AI Stocks Under Pressure: The S&P 500 Index slipped 0.6% for the week, trimming its year-to-date gain to 17.5%. Stocks within the communications services and technology sectors led the market lower on concerns about the timing and ultimate profitability of heavy investments in artificial intelligence (AI). Shares of smaller companies and international indexes—with their comparatively smaller exposure to AI—performed well. The Russell 2500 Index gained 1.1%, extending its year-to-date return to 13.9%. Internationally, the MSCI developed and emerging market indexes gained 0.9% and 0.4%, respectively, bringing their year-to-date returns to 29.5% and 32.1%.

Yield Curve Steepens Slightly: Short-term U.S. Treasury security yields (two years and under) dropped between 0.02% and 0.04%, while longer-term yields (five to 30 years) edged up 0.03% to 0.05%. The yield on the 10-year U.S. Treasury note settled at 4.18% on Friday, up 0.04% for the week. The Bloomberg Aggregate Bond Index slipped 0.2%, while the Bloomberg Municipal Bond Index was flat. Year-to-date, these indexes were up 6.7% and 4.0%, respectively.

FOMC Rate Cut: As widely expected, on Wednesday the Federal Open Market Committee (FOMC) lowered the federal funds rate by 0.25%, setting the target range at 3.50%–3.75%. This marked the third 0.25% cut since September, reflecting the FOMC’s concern about softening labor market conditions. The decision to cut rates was not unanimous: two committee members—Kansas City Fed President Jeff Schmid and Chicago Fed President Austan Goolsbee—voted to keep rates unchanged until stronger evidence of a downward trend in inflation emerges.

Positive Revisions to FOMC’s Outlook: In its updated quarterly Summary of Economic Projections (SEP), the FOMC raised its estimate for 2026 real GDP growth to 2.3%, from 1.8% in September. Meanwhile, it lowered its 2026 core Personal Consumption Expenditures (PCE) inflation forecast to 2.5% from 2.6%.

Interest Rate Outlook Unchanged: The FOMC's “dot plot” forecast for the fed funds rate at the end of next year remained unchanged from September’s at 3.38%. This implies just one 0.25% cut is in store for the year. As of Friday, fed funds futures implied two cuts, with the year-end rate settling at just under 3.10%, unchanged from a week ago.

Mixed Labor Market Signals: Initial claims for unemployment benefits for the week ending December 6th jumped to 236,000, an increase of 44,000 from the prior week and above the Bloomberg consensus forecast of 220,000. However, continuing claims for the week ending November 29th fell by 99,000 from the prior week to 1.84 million, which was below the Bloomberg consensus forecast of 1.94 million.

The Bureau of Labor Statistics’ (BLS) October Job Openings and Labor Turnover Survey (JOLTS) showed job openings edged up to 7.67 million from 7.66 million in September, above the Bloomberg consensus forecast of 7.12 million. However, layoffs at 1.85 million were above September’s 1.78 million and at the highest level reported so far this year.

Although the reports are mixed, labor supply and demand seem balanced, with low unemployment and positive real wage growth.

Labor market and inflation reports will be in focus this week. The Bureau of Labor Statistics will release its payroll and unemployment reports for November on Tuesday. The Bloomberg consensus calls for a slight uptick in the unemployment rate to 4.5% from 4.4%, last reported for September. Non-farm payrolls are expected to increase by 50,000 compared with September’s previously reported increase of 119,000. The government shutdown could produce distortions in these reports, limiting their reliability.

On Thursday, the BLS will release November’s Consumer Price Indexes (headline and core, which excludes food and energy prices). Measured on a year-over-year basis, the Bloomberg consensus estimates for these measures are 3.1% and 3.0%, respectively. The FOMC’s inflation target is 2%.

Turning to the stock market, AI-related concerns that dragged on the S&P 500’s returns last week reflect a healthy dose of skepticism and revaluation following explosive gains in technology and communications services stocks earlier in the year. Investor worries that a bubble has formed in AI stocks seems premature. Overall valuation of these stocks appears reasonable relative to their strong growth prospects. The powerful growth narrative of AI could continue attracting investor dollars to these stocks in 2026. If so, last week’s sell-off could prove temporary.

Roger Khlopin, CFA
Chief Investment Officer

Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager