By Martin Baccardax
Federal Reserve Chairman Jerome Powell may not be anyone's idea of jolly, but he has still left something of a gift for Wall Street as Christmas approaches.
Investors haven't unwrapped it just yet, distracted by piecing together the year's sprawling artificial-intelligence trade.
But the message from Powell is clear enough: the Fed is likely to stay out of the market's way.
Powell told reporters in Washington on Wednesday, following the Fed's third consecutive rate cut since the summer, that the risks to its twin mandate of full employment and stable prices are largely in balance. He agreed that there's a high bar for more cuts but said that doesn't mean the next move in rates will be higher.
In effect, he's saying that the Fed isn't going to get too involved in markets over the final months of his tenure as chair, which ends in May. Rate traders seem to agree: the earliest they're pricing in a cut in 2026 is April, according to the CME Group's FedWatch.
"While 2026 may not bring as many rate cuts as 2025, it's clear that the Fed's prior hiking cycle that disrupted markets and the economy post-Covid is firmly in the rearview mirror," said Chris Kampitsis, managing partner at Barnum Financial Group. "That's bullish for stocks."
Right now, it's just the Dow Jones Industrial Average that's reflecting that optimism. Unloved on Wall Street but famous on Main Street, the Dow hit 48,700 points on Wednesday and looks set for its 18th record high of the year.
Elsewhere, Oracle's 11% slump, one of its biggest post-earnings decline since 2001, is holding down gains for the S&P 500 and the tech-focused Nasdaq.
But perhaps not for long. The second half of December is typically one of the strongest of the year for stocks, with Bank of America data suggesting the final 10 days usually see the S&P 500 rising around 1.17%.
That would take the benchmark to within just a few points of the 7,000-point mark by the end of the year and peg its 2025 advance at around 19%.
Looking further ahead, corporate earnings are set to grow by around 14% next year, according to forecasts collected by LSEG, and the economy remains remarkably resilient.
In fact, the Fed lifted its near term projections for GDP growth on Wednesday, forecasting a 2.3% advance in 2026 while keeping its outlook for headline unemployment unchanged at 4.4%.
AI investment continues to expand, as well, and that is likely to drive faster adoption of the new technology that will quicken the pace of returns for the billions in capital already committed.
"These factors can easily push the U.S. economy beyond our forecast of 2.25% growth -- toward 3% -- and support a double-digit return for U.S. equities," Vanguard economists, led by Joseph Davis, wrote in a recent outlook.
"Even at current stretched valuations, such momentum wouldn't be unprecedented, especially if AI scalers continue to grow earnings," the team added.
And Nancy Tengler, CEO and CIO at Laffer Tengler Investments, isn't even sure the market's most important stocks, the so-called Magnificent 7, are actually that expensive.
Removing Tesla from the Mag 7 complex, she argues, presents a price-to-earning ratio for the rest of the cohort of 32x, "healthy, but hardly bubble territory."
Doing the same ex-Tesla calculation for earnings growth, she argues, produces a PEG ratio of 1.9x, "within the average range for the overall market."
"Our investing theme is focused on old economy companies pivoting to the new technologies and the providers of the 'picks and shovels'," she said. "We still believe in the aspect of the trade that includes many of the Mag 7."
And that might be the gift that keeps on giving well into next year and beyond.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 11, 2025 15:53 ET (20:53 GMT)
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