The Big Three - December 2025

Federal reserve cuts rates but signals a pause amid uncertainty

After three consecutive interest rate cuts, investors now face an increasingly uncertain US monetary policy outlook for the year ahead, clouded by persistent inflation, significant gaps in economic data, and an impending leadership change at the Federal Reserve. At its December meeting, the Fed lowered the policy rate by 25bps to 3.50–3.75%, but the decision came by a split vote, highlighting the divide among officials over balancing still-elevated inflation with signs of a cooling labour market. Despite this latest cut, officials signalled they would likely pause additional reductions, stating that they need clearer signals on the direction of employment and inflation.

Markets expect two 25bps cuts in 2026, whilst the Fed’s own outlook points to just one cut next year and one in 2027, with several officials opposing further easing at all. This uncertainty is amplified by the 43-day government shutdown earlier in the autumn, which delayed critical data releases and left the Fed with less visibility than usual on the true state of the economy. At the same time, Chair Powell’s term ends in May, raising the prospect of a shift in policy stance under new leadership, adding another layer of unpredictability for markets.

The key takeaway is that the Fed is navigating a delicate balancing act, trying to support growth without letting inflation re-accelerate, while operating with incomplete information. Markets remain broadly constructive as equities are near highs, and bond investors are reluctant to extend duration. However, there is growing recognition that the path through 2026 will be shaped by greater volatility and less policy clarity than seen in recent years.

AI sector stumbles despite broader market records

US equities extended their rally last Thursday, with the S&P 500 and Dow Jones closing at new records and the Russell 2000 hitting a new high following the Fed’s quarter-point cut. Beneath the surface, weakness in the AI complex weighed on sentiment. Oracle shares plunged after reporting softer revenue and sharply higher capital expenditure (capex) and lease commitments, reigniting concerns over the heavy financial demands of AI infrastructure. The company’s record quarterly spending and upwardly revised full-year capex forecast from $35 billion to $50 billion, added to worries over margin pressure, rising leverage and negative free cash flow, now down by $13 billion over the past year. The decline spilled into broader AI names, dragging Nvidia and Micron lower.

Broadcom also fell in extended trading despite beating earnings expectations, as investors focused on unresolved questions around Google potentially in-sourcing chip production, rising memory prices and uncertainty over its OpenAI agreement. As a result, the Nasdaq slipped 0.26% despite other US indices hitting record highs. This reinforced signs of rotation, with investors moving out of mega-cap tech and into areas more leveraged to falling rates; notably, the S&P 500 financials sector closed at a record high, buoyed by strong gains in Visa and Mastercard.

The year in review

Global stock markets mostly trended upwards in 2025, with technology companies  particularly focused on artificial intelligence leading the charge. US tech giants delivered another year of impressive earnings, while Japan benefited from government support and a weaker yen that boosted exports. Europe also staged a recovery, supported by increased fiscal spending, while emerging markets were more volatile, especially when trade tensions flared. Technology was clearly a major driver of returns, but heavy reliance on a single sector highlighted the importance of diversification across industries and geographies to manage risk.

Bonds regained attention in 2025 as yields became attractive again. US treasury yields for the most part traded at around 4.3-4.5% throughout the year, at times outpacing inflation. Corporate bonds generally held up, though high-yield debt faced pressure when policy uncertainty rattled investors. Commodities showed mixed results: gold benefited from global uncertainty, acting as a safe-haven asset, while oil struggled due to oversupply and supply-chain disruptions. The broader economic backdrop was one of slower, steady growth, with global GDP around 2.3%, making it one of the weakest non-recession years since 2008. Inflation cooled at times but remained above central bank targets, prompting cautious rate cuts. Despite choppiness and headline-driven volatility, long-term trends such as artificial intelligence and clean energy continued to shape markets.