Weekly Stock Market Update | Edward Jones

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Weekly market wrapPublished Dec. 12, 2025Published December 12, 2025James McCannShare:

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Fed meeting sets the stage for broadening market gains

Key takeaways:

• Markets reacted positively to the Fed meeting last week, less so on account of the widely expected 25 basis point (0.25%) interest-rate cut, but more around the broader messaging from the central bank on the economic and policy outlook, in our view.
• While it looks like the Fed is preparing to take a pause from its cutting cycle in January, commentary from Chair Powell suggests that the FOMC will remain responsive to further weakness in the labour market and that the committee remains optimistic inflation will cool.
• Against this backdrop, most FOMC members are forecasting lower rates next year. We see scope for one or two cuts, leaving the fed funds rate in the 3%-3.5% range and removing the drag on the economy seen from high interest rates over recent years.
• Falling interest rates will likely weigh on cash returns in 2026, especially when we adjust for inflation. Investors could consider moving toward longer-maturity fixed-income investments, or increased allocations to diversified equities as we see a broadening in market leadership.
• Small-cap equities outperformed last week, as investors continue to show signs of rotating into lower-valuation stocks, which might benefit from Fed easing, with tech names appearing to take a breather after some disappointments in high-profile earnings reports.

Fed delivers for markets

In our view, the rally in the wake of last week's Fed meeting wasn't down to the 25 basis points (0.25%) interest-rate cut delivered by the FOMC, which was widely expected. Instead, we think investors likely took encouragement from signals around the policy outlook and news that the Fed will start buying Treasury Bills to support liquidity in short-term money markets.

The decision to cut was, as anticipated, contested. Two FOMC members, Schmid and Goolsbee, voted against the move, expressing concerns over elevated inflation*. Moreover, individual members' interest-rate forecasts show that four other policymakers were inclined to leave rates unchanged in December, with these either not scheduled to vote at this meeting, or convinced to support a cut*.

Despite objections, the majority supported a third consecutive cut on account of concerns over the labor market*. Hiring has clearly slowed in 2025, and, amid disruptions to high-quality data after the government shutdown, another rate cut was seen as a prudent step to protect against risks of a deeper deterioration*.

Source: Haver Analytics Chart description

This chart shows the monthly change in ADP private employment and 3-month moving average.

Source: Haver Analytics

This chart shows the monthly change in ADP private employment and 3-month moving average.

Given splits on the FOMC and elevated inflation, the market had been expecting last week's move to be accompanied by "hawkish" messages that might indicate less chance of future interest-rate cuts*.

There were nods in this direction. Subtle changes to the FOMC press statement suggest the central bank is preparing to pause its easing cycle, similar to the message in December 2024 before an extended pause*. Moreover, Chair Powell indicated that following 175 basis points (1.75%) of rate cuts since September 2024, it may be appropriate to wait and see how the economy evolves before moving again*.

However, while these comments seemingly set up a pause in near-term policy easing, they were perhaps not as hawkish as feared.

First, Chair Powell struck a cautious tone on the job market, calling this extremely weak, and warning that negative nonfarm-payroll readings are possible*. This caution suggests the FOMC will likely remain highly sensitive to further disappointments in the labor market.

Second, FOMC members lowered their inflation forecasts this year and next, despite becoming more optimistic on growth*. This indicates greater confidence that upward pressures on inflation due to tariffs will likely be temporary, and that the economy can rebound in 2026 without maintaining inflationary pressures.

Finally, 12 out of 17 members continue to expect lower interest rates, with the median forecast pointing to one cut in 2026 and one more in 2027*. Chair Powell was tight-lipped when asked about the Fed's next step but did indicate that it was unlikely this would be a hike, maintaining a bias for further rate easing*.

Markets liked what they heard

These indications reassured investors, driving a rally in shorter-term bond markets, which are pricing in two 25 basis point (0.25%) cuts next year, and a softening in the dollar*. They also helped equities, particularly in the interest-rate-sensitive small-cap sector, which again outperformed big tech names over the week*. This rotation was amplified by a stumble across the Magnificent 7, after Oracle and Broadcom results that raised concerns over AI investment and short-term revenues*.

Source: Bloomberg Chart description

This chart shows the percentage change in major U.S. equity indexes over the past five days and month, with the small-cap Russell 2000 index outperforming. Past performance doesn't guarantee future results. An index is unmanaged, cannot be invested into directly and is not meant to depict an actual investment.

Source: Bloomberg

This chart shows the percentage change in major U.S. equity indexes over the past five days and month, with the small-cap Russell 2000 index outperforming. Past performance doesn't guarantee future results. An index is unmanaged, cannot be invested into directly and is not meant to depict an actual investment.

These market moves might have also been amplified by news that the Fed will buy $40 billion in Treasury bills each month until April to support liquidity in money markets*. This reflects a technical adjustment to how the Fed sets interest rates, in our view, as opposed to any shift in policy, such as Quantitative Easing, whereby the central bank buys longer-maturity securities to lower longer-term interest rates and stimulate the economy. However, some investors see a less clear distinction between these policies, interpreting purchases as a form of policy easing*.

