Weekly Market Update: Markets Whipsawed by Geopolitics, AI Optimism Offers a Lifeline

Market Overview

A holiday-shortened week packed with geopolitical headlines and global volatility left U.S. equities modestly lower. Tariff threats aimed at several European trade partners drove a sharp risk-off move early in the week, with the S&P 500 falling 0.34% and the Dow Jones Industrial Average down 0.50%. The Nasdaq slipped 0.06%, while small caps again showed relative strength, with the Russell 2000 declining just 0.32% and continuing to outperform large caps on a year-to-date basis.

Despite the weekly pullback, broader trends remain constructive. The S&P 500 is still up 1.10% year-to-date and 14.49% over the past year, while the Nasdaq has gained 1.13% YTD and nearly 18% over the last 12 months. Growth leadership cooled modestly this week, with Russell 1000 Growth down 0.48%, while value stocks proved more resilient, falling just 0.21%.

International markets were mixed. Developed international equities (MSCI EAFE) edged higher by 0.14%, while emerging markets gained a stronger 1.09%, supported by continued enthusiasm around artificial intelligence supply chains in Asia. Over the past year, emerging markets are now up more than 42%, underscoring their recent momentum.

Sector performance reflected the week’s volatility. Energy led with a strong advance, benefiting from a surge in natural gas prices. On the downside, financials, real estate, and utilities lagged, with financials among the weakest performers.

Federal Reserve Insights and Economic Roundup

Economic data was relatively light but directionally important. A slight upward revision to third-quarter GDP reinforced the narrative of above-trend economic growth, while delayed inflation reports from October and November confirmed that core services inflation remains sticky. Core services excluding housing rose 0.25% month over month in November, pushing the annual rate to 3.3%.

With inflation still running hotter than the Federal Reserve’s comfort zone and uncertainty surrounding tariff pass-through effects, markets broadly expect no change in policy at this week’s FOMC meeting. The Fed remains in a longer-term easing cycle, but rate cuts are increasingly viewed as a late–second quarter story rather than an imminent one.

In fixed income, Treasury yields were little changed on the week despite elevated volatility abroad. The 10-year U.S. Treasury ended near 4.24%, while the 2-year yield hovered around 3.60%, keeping the yield curve modestly inverted. Core bonds, as measured by the Bloomberg U.S. Aggregate Index, posted a small gain of 0.07%, while corporate bonds also edged higher.

Credit spreads remain tight, signaling confidence in the economic backdrop. While historically low spreads can imply muted forward excess returns, all-in yields remain attractive, particularly for income-oriented investors, helping support continued demand.

The Week Ahead

Attention now turns to a busy economic calendar and a pivotal Federal Reserve meeting.

Monday: Chicago Fed National Activity Index, Durable Goods Orders (preliminary), Dallas Fed Manufacturing

Tuesday: ADP Employment, Case-Shiller Home Prices, Consumer Confidence, Richmond and Dallas Fed surveys

Wednesday: MBA Mortgage Applications, FOMC Rate Decision

Thursday: Jobless Claims, Trade Balance, Factory Orders, Wholesale Inventories

Friday: Producer Price Index (PPI), Chicago PMI

With inflation trends, policy signals, and geopolitical developments intersecting, investors should expect continued volatility as markets search for clarity on the path forward.