Fed Takes Center Stage with a 25 Basis Point Rate Cut Expected

Performance for Week Ending 12.5.2025:

The Dow Jones Industrial Average (Dow) gained 0.5 percent, the Standard & Poor’s 500 Index (S&P 500) added 0.3 percent, and the Nasdaq Composite Index (Nasdaq) tacked on 0.9 percent. Sector breadth was mixed with 6 of the S&P sector groups closing higher and 5 closing lower. The energy sector (+1.4 percent) was the best performer, while utilities (-4.5 percent) was the weakest.

*See below for Index Definitions

MARKET OBSERVATIONS: 12.1.2025–12.5.2025

The S&P 500 finished higher for a second straight week and just shy of a new all-time high on optimism the Federal Reserve will reduce rates at this week’s Federal Open Market Committee (FOMC) meeting. Investors appear to be betting that lower rates will help jumpstart economic growth and stabilize the softening labor market. Better than expected third quarter earnings season and favorable seasonals also came into play.

Market View–2026 Outlook:

As the equity bull market gets set to enter its fourth year, we believe there is further room to run given expected tailwinds in 2026 from monetary and fiscal stimulus, wealth effect benefits for middle- and high-income households, further deregulation, and the ongoing AI boom.

Despite concerns about elevated valuation levels, the price/earnings multiple on the S&P has been relatively stable over the course of the year, with earnings growth being the primary driver of returns, a trend we expect to continue in 2026. According to consensus expectations, earnings are forecast to grow by around 13 percent next year and over 14 percent in 2027

The one factor that almost always kills a bull market is the rising probability of a recession, something that we don’t anticipate as economic growth is expected to remain positive, driven by fading tariff-related headwinds and strengthening fiscal tailwinds, albeit at a more moderate pace.

Monetary policy should also remain supportive, with the Federal Reserve (Fed) expected to continue to gradually reduce interest rates next year. Lower rates should reduce borrowing costs and support equity valuations, especially growth stocks with long-duration cash flows.

Q3 Earnings Wrap Up: As of Dec. 5, 495 members of the S&P 500 have released fiscal third quarter results, with over 82 percent beating expectations. Aggregate earnings for this group are up 12.9 percent from a year ago, solidly ahead of the 7.2 percent projected year-over-year growth rate at the start of earnings season. On the sector level, the biggest upside surprises came from industrials and healthcare. In terms of year-over-year growth, technology and financials posted the biggest gains.

Economic Roundup: First-time claims for U.S. unemployment benefits unexpectedly fell to a three-year low in the week ended November 29th. The report said initial jobless claims slid to 191,000, a decrease of 27,000 from the previous week's revised level of 218,000. In a less optimistic update, the latest report from consulting firm Challenger, Gray & Christmas showed announced job cuts this year surpassed 1 million in November, 54 percent higher than the same 11-month period a year ago and the highest level since 2020. Separately, payroll firm ADP said U.S. private employers shed 32,000 jobs in November, marking an unexpected decline in the labor market after October's revised 47,000 jobs gained. Meanwhile, data from the Institute for Supply Management showed U.S. services activity expanded slightly in November to a reading of 52.6 percent, while the index for prices paid eased to a seven-month low. Elsewhere, a long-delayed report released by the Commerce Department showed consumer prices in the U.S. increased in line with economist estimates in the month of September. The Commerce Department said its personal consumption expenditures (PCE) price index climbed by 0.3 percent in September, matching the growth seen in August along with economists’ estimates.

The Week Ahead: The focal point this week will be the two-day Fed meeting on Tuesday and Wednesday, which comes as several economic indicators are still unavailable due to the government shutdown. Most investors are expecting a “hawkish cut” where the Fed cuts rates by 25 basis points but simultaneously signals that it intends to be cautious about future reductions. According to Bloomberg’s World Interest Rate Probability tool, there is a 95 percent probability of a 25-basis point cut at the conclusion of next week’s meeting, although the markets are not fully discounting another cut until the June meeting. Reports of interest on the data calendar includes the job openings and labor turnover survey (JOLTS) on Tuesday and initial jobless claims on Thursday. On the earnings front, 8 members of the S&P 500 are scheduled to report fiscal quarter results, including Oracle, Adobe, and Broadcom. Outside of the Fed meeting, Philadelphia Fed President Paulson and Cleveland Fed President Hammack, are both scheduled to speak on Friday morning. (Note: This will be the last edition of the Weekly Viewpoint for the year. Happy Holidays and Happy New Year!)

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Standard and Poor's 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Nasdaq Composite Index is a broad-based capitalization-weighted index of stocks in all three Nasdaq tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.