Weekly Market Recap: Markets Close 2025 on a Cautious Note as Investors Look Ahead to the Next Catalyst

Market Overview

U.S. equities drifted lower during the New Year’s holiday-shortened week as light trading volumes and a lack of fresh catalysts pushed markets into a mildly risk-off posture to close out 2025. Major indexes gave back modest ground, with the S&P down 1.2%, trimming year-to-date gains after another year of strong double-digit returns. While the tone was cautious, the pullback appeared more reflective of calendar effects than any meaningful shift in fundamentals.

Despite the late-year softness, 2025 marked another strong chapter for equities. The S&P 500, Nasdaq, and Russell 2000 all delivered their third consecutive year of double-digit gains, supported by resilient economic growth, robust AI-driven earnings, and the Federal Reserve’s return to an easing cycle later in the year. Technology once again led performance, while value lagged in the U.S. but fared better overseas.

International markets finished the year on firmer footing. European equities capped their strongest year since 2021, driven by resilient growth expectations and increased fiscal spending, particularly in defense. In Asia, markets ended mixed on the week but closed 2025 with rare outperformance versus U.S. peers, supported by renewed optimism around artificial intelligence and semiconductor demand.

Federal Reserve Insights and Economic Roundup

Federal Reserve policy remained a focal point as investors parsed the December FOMC meeting minutes. Policymakers signaled that additional rate cuts remain possible in 2026 if inflation continues to moderate, though divisions persist and caution remains elevated. From our perspective, the broader economic picture increasingly reflects structural rather than cyclical forces, with productivity gains—particularly from technology and AI—helping offset cost pressures.

Inflation risks have eased modestly, and core inflation is expected to trend toward 2.5% in 2026. At the same time, labor market risks appear tilted to the downside. Slowing job creation, rising unemployment among more cyclical worker groups, and concentrated hiring in less sensitive sectors suggest growing fragility beneath the surface.

Economic growth remains resilient despite a low-hiring environment. Strong business investment, especially in technology, and improving productivity should support above-trend growth in the coming quarters. We continue to expect the Fed to deliver a couple of rate cuts this year as labor market softness becomes more evident, reinforcing the case for patience among long-term investors.

The Week Ahead

The following economic data is slated for the week ahead (some U.S. government data releases may be intermittent over the next month due to the recent shutdown):

Monday: ISM Manufacturing (Dec); Wards Total Vehicle Sales (Dec)

Tuesday: S&P Global U.S. Services PMI (Dec final); S&P Global U.S. Composite PMI (Dec final)

Wednesday: MBA Mortgage Applications; ADP Employment Change; ISM Services; JOLTS Job Openings; Factory Orders; Durable Goods & Capital Goods (final)

Thursday: Challenger Job Cuts; Productivity & Unit Labor Costs; Jobless Claims (initial/continuing); Trade Balance; Wholesale Inventories & Sales; NY Fed 1-Year Inflation Expectations; Consumer Credit

Friday: December Jobs Report (payrolls, wages, unemployment); Housing Starts & Building Permits; U. of Michigan Consumer Sentiment (prelim); Household Net Worth (3Q)