U.S. stocks advanced during the holiday-shortened week, with the S&P 500 Index and Dow Jones Industrial Average both hitting record highs. News flow and trading volumes were generally light throughout the week, but some recent favorable economic data alongside artificial intelligence (AI) optimism appeared to support positive sentiment. The small-cap Russell 2000 Index was the worst performer of the major indexes, finishing the week 0.19% higher. On the macro front, the U.S. economy expanded at the fastest pace in two years during Q3, as U.S. real GDP grew at an annual rate of 4.3%, ahead of the second quarter’s 3.8% growth rate and well above estimates for around 3%.

A near end to the central bank rate cut cycle, some major divergences in sovereign rates and broadly tighter credit and EM spreads

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The S&P 500 index finished the week little changed, while the Nasdaq added 0.48%. The Russell 2000 Index performed worst, declining 0.86%, followed by the Dow, which shed 0.67%. Equities started the week broadly lower but reversed course toward the end of the week, supported in part by an encouraging US inflation report as well as strong earnings results from semiconductor manufacturer Micron Technology that seemed to help shift AI-related sentiment. On the macro side, US unemployment rate rose to 4.6% in November, the highest level in over four years while US core inflation dropped to slowest pace since early 2021. December business activity growth slowed to a six-month low. US Treasuries yields generally decreased across most maturities.

A “not so hawkish” Fed rate cut and ECB Schnabel’s comments drove a yield curve bear steepening last week.

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Most US stock indexes rose and hit all-time highs during the week, supported by the Federal Reserve’s 3rd consecutive interest rate cut and commentary from central bank officials that some investors interpreted as less hawkish than feared. The small-cap Russell 2000 Index, performed best, adding 1.19%, followed by the Dow Jones Industrial Average’s 1.05% gain. Meanwhile, the S&P 500 Index pulled back sharply on Friday and erased its gains from earlier in the week. Renewed concerns regarding technology stock valuations and questions around whether elevated spending on AI infrastructure will pay off weighed on the Nasdaq Composite index, which fell 1.62% over the week.

Flash note

The interest rate cut by the Fed is highly anticipated but the narrative will be important for sentiment and the remaining days of trading this year.

A shift in the 2026 central bank outlook contributes to driving rates higher, as fiscal policy supports growth and inflation prospects across all major regions