Resilient Markets Look Ahead to the Federal Reserve Decision

December 8, 2025

Financial Markets

U.S. equity markets finished modestly higher for the week, continuing to hover just below the all-time highs reached in late October. Leadership broadened, with small caps outperforming early in the week and reaching record highs on Thursday. Large-cap stocks, however, regained momentum on Friday, narrowing the performance gap. This strength reflected growing confidence that the Federal Reserve will deliver a rate cut at its meeting this week, an outcome now implied with roughly 80–90% probability in Fed Funds futures markets.

Despite a stream of mixed economic releases, investors appeared comfortable with the prevailing narrative of a resilient but cooling economy marked by steady but bifurcated consumer spending, ongoing disinflation, and continued softening in labor-market momentum. These dynamics have reinforced expectations that the Fed’s next move will be an “insurance cut,” designed to support growth rather than respond to acute economic stress.

Economics

Labor Market

Recent labor-market indicators painted a nuanced picture of both cooling and resilience. The November ADP report showed private-sector payrolls declining by 32,000, a sharp miss relative to expectations for a modest gain and the weakest reading since March 2023. This marked the fourth negative reading in the past six months and reflected particular weakness among small businesses, which have struggled with higher financing costs and softer demand. Separately, announced layoffs tracked by Challenger Gray & Christmas fell in November after a large spike in October. Although year-to-date announcements remain elevated at 1.1 million—the highest level since 2020—the month-to-month deceleration suggests that employers remain cautious but not broadly retrenching. Underneath the aggregate data, joblessness continues to vary significantly by industry, education level, and, more recently, by age. As of September, unemployment among workers aged 20–24 was 9.2%, nearly three times that of workers 25 and older, highlighting the growing challenges facing recent college graduates in particular.

In contrast to these soft spots, jobless claims offered a notably stronger signal. Initial claims fell to 191,000, the lowest level in more than three years and well below consensus expectations. However, continued claims remain elevated near 1.94 million, indicating that while layoffs remain low, displaced workers may be experiencing more difficulty finding new positions. Altogether, the data suggest that the labor market is weakening at the margins but remains fundamentally durable, raising important considerations for the Fed as it weighs whether modest easing can be delivered without risking a resurgence in inflation.

Inflation    

Inflation trends continued to move in a favorable direction. While September’s Core PCE Deflator remains above the Fed’s 2% target, recent three-month annualized measures have drifted into the low to mid-2% range, consistent with steady disinflation. Measures of inflation expectations also moved lower. The University of Michigan’s survey showed one-year expectations falling to the lowest since January, while long-run expectations eased slightly as well. These dynamics, viewed alongside prior shutdown-affected data, reinforce the sense that price pressures are gradually ebbing rather than reaccelerating, even with tariffs filtering through parts of the supply chain. At the same time, the cumulative impact of prior surges in essential categories such as food, energy, shelter, insurance, and clothing continues to weigh heavily on consumers, particularly lower-income households that have struggled to regain purchasing power since the sharp price increases of 2021 and 2022. This lingering strain has contributed to a widening bifurcation in spending patterns, with higher-income consumers maintaining discretionary purchases while more vulnerable households remain under pressure.

Economic Activity

Backward-looking economic data continued to reflect a period of resilient but slowing growth, with the ISM Manufacturing PMI slipping to 48.2 in November, marking its ninth contractionary reading in ten months. Respondents cited subdued demand and tariff-related cost pressures. Meanwhile, personal consumption expenditures decelerated from August but remained positive, consistent with a consumer that is stretched yet still engaged. More current information on holiday shopping, including robust spending on Black Friday and Cyber Monday, underscored this dynamic.

At the same time, several leading indicators point toward the possibility of stabilization and even a modest reacceleration in economic activity on the horizon. Consumer Sentiment improved more than expected in December, lifted by a jump in the expectations component. Regional Federal Reserve manufacturing surveys have begun to turn higher, and banks are reporting modest easing in lending standards, according to the Senior Loan Officer Opinion Survey. Mortgage application activity has also picked up as borrowing rates have declined. Record-setting online Black Friday sales further illustrate that, while selective, consumers remain willing to spend. Layered on top of fiscal support from the recently passed One Big Beautiful Bill, the prospect of a more dovish Fed stance, and the end of quantitative tightening may reinforce these green shoots as the economy moves into 2026.

Conclusion

Taken together, the latest economic data continue to validate the view that inflation remains above target but is moderating, consumers are stretched but not retrenching, and the labor market is weakening but far from unraveling. This combination gives the Federal Reserve room to nudge interest rates lower as a precaution rather than in response to acute stress, a policy stance that historically provides a constructive backdrop for financial markets.

At the same time, important risks persist. Inflation has not fully returned to the Fed’s target, and the burden of higher prices continues to fall unevenly across households and sectors. A sharper slowdown in growth or renewed geopolitical and fiscal uncertainty could quickly shift investor sentiment and weigh on earnings and credit conditions. Additionally, analysts are now anticipating another year of double-digit profit growth—and even the possibility of an acceleration—which, if realized, would continue to support equity valuations. The caveat, however, is that any earnings disappointment, particularly among the mega-cap companies that dominate index performance, could have an outsized negative market reaction.

Against this backdrop, maintaining a disciplined approach, grounded in quality investments, prudent diversification, and a long-term perspective, remains the best way to safeguard assets. While the current environment is broadly constructive, markets are likely to stay sensitive to incoming labor market and inflation data.

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