluded that the backward-looking data did little to alter the Fed’s near-term policy calculus materially.

Economics

Economic data releases were broadly constructive. The initial read on third-quarter real GDP came in well above expectations, posting the strongest growth rate since the third quarter of 2023. Consumer spending remained the primary engine of growth, underscoring the resilience of household demand through late summer. The persistent strength of equity markets has been a potent stimulant for the asset-heavy, more affluent consumer.

While the headline GDP figure drew attention, most analysts cautioned against placing excessive weight on the report. The data cover the July-through-September period and were further delayed by the government shutdown, limiting their relevance for current policy decisions. As a result, while the growth surprise carried hawkish implications at the margin, it was not viewed as sufficient to alter expectations for eventual rate cuts meaningfully.

Elsewhere, the data flow showed a mixed but generally stable picture. October durable-goods orders disappointed on the headline, driven by weaker defense spending, but core capital-goods orders rose 0.5% and have now increased for seven consecutive months, signaling continued business investment momentum. November industrial production also exceeded expectations, advancing 0.2%.

Labor-market indicators continued to point to a “low-firing, low-hiring” equilibrium. Initial jobless claims fell to 214,000 for the week ending December 20^th, while continuing claims edged higher. ADP private payroll estimates showed further moderation in hiring, with the four-week average slipping to 11,500 jobs from 17,500. These data reinforce the view of a cooling but still orderly labor market.

Consumer sentiment weakened further in December, marking the fifth consecutive monthly decline. Survey respondents expressed a more pessimistic outlook on labor-market conditions, with fewer consumers reporting that jobs are plentiful and more saying jobs are hard to get. Notably, perceptions of current personal finances turned negative for the first time in four years, a development worth monitoring as it may signal emerging caution among households.

Federal Reserve commentary reflected the ongoing internal debate. Governor Stephen Miran, a recent Trump appointee and among the more dovish voices on the Committee, said that while the urgency for aggressive easing has diminished after recent rate cuts, further reductions are still likely warranted. He cited continued progress on shelter disinflation and warned that delaying additional cuts could increase the risk of a future economic downturn. In contrast, Cleveland Fed President Hammack reiterated a more hawkish stance, favoring a pause to assess the cumulative impact of recent cuts and stressing that inflation remains uncomfortably close to 3%. Market pricing reflects this tension. Expectations for rate cuts through 2026 have flattened modestly, with futures markets now anticipating fewer total cuts than earlier in the month.

Conclusion

The holiday-shortened week reinforced a broadly constructive year-end narrative. U.S. equities advanced to fresh highs as investors digested a notable upside surprise in third-quarter GDP and a steady, though cooling, labor market. Growth momentum appears sufficient to sustain optimism without materially altering the Federal Reserve’s cautious, data-dependent stance.

At the same time, cross-asset signals point to a more nuanced investor mindset. A softer U.S. dollar and record-high precious metals suggest that while equity participation remains strong, many investors are simultaneously hedging against medium-term policy uncertainty, inflation credibility concerns, and unresolved geopolitical risks.

For long-term investors, the message remains one of balance. Equity momentum is positive heading into year-end, market participation is broadening, and defensive hedges are working as intended. As the calendar turns, investor focus will increasingly shift toward Federal Reserve communications, midterm election policy rhetoric, and early-2026 economic data to assess whether late-2025 strength can extend beyond seasonal support into a more durable expansion, allowing companies to grow into elevated expectations and valuations.

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