The rally was characterized by calm, steady progress—a notable shift from the volatility that dominated early November. The S&P 500 finished just 0.3% below its record closing level, briefly surpassing the mark during Friday's session before paring gains. The VIX volatility index fell to 15.41, down from 16.35 the previous week, signaling reduced investor anxiety.
Macro & Policy: December Rate Cut Odds Surge to 87%
The primary catalyst for the week's measured advance was a decisive shift in Federal Reserve policy expectations. After weeks of uncertainty and divided commentary from Fed officials, markets have now priced in an 87% probability of a 25 basis point rate cut at the December 9-10 FOMC meeting.
This dramatic repricing was driven by several key developments:
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Delayed Economic Data Signals Dovish Path: The long-delayed September PCE inflation report—held up by the 43-day government shutdown—showed core inflation rising just 0.2% month-over-month and 2.8% year-over-year. Both figures met expectations and remained below Fed comfort zones, arriving just days before the blackout period to provide critical support for a cut.
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Weakening Labor Market: Multiple data points painted a picture of deteriorating employment conditions. The ADP private payrolls report shocked markets by showing a loss of 32,000 jobs in November, the largest decline in months. The Chicago Fed's alternative unemployment estimate held steady at 4.4%, while Revelio Labs reported consecutive months of job losses concentrated in retail, leisure, and hospitality.
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Dovish Fed Commentary: Key policymakers, including New York Fed President John Williams, Fed Governor Christopher Waller, and San Francisco Fed President Mary Daly, all signaled openness to additional easing, citing labor market softening as justification for continued accommodation.
Major Wall Street institutions reversed their hawkish calls mid-week, with Morgan Stanley, JP Morgan, and Bank of America all switching to expect a December cut. However, analysts warn that any cut will likely be "hawkish"—accompanied by language suggesting a higher bar for future easing in 2026.
Bond Markets: Yields Rise Despite Rate Cut Optimism
In a counterintuitive move, Treasury yields rose during the week despite growing rate cut expectations. The 10-year Treasury yield climbed to 4.138% by Friday, up 12 basis points from the prior week—the largest one-week gain since April.
Credit spreads remained historically tight, with the ICE BofA US High Yield Index option‑adjusted spread near 2.9%, well below its long‑term average of roughly 4.9%, indicating no systemic stress despite elevated valuations.
Technology & AI: A Reshuffling of Leadership
Unlike the broad technology-led surges of previous years, 2025 has seen a significant divergence in mega-cap performance.
Alphabet (Google) has emerged as the clear leader for the year, boasting a dominant +68% year-to-date gain fueled by the successful rollout and monetization of its Gemini 3 AI model.
The "Magnificent Seven" moniker is also being challenged by the ascent of Broadcom, which has surged +64% year-to-date, recently eclipsing Tesla in market cap to prompt calls for an "Elite 8." Nvidia remains a powerhouse with a solid +34.0% gain, while Microsoft (+15.5%) and Apple (+13.1%) have posted more modest returns. Meanwhile, Tesla and Meta continue to trail the group, highlighting that investors are becoming more selective about AI execution.
Corporate Spotlight: Earnings and M&A Drive Headlines
The week featured several standout corporate developments that captured market attention:
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Netflix-Warner Bros. Mega-Deal: In the week's most consequential announcement, Netflix agreed to acquire Warner Bros. studios and HBO for $72 billion in equity ($82.7 billion enterprise value). The blockbuster transaction gives Netflix control of iconic franchises including Batman and Harry Potter. Given the regulatory hurdles, Netflix has committed to a massive $5.8 billion reverse breakup fee, signaling high confidence in the deal's approval.
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Salesforce Soars on AI Momentum: Salesforce shares surged 13% for the week after reporting adjusted earnings of $3.25 per share and strong guidance. CEO Marc Benioff highlighted that 362 customers expanded their Agentforce AI agent purchases in Q3—up from just three in Q1—signaling accelerating enterprise AI adoption.
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Ulta Beauty Shines: The cosmetics retailer jumped nearly 13% on Friday after reporting Q3 earnings of $5.14 per share (beating estimates of $4.64). Ulta raised its full-year guidance for the second consecutive quarter, citing strong beauty engagement despite broader consumer caution.
Economic Data: Holiday Spending Resilient Amid K-Shaped Recovery
Black Friday and the Thanksgiving shopping period delivered encouraging signals for the consumer economy, though spending patterns revealed stark income-based divisions:
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Record Holiday Spending: Adobe Analytics reported a record $11.8 billion in online spending on Black Friday (up 9.1% Y/Y), with the five-day Thanksgiving period generating $44.2 billion in online sales.
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K-Shaped Consumer: While the National Retail Federation expects holiday sales to exceed $1 trillion, the aggregate strength masks divergence. Affluent shoppers are driving growth at premium retailers, while middle-income households are trading down to value chains and increasingly utilizing buy-now-pay-later financing.
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GDP Outlook: Despite the government shutdown's lingering effects, Q2 GDP growth was revised upward to 3.8% annualized. However, economists expect Q4 growth to slow as shutdown-related disruptions weigh on activity.
Valuation Reality Check: Market Priced for Perfection
With the S&P 500 approaching new highs, valuation metrics flash elevated warning signals:
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Multiple Expansion: The S&P 500 trades at a forward P/E of approximately 27.5x, well above the 5-year average of 22.5x. The Shiller CAPE ratio stands at 40.01—the second-highest level in history, exceeded only during the dot-com bubble.
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Historical Warning:Markets have registered CAPE readings near or above 40 only a small fraction of the time since 1957—on the order of just a few percent of all months—underscoring how unusual today’s valuations are. Historical studies of those elevated episodes show that the S&P 500’s average real return over the subsequent three years has tended to be weak and often negative, even though the range of outcomes is wide and does not preclude positive returns.
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Counterargument: Bulls point to improving fundamentals—83% of S&P 500 companies beat Q3 earnings estimates—and argue that AI-driven productivity gains may justify structurally higher multiples.
Looking Ahead: Santa Claus Rally in Play?
With December underway, seasonal tailwinds are blowing:
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Seasonal Odds: Since 1950, the S&P 500 has posted positive returns in December 72% of the time. The "Santa Claus Rally"—the last five trading days of December and first two of January—has occurred 79% of the time.
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The Bottom Line: The path of least resistance remains higher into year-end, supported by the return of the "Fed Put" (87% cut odds) and resilient earnings. However, investors should remain cognizant of the stretched valuations (40x CAPE) and labor market cracks.
Investment Implications: We continue to advocate for balanced positioning. Maintain exposure to quality growth stocks with visible AI revenue (like Alphabet and Broadcom), while increasing allocations to defensive sectors and international markets offering better value. Avoid chasing momentum blindly at these altitudes.
