Markets Rally to New Highs as the Fed Delivers Widely Anticipated Cut

December 15, 2025

Financial Markets

Equity markets marched to fresh highs last week, with the S&P 500 (market-cap-weighted and equal-weighted), Dow Jones Industrial Average, and small-cap S&P 600 all closing at record levels on Thursday. Markets pulled back on Friday, and both the cap-weighted S&P 500 and the NASDAQ ultimately finished the week lower, underscoring the extent to which leadership has continued to rotate away from the largest, AI-exposed names and toward a broader set of sectors and market caps.

The Federal Reserve delivered a widely expected 25 basis-point cut on Wednesday, lowering the Federal Funds target range to 3.50%–3.75%. This marks the third reduction of 2025 and reinforces the Fed’s shift toward a risk-management orientation. While policymakers signaled only limited further easing next year, markets responded favorably to Chair Powell’s press-conference remarks, which were less hawkish than feared and emphasized the Fed’s willingness to offset a cooling labor market within the framework of its dual mandate of full employment and price stability.

Under the surface, the ongoing leadership rotation in equity markets remained a defining feature of the week. AI-heavy technology stocks came under pressure after Oracle’s expanded AI-capex plans and Broadcom’s updated AI margin commentary sparked renewed concerns about the durability of ultra-high AI spending. This weighed on several of the year’s most popular and widely owned beneficiaries of the AI boom. In contrast, financials, materials, industrials, small caps, and other cyclical areas outperformed, benefiting from improved rate-cut visibility and attractive relative valuations.

In fixed-income markets, Treasury yields initially climbed ahead of the meeting, with the 10-year briefly surpassing 4.2%, its highest level in more than two months, as investors priced in both the expected rate cut and uncertainty about the 2026 policy path. After Wednesday’s decision and the Fed’s announcement of upcoming Treasury bill purchases, yields eased across the curve, with the 2-year settling near 3.5% and the 10-year near 4.1%. These moves suggest that investors saw the combined rate cut and liquidity support as helpful but not the start of a rapid easing cycle. Nonetheless, longer-term yields resumed their upward trend into the week’s end, causing a slight steepening of the 2s–10s curve and indicating some reassessment of medium-term growth and inflation prospects.

Economics

The week’s main economic event was the Federal Reserve’s third consecutive rate cut of 2025. Even though the outcome was widely expected, the meeting was one of the most divided in recent years. Three FOMC members formally dissented: two preferred no cut, and one supported a larger 50 basis-point reduction. This was the first time since 2019 that there were three dissenting votes in different directions. These dissents highlight ongoing uncertainty about the appropriate pace of easing, especially since official inflation data for October and November are unavailable due to the government shutdown.

The Committee’s statement offered little urgency about the next move, noting that members continue to debate “the extent and timing of additional adjustments.” The updated Summary of Economic Projections (SEP) reinforced this caution. The Fed’s median outlook still shows only one interest rate cut in 2026, unchanged from September’s meeting, while individual projections revealed unusually wide divergence. Forecasts for unemployment remained steady at 4.4%, inflation expectations edged slightly lower, and growth projections moved modestly higher—an incremental improvement, but not enough to meaningfully shift the longer-term policy debate.

One notable development was the Fed’s announcement that it will begin purchasing $40 billion worth of Treasury bills per month. Framed explicitly as a technical step rather than a policy signal, the added liquidity still provides some support to financial conditions during a time when market functioning and reserve balances have been key areas of focus.

Market reaction was also influenced by Chair Powell’s press conference remarks, including his view that federal jobs data may be overstating employment strength by as much as 60,000 jobs per month. If true, this suggests that job growth has been slightly negative rather than modestly positive recently, supporting the Fed’s case that precautionary easing is justified even before inflation reaches its target.

Globally, the monetary policy landscape is tilting more hawkish. Australia, Canada, and New Zealand joined Japan last week in seeing higher policy rates priced into their respective forward curves, while European Central Bank (ECB) official Isabel Schnabel stated she is comfortable with market expectations for a potential next move being a hike. The Reserve Bank of Australia left rates unchanged but flagged upside inflation risks, and ahead of next week’s expected Bank of Japan hike, Governor Ueda offered no pushback, citing Japan’s resilience to U.S. tariff shocks and inflation that continues to move toward the target.

Against this backdrop, the Fed’s comparatively less hawkish tone stands out, offering a counterbalance to the global drift toward tighter stances while maintaining its commitment to a data-dependent approach.

Conclusion

Equity markets are entering the final stretch of 2025 from a position of notable strength. Record highs in the S&P 500 and the Dow, combined with improving breadth due to participation from small caps and value-oriented cyclicals, depict a healthier, more balanced market landscape. The Fed’s latest move reduces the risk of overtightening. It reaffirms a willingness to support the economy as labor-market conditions cool. However, the unusually high number of dissents highlights increasing internal debate and suggests that the bar for additional cuts may now be higher. The ongoing rotation away from the most richly valued AI beneficiaries toward a broader set of sectors underscores the importance of balanced equity exposure across styles, sectors, and market capitalizations, which is a positive sign for diversified, long-term investors.

In short, monetary policy is incrementally more supportive, leadership is expanding, and the economic environment, though mixed, remains resilient enough to sustain market momentum, provided inflation stays controlled and global risks do not escalate. As we near the New Year, investors will focus on the appointment of a new Fed Chair and the 2026 U.S. midterm elections.

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