AI Spoils Fed Gift

Equities finished the week lower after AI-linked names Oracle and Broadcom issued warnings over data centers and profit margins. The Fed likely delivered a Christmas

present to the markets. There's now some breathing room for lower-end consumers affected by interest rates and sufficient liquidity for markets moving forward. In fact, according to Bank of America, the Fed has accomplished a balance between inflation and employment. Powell stated last week that he expected both inflation and the unemployment rate to tick just a bit higher, but to remain stable overall. This allowed the Fed to deliver the 3rd and final rate cut of 2025. Next Fed steps remain a bit more uncertain with the Dot-plot signaling 1 or 2 rate cuts in 2026 and a new Fed chairman next year that could change the dynamic of the FOMC.

Assets other than just the S&P 500 Index out-performed in 2025. Gold, silver, and international stocks all out-paced the benchmark in 2025 by a large margin. Just buying

the index wasn't the best strategy this year. Since the market bottomed on November 20th, we've seen asset classes that were lagging this year start to out-perform. While the S&P 500 Index is higher since the market bottom, mid-cap and small cap equities have out-paced the S&P. This is confirmed by the equal-weighted version of the S&P 500 Index, which is also out-performing the traditional market-weighted index.

There could be a shift in sentiment as small and mid-cap stocks look to make a recovery on the corporate earnings front. Small caps in particular nearly caught large caps

in terms of corporate earnings in the 3rd quarter and both small and mid-caps are expected to out-pace large caps in 2026. Another part of the tale is the fact that AI-driven names, especially represented by the Mag 7, might be getting a little tired as the expectation now moves from how much build-out of AI data centers will be completed toward how will AI companies monetize this new technology. Assuming AI doesn't derail the risk-on sentiment on Wall Street, it looks like Santa might be riding his sled through Wall Street this December.

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