Investors Weigh Market Rotation and Data Uncertainty

December 22, 2025

Financial Markets

U.S. equity markets ended the week mixed, with the S&P 500 and NASDAQ up modestly and other indices down a bit. A rally on Thursday and follow-through on Friday offset declines from earlier in the week. The rebound was sparked by a significantly cooler-than-expected inflation report and a strong earnings surprise from a key AI-linked company, Micron Technology, a supplier of computer memory chips.

Beneath the surface, market dynamics continue to shift. Early in the week, market-cap-weighted indices declined even as broader market breadth was evenly split between advancing and declining stocks. The more balanced participation across the broader market indicated rotation rather than wholesale risk aversion, with investors reallocating away from concentrated winners toward other areas of the equity market. This pattern highlights the outsized impact that recent market leaders, particularly mega-cap technology and AI-related names, have on overall index performance.

Early-week pressure on AI-linked names was fueled by reports that Oracle’s proposed $10 billion data center project in Michigan was in limbo after financing with Blue Owl Capital fell through. The development raised fresh concerns about Oracle’s AI infrastructure strategy, rising leverage, and tighter lending conditions, with the company’s credit default swaps reaching their highest levels since the Global Financial Crisis. These headlines followed earlier scrutiny of delays in data center development and profit expectations tied to AI investments, amplifying near-term pressure across the space.

That caution eased meaningfully on Thursday, as markets rallied sharply after a cooler-than-expected November Consumer Price Index (CPI) report and a decisive earnings beat and guidance increase from Micron Technology. Together, these developments helped offset recent post-earnings weakness in Oracle and Broadcom, reassuring investors that AI-related demand remains robust despite heightened scrutiny and elevated expectations. The rebound sparked renewed buying in momentum and growth stocks, with AI-linked companies once again assuming a leadership role. This shift lifted the cap-weighted S&P 500 and the tech-heavy NASDAQ Composite into positive territory by week’s end, while underscoring that investor positioning remains active and rotational rather than uniformly risk-seeking.

Economics

The central economic development of the week was a much lower-than-expected November CPI report. Over the two months from September to November, annualized headline CPI decelerated from 3.0% to 2.7%, below the consensus expectation of 3.1%. Annualized core CPI, excluding food and energy, slowed from 3.0% to 2.6%, versus expectations for no change, marking the lowest core inflation pace since March 2021.

However, the report came with important caveats. Many month-over-month, component-level details were missing because data collection lapsed during the government shutdown, and survey operations resumed only in the second half of November. While this raises legitimate questions about precision, the available data still conveyed a clear message of easing inflationary pressure. Shelter inflation, a critical component given its heavy weight in both headline and core indices, slowed to 3.0% year over year, down from 3.6% in September. Although shelter measurement issues remain a concern, the continued deceleration is an encouraging signal of sustained disinflation into 2026.

Early reactions highlighted the report’s dovish implications while underscoring the need for caution given the missing October data. Still, stability in tariff-sensitive categories and the ongoing slowdown in shelter costs were broadly viewed as constructive. Despite the softer inflation print, market-implied expectations for near-term easing moved only modestly. Fed funds futures currently price roughly a 20% probability of a 25-basis-point rate cut in January, up slightly from prior levels. Importantly, essential categories, such as food, energy, shelter, utilities, fuel, and car insurance, continue to rise faster than the headline index, underscoring that cumulative price increases remain a meaningful challenge for low- and middle-income consumers, who experience inflation in absolute terms rather than rates of change.

Labor market data were mixed. November nonfarm payrolls rose by 64,000, exceeding the consensus expectation of a 40,000 gain. However, August and September numbers were revised lower by a combined 33,000 jobs, and October payrolls fell sharply by 105,000—attributed mainly to deferred federal resignation buyout programs during the shutdown. The unemployment rate rose to 4.6%, above the 4.4% consensus and the highest level since September 2021. Notably, the broader U-6 unemployment rate, which includes discouraged workers and those working part-time for economic reasons, jumped to 8.7% in November from 8.0% in September, highlighting more pronounced slack beneath the surface than what was captured by the standard unemployment measure. Average hourly earnings rose just 0.1% month over month, undershooting expectations and bringing the annual pace to 3.5%.

Retail sales data added another layer of nuance. October headline retail sales were essentially flat on the month, below expectations, with prior data revised lower. On a year-over-year basis, sales rose 3.5%, down from 4.2% previously. Gains were concentrated in categories previously pressured by tariffs, including furniture, home furnishings, electronics, appliances, and clothing. Offsetting this strength were declines in auto sales, food services and drinking places, and building materials, the latter reinforcing concerns about ongoing weakness in residential investment.

Conclusion

The past week underscored the crosscurrents shaping today’s market environment. Major equity indices overcame early-week declines with a strong late-week rally, reflecting investor efforts to weigh encouraging disinflation signals against ongoing sector rotation, mixed labor data, and uncertainty about data quality. The inflation report, while clearly softer, carries caveats that warrant caution, even as it strengthens the case for eventual policy easing.

From a portfolio perspective, diversification remains essential. The continued rotation beneath the surface suggests that heavy reliance on any single theme, particularly areas that have already delivered outsized gains, may be less effective as market narratives evolve. This week’s market activity demonstrated resilience amid conflicting forces: supportive inflation data and earnings strength on one hand, and a cooling labor market, uneven consumer signals, and lingering uncertainty on the other. In this environment, selective positioning, disciplined risk management, and vigilance around incoming data remain critical as investors navigate the path ahead.

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