A variety of tailwinds appear poised to help stocks power ahead, potentially offsetting risks such as a potential Supreme Court ruling that could disrupt expectations regarding tariffs and increasing caution among retail investors.
The S&P 500, powered for the most part by gains among the Magnificent Seven tech stocks, a resilient domestic economy, and expectations that the Federal Reserve will continue to tilt toward lowering interest rates, is sitting on a double-digit year-to-date gain. The index ended a shortened Friday session at 6849.09, leaving the 7000-point threshold clearly within sight.
That is an impressive accomplishment for a market that fell 19% over the seven weeks that ended on April 9, when the bulk of President Donald Trump’s so-called Liberation Day tariffs were suspended. Jeffrey Buchbinder, chief equity strategist at LPL Financial, describes the market’s post-April rebound as “one of the most powerful messages in investing.”
“Double-digit intra-year declines often come with double-digit annual gains,” he said. “It’s easy to get scared out of the market when volatility arrives, so those investors who keep this pattern in mind should be more confident holding on through the tough times.”
That is a good lesson to consider heading into December as well, given that the S&P 500 is up 16.7% in 2025, within striking distance of a 20% gain for the year. That would mark three consecutive annual advances of 20% or more, a feat last seen in the mid-1990s.
A December rate cut could help it happen. Prices of interest-rate futures now imply roughly 87% odds of a quarter-point reduction, according to the CME Group’s FedWatch tool. Weaker-than-expected readings for private-sector jobs growth and retail sales, plus a further decline in the University of Michigan’s consumer confidence benchmark, have the market confident that policymakers will focus on employment, rather than their prolonged fight against inflation, when they meet on Dec. 9-10.
“Stocks are celebrating the likelihood of a December rate cut, as it’s becoming clear that the labor market is the priority for the Federal Reserve,” said Paul Stanley, chief investment officer at Granite Bay Wealth Management.
“We believe the worst of the volatility for this year is behind us, as investors start to look ahead to 2026 and start to price in continued earnings growth and productivity from artificial intelligence,” he said.
Also on the list of positive factors are the Republican tax and spending bill and the end of the Fed’s reduction in the size of its balance sheet. The legislation, effective Jan. 1, will add a potent mix of spending increases, tax cuts, and accounting changes. The end of so-called quantitative tightening will leave more liquidity in the banking system and financial markets.
Some investors also see the recent turmoil in tech stocks, which has triggered a divergence among the market’s biggest AI names over the past five weeks, as a positive development. People are no longer buying AI stocks willy-nilly. Companies with a clear line of sight on AI profits are being rewarded, while those with weaker balance sheets and debt-paced business models are losing ground.
“We don’t think the stock market action this quarter shows evidence that AI is a bubble popping,” said Jim Lebenthal, partner and chief equity strategist at Cerity Partners.
“We are increasingly confident that AI represents a generational technological shift with broad and lasting economic impact,” he added. “But confidence in the long-term destination doesn’t eliminate risk in the short-term path.”
That said, the setup heading into the final 16 trading days before the Christmas break looks solid.
Benchmark 10-year Treasury note yields are holding below the 4% threshold for the first time since late October. The market’s main volatility gauge, the Cboe Volatility Index, or VIX, has retraced nearly all of its advance over the past month.
The stocks making the biggest gains are also changing. Tech is taking a back seat to sectors such as healthcare, materials, and consumer discretionary. That suggests more broadly based gains for a market that has been far too reliant on a handful of stocks.
Even history points to stocks moving higher. Bank of America data suggest that the second half of December is the second-strongest period of the year for U.S. stocks going all the way back to 1928. The average return is 1%, with gains around 70% of the time.
Still, there are risks.
In early November, the Supreme Court heard arguments on the legality of many of Trump’s tariffs, imposed under the International Emergency Economic Powers Act. A ruling could arrive before the end of the year, potentially disrupting the market’s assumptions for how high tariffs will be, and what products are affected, heading into 2026.
The president is also set to name his chosen successor to Fed Chair Jerome Powell, whose term expires in May, sometime in the next few weeks. National Economic Council director Kevin Hassett remains the odds-on favorite. Markets will react to any predecessor deemed too pliant to Trump’s desire for lower interest rates that would support his debt-led economic strategy.
Retail investors, meanwhile, entered the final week of November in a cautious mood, according to the American Association of Individual Investors. The most recent reading of the group’s benchmark sentiment survey showed a net bearish result of 42.7%, up from 36.3% at the start of the month and the longer-term average of 31%.
Ruben Dalfovo, investment strategist at Saxo Bank, thinks that likely reflects the November wobble more than a market facing weakness heading into the usually supportive December stretch.
“Seasonality offers a kinder lens,” he said. “Historically, late year markets are slightly more favorable, but only by enough to reward those who are already participating, not those waiting for a postcard perfect entry.”
Write to Martin Baccardax at martin.baccardax@barrons.com
