December Markets Wrap Up a Pivotal Year

December closed out a year marked by moderating inflation, a supportive Federal Reserve, and steady equity markets—conditions that kept the soft‑landing outlook intact heading into 2026. As the month progressed, leadership broadened beyond mega‑cap and AI‑focused names, signaling a healthier and more balanced market backdrop as we move into the new year.

Shifting Market Leadership as the Year Ended

A wider range of companies participated in December’s gains, extending well beyond the handful of large technology‑driven stocks that dominated much of the year. This broader participation suggested a more even footing across sectors and a constructive foundation for early 2026.

Major U.S. Indices Diverge

Market benchmarks moved in different directions during the month. The S&P 500 was essentially flat after a strong full‑year rise, while the Nasdaq 100 pulled back as investors locked in profits following months of leadership from AI and semiconductor groups. The Dow saw relative strength, supported by renewed interest in industrial and defensive areas.

The S&P 500 eased by 0.05%, the Nasdaq 100 slipped 0.73%, and the Dow Jones Industrial Average rose 0.73%.

Fed Actions, Meeting Minutes, and Policy Signals

The December 10 FOMC meeting produced a third 25‑basis‑point rate cut, bringing the federal funds target range to 3.50%–3.75%. Policymakers described growth as “moderate,” job gains as “slowed,” and inflation as “somewhat elevated,” reflecting a shift toward balancing inflation concerns with the risk of labor market weakness.

The accompanying economic projections indicated a gradual and limited easing cycle, with only two additional cuts projected through 2027. Growth expectations remained near trend, and inflation continued drifting toward 2%.

Minutes released on December 29 showed a divided committee, with a 9–3 vote—the largest number of dissents since 2019. Debates centered on whether inflation had moderated enough to justify further rate reductions or if cutting too quickly could risk renewed pricing pressures.

Inflation Moves Lower

November’s CPI report showed headline inflation at 2.7% year over year, its lowest level since mid‑year, while core CPI increased 2.6%. Shelter rose 3.0%, medical care 2.9%, and household furnishings 4.6%. Monthly gains came in below expectations, supporting a continued disinflation trend even as gasoline prices picked up.

Shelter inflation registered 3.6% on an annual basis, and gasoline climbed 4.1% month over month, but easing momentum across core services helped maintain the broader cooling trend.

Labor Market Cools

The unemployment rate rose to 4.6% from 4.4% as the Fed acknowledged a labor market moving toward better balance. Officials noted rising downside employment risks. Payrolls increased by 64,000—well below the year’s average. Healthcare and construction added jobs, while sectors such as transportation, warehousing, and consumer‑oriented industries saw declines.

Services Expand, Manufacturing Contracts

The services sector remained a growth driver. The ISM Services PMI stayed at 52.6, marking nine straight months of expansion. Business activity reached 54.5 and new orders 52.9, though the employment component remained below 50, indicating slower hiring.

Manufacturing reflected continued softness. The ISM Manufacturing Index fell to 48.2, signaling ongoing contraction as firms reported weak export demand and inventory reductions—a goods‑sector downturn occurring alongside resilient services activity.

Looking Ahead to 2026

Strategists broadly expect a soft‑landing scenario as the new year begins, characterized by modest growth, ongoing disinflation, and a measured pace of additional Fed cuts. For long‑term, diversified investors, the themes remain consistent: stay invested, maintain balance across asset classes, and use volatility as an opportunity rather than a deterrent.

As always, we encourage readers to reach out to their financial team for personalized guidance and support tailored to their long‑term goals.