The beginning of the end of Fed easing

Looking ahead to 2026, while we think we are approaching the end of the Fed easing cycle, there still looks to be room for one or two cuts, leaving interest rates between 3%-3.5%.

A weak labor market, particularly around the start of 2026, should make a case for lower rates, in our view. We get the delayed November nonfarm-payrolls data on Tuesday, with forecasters expecting a modest 50,000 gain in jobs over the month*. Further sluggish increases as we move into 2026 would argue for additional easing, in our view, especially given the sensitivity at the Fed to these downside risks. We will also be watching consumer spending closely for signs that a cooling labor market is starting to weigh on spending. Tuesday's October retail-sales data will be an important waymark on this front.

However, we would need to see a sharp deterioration in the economic outlook to justify more aggressive easing. With inflation still running well above its 2% target*, and expected to do so through 2026, we think the Fed needs to be mindful that too much policy loosening could exacerbate price pressures.

Implications for investors

There are a few important takeaways from Fed week.

First, returns on cash, or very short-term investments like money-market funds, CDs and Treasury bills, have already fallen*, and we believe that yields will likely continue to move lower in the year ahead. We think this is especially pressing in an economy in which inflation is running close to 3%, meaning the real return on cash-like investments will likely be close to zero.

Source: Haver Analytics, Bloomberg Chart description

This chart shows the inflation-adjusted fed funds rate and 3-month and 12-month T-bill yields.

Source: Haver Analytics, Bloomberg

This chart shows the inflation-adjusted fed funds rate and 3-month and 12-month T-bill yields.

Investors might consider moving up the curve to take advantage of somewhat higher returns. The 10-year U.S. Treasury yield has increased in recent weeks from its 2025 low of 4% to around 4.2% at present*. However, we don't see significant scope for government bonds to rally much from here. Instead, the 10-year Treasury yield should remain rangebound, between 4%-4.5%, through much of 2026, in our view. With the Fed nearing the end of its easing cycle, inflation still elevated, and lingering concerns over the U.S. federal debt outlook, there looks to be few triggers for yields to move materially lower.

For those investors with more risk tolerance, and longer time horizons, we suggest increasing allocations to equities, as opposed to bonds. At present we believe targeting diversified portfolios of domestic and international stocks is most appropriate.

Domestically, we like large-cap equities to help maintain exposure to the ongoing AI investment cycle. However, the recent rotation away from mega-cap tech companies into other sectors and cap sizes highlights the benefits of diversification and potential for a broadening market leadership, in our view. We think mid-cap stocks offer a way to benefit from the steady growth and lower interest rates we anticipate next year.

Similarly, we think portfolio resilience can be enhanced by geographical diversification too, with international equities and emerging-market equities both attractive at present given solid earnings prospects and lower valuations compared with U.S. large-cap stocks *.

Speak to your financial advisor to consider your portfolio allocations as we move into the new year.

James McCann Investment Strategy

Weekly market stats

INDEX	CLOSE	WEEK	YTD
Dow Jones Industrial Average	48,458	1.0%	13.9%
S&P 500 Index	6,827	-0.6%	16.1%
NASDAQ	23,195	-1.6%	20.1%
MSCI EAFE *	2,810.47	3.2%	26.3%
10-yr Treasury Yield	4.19%	0.1%	0.3%
Oil ($/bbl)	$57.49	-4.3%	-19.8%
Bonds	$99.81	-0.2%	7.0%

Sources: *Bloomberg

Source: FactSet, 12/12/2025. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *Morningstar Direct, 12/14/2025.

The Week Ahead

Important economic data and events for the week ahead include labor, inflation, PMI, housing and retail sales.

Review last week's weekly market update.

James McCann

Senior Economist

Thought Leader In:

• Economic issues impacting the lives of everyday Americans.
• The effects of government spending, taxes and regulation changes on our clients.
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“The economic, political and policy landscape is shifting dramatically, making it ever more challenging for our clients to navigate their personal finances. In this environment, it's our deep, research-driven insights that can help clients stay on track to reach their financial goals."

James McCannSenior Economist

Read Bio

Thought Leader In:

• Economic issues impacting the lives of everyday Americans.
• The effects of government spending, taxes and regulation changes on our clients.
• Building diversified portfolios to help investors reach their long-term financial goals.

“The economic, political and policy landscape is shifting dramatically, making it ever more challenging for our clients to navigate their personal finances. In this environment, it's our deep, research-driven insights that can help clients stay on track to reach their financial goals."

James McCannSenior Economist

Read Bio

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Important Information:

The Weekly Market Update is published every Friday, after market close.

This is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Past performance does not guarantee future results.

Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment.

Diversification does not guarantee a profit or protect against loss in declining markets.

Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

Dividends may be increased, decreased or eliminated at any time without notice.

Special risks are inherent in international investing, including those related to currency fluctuations and foreign political and economic events.Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

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