Key Takeaways

• Market breadth is improving, boosting the odds of a December rally.
• Rate-cut expectations are surging, lifting investor sentiment.
• Leadership is rotating beyond mega caps, strengthening the rally’s foundation.

Markets opened December on a softer footing after the S&P 500 closed its seventh straight up month. The month-end rally lacked conviction and Friday’s session saw the lightest equity volume of the year.

Still, the S&P 500 steps into December with the familiar scent of a potential Santa rally in the air. Technical signals have quietly aligned over recent sessions, and with investor focus moving to interest rate cut expectations, the final month of the year could carry more upside than sceptics expect.

Equity Leadership Tension

The S&P 500 begins December with stretched leadership. Mega cap names reached new records on Friday, helping secure the seven month winning streak, but breadth remains uneven. Equal-weight performance has improved recently, reflecting a rotation into laggards.

Consumer behaviour remains a key watch. Holiday spending is up 7% so far, although expectations for lower average spend for Black Friday and Cyber Monday are rising. Positioning leans cautious into the week. Equity investors are still committed to large cap momentum after the seven month rally, but early December flows show profit taking in tech and a gradual rotation into equal-weight and defensives.

Rally Broadens and S&P Reclaims the 50-Day Moving Average

The equity bounce is starting to look less like a pure squeeze and more like a proper broadening. Market breadth firmed throughout the end of November, easing concerns that the backdrop is only supportive for a narrow set of mega cap stocks, and creating a constructive setup for a seasonal upswing. The NYSE advance-decline line pushed above resistance, and more S&P 500 constituents reclaimed their 50-day and 200-day moving averages. Even as the index pulled back, fewer names slipped into new lows, which is a sign that underlying support is deepening rather than fracturing.

Health care is emerging as a clear winner in this phase, and the sector has been the top performer in the latest leg of the rally. While the November pullback sharpened nerves around concentrated AI trades, it has not derailed the medium-term case for equities if leadership continues to rotate rather than simply deflate.

Expectations of a December Rate Cut Surge

Macro sentiment has changed decisively over the past week, and expectations of a Federal Reserve rate cut in December surged. Investors now assign 88% probability for a 25 basis point cut, driven by softer labour-market data, dovish commentary from key policymakers and the absence of pushback from Fed Chair Jerome Powell.

New York Fed President John Williams openly supported a cut after fresh labour data pointed to cooling conditions. Other officials, including Governor Christopher Waller, echoed the view that easing might be appropriate to prevent further weakening in employment markets. With the Fed now in its pre-meeting blackout period, markets are leaning heavily on these recent clues.

Fed Chair Succession Drives New Rate Cut Bets

Beyond December, forecasts suggest only a gradual path of further easing, tempered by expectations around who will lead the Fed next. Political uncertainty adds another layer, with President Donald Trump signalling he has chosen a potential successor to Powell, a decision that could influence the policy trajectory well into 2026.

Recent reports suggest the shortlist for the next Fed chair includes Kevin Hassett, former governor Kevin Warsh, and current governor Christopher Waller, among others. A change at the helm could meaningfully change the Fed’s policy trajectory. Should the nomination favour a more dovish candidate inclined toward earlier and more aggressive rate cuts, investors may gain renewed confidence in a looser policy environment. This could provide an additional tailwind for equities, particularly interest-sensitive areas like retail and high-growth sectors.

Speculation that Kevin Hassett is the frontrunner for Fed chair is feeding that bias without unsettling markets. The fact that equities, Treasuries and the dollar all took Hassett headlines in stride is itself a positive signal for his candidacy. Investors see the balance of risk tilting toward easier policy and softer price pressure in 2026, with two 25 basis point rate cuts widely expected.

AI Revival and Consumer Spending Lift Optimism

The AI trade, which stumbled earlier in November, has staged a robust rebound. Key technology names jumped, and sentiment recovered following supportive Fed commentary. Alphabet led the revival amid optimism around its Gemini AI updates, while Nvidia and Oracle also regained traction.

Consumer behaviour tells a compelling story of its own. Despite weakening confidence and a more fragile labour backdrop, Americans leaned heavily into online shopping over the Thanksgiving weekend. Spending surged, supported by AI-powered price-comparison tools and more aggressive discount-driven buying. E-commerce results, confirmed by multiple data providers, suggest consumers remain willing to spend, albeit more strategically, heading into the holidays.

Source: TradingView. S&P 500 daily price chart as of 1 December 2025.

Positioning for the Final Stretch of 2025

Seasonality remains a powerful ally. December has historically delivered gains in most years, and when the index enters the month in the green year-to-date, the probability of a positive finish rises even further. This tendency is strongest in the first year of the U.S. presidential cycle, adding further statistical support to the bullish case.

With the S&P 500 up 16% year-to-date, the market enters December at an intriguing crossroads. Technicals point to improving momentum, seasonal factors are bullish, and rate-cut expectations are rising. At the same time, concerns around AI valuations, fragile consumer sentiment and volatility around Fed rate cuts expectations contribute to heightened caution among investors.

If the Fed delivers the expected cut on the 10th of December, this will support the seasonally bullish trend and could trigger the next leg higher. Conversely, a surprise hold, or a tone perceived as too hawkish, could interrupt the rally.

For now, the balance of evidence leans toward a constructive December. Support levels are holding, breadth is improving and risk appetite is rising. Therefore, we see a potential for a rally towards 7,000 by the end of the year, and to 7,800 by the end of 2026.

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