Markets feel stuck despite strong earnings, rate cuts, and solid growth—here’s why.
KEY TAKEAWAYS
Markets have traded sideways despite strong earnings and multiple rate cuts
AI earnings growth remains strong but investor confidence has stalled
Inflation progress continues but remains above target
Fed policy is cautious and framed as insurance rather than stimulus
Multiple small risks are weighing on sentiment simultaneously
MY HOT TAKES
This is a hesitation market–not a broken one
AI skepticism is about timing–not viability
Rate cuts without dovish conviction don’t excite markets
High valuations reduce tolerance for uncertainty
These overhangs likely persist into 2026
You can quote me: “The current market theme: a tired person falling up the stairs.”
‘Tis the season. Markets have been anything but jolly despite getting an early rate-cut gift. We are just one week away from Christmas, which means that we are just two weeks away from the start of 2026. Now, I am not going to jump the gun and do a 2025 retrospective or a what to expect in 2026 note, but I do feel that it is important to be thoughtful about markets in these past few weeks as we collect our thoughts and turn our eyes to northern skies in hopes of spotting Santa–more specifically, a much-needed Santa rally.
To do this correctly, we have to look back at how stocks have behaved year-to-date. Let’s start by observing the price chart of the S&P 500. Have a quick look and let’s keep rolling.
Just by looking at this chart, you can see that there were three high-level themes of the year. The launch of the year witnessed a painful destruction of the racy investment sentiment that powered stocks through 2024. The second theme that carried us through much of spring and summer was all about Fed rate cut expectations and AI. And finally, our current theme, which I can only liken to a tired person falling up the stairs. Right now, we are not quite at the top of the staircase, and we are all wondering if we will even get there.
Technicians will look at this chart and immediately warn you that yesterday’s ugly close below the 50-day moving average (pink line) is a warning signal, however, the three moving averages 50-day, 100-day (green line), and the 200 day (yellow), are all still spread out, meaning, no imminent cross-overs such as the one in mid-March (pink crossed green). Additionally, all three moving averages are still trending positive. Ok, so heads up, but everything is cool. But it sure doesn’t feel that way does it? No, it doesn’t
Stocks have been essentially trading sideways since mid-October. That coincided with Q3 earnings season which is officially over, though there have been a few stragglers. Q3 earnings for the S&P 500 were extremely solid. Stocks beat EPS estimates by a 6.25% margin with year-over-year growth of 13%. EPS growth from AI stocks eclipsed the broader S&P significantly. The Bloomberg AI Total Return Index, which includes 121 AI-related stocks, grew EPS by nearly 21%. Since the start of Q3 earnings, however, that AI index is virtually unchanged, while the S&P is up by a paltry 1.16%.
We had an unarguably strong earnings season by not only the S&P 500, but also the AI stocks which were the growth engine of 2024 and most of ‘25. Now, to be fair those great earnings growths are lower than they were a year earlier but they could certainly be described as anything but “highly attractive” given that one would be hard pressed to find anything else like them in other industry groups.
Perhaps, I forgot to mention that the Fed cut interest rates twice since the start of earnings season, and once prior. This over an economic backdrop of still sticky, above target inflation, which was still lower than projections from earlier in the year. Ok, while we are on the topic of the economy. The unemployment rate is ticking higher which was largely the driver of the Fed cuts. GDP estimates for the year have been revised up and up and up. Current estimates have the US closing out 2025 with a 2.0% GDP growth–in a year that was supposed to be sluggish and made worse by tariffs.
So, what gives? Why does it feel like markets can simply not get their footing recently? Well, there are several factors overhanging markets, and those themes are likely to carry into 2026 where they will likely stick throughout the year.
First, let’s start with the elephant that refuses to leave the room: AI. Not whether it is real, transformative, or here to stay–it clearly is–but whether the pace of capital spending can remain justified relative to the timeline for monetization. Companies are spending eye-watering sums on chips, data centers, power infrastructure, and talent, all in pursuit of future revenue streams that are still forming. That gap between investment today and cash flow tomorrow makes investors uneasy, especially after two years of near-religious fervor in anything labeled “AI.” The fear isn’t that AI disappears, it’s that expectations simply ran too far, too fast.
Layered on top of that is inflation, which stubbornly refuses to behave the way markets want it to. Yes, it’s lower than its peak, and yes, progress has been made, but “lower” is not the same thing as “done.” Services inflation remains sticky, shelter costs remain elevated, and tariffs, despite fading headlines, still lurk in the background. Inflation that resides above target forces investors to accept a world that looks very different from the easy-money decade that preceded it.
Which brings us directly to the Fed. Rate cuts happened, but they didn’t come with a dovish victory lap. The hawks are still very much perched on the FOMC fence, reminding markets that easing policy does not mean abandoning vigilance. The message has been clear: cuts are insurance, not stimulus. That distinction matters. Markets want reassurance that the Fed has their back. What they got instead was a Fed that remains “data-dependent”, cautious, and unwilling to declare mission accomplished.
Geopolitics remains another ever-present shadow. From ongoing conflicts to trade tensions and election-year uncertainty abroad, markets are constantly forced to price risks that cannot be modeled neatly. These risks don’t always show up in earnings forecasts or economic data, but they absolutely show up in positioning and sentiment. When uncertainty rises, enthusiasm tends to fall–even when fundamentals look fine. Case in point: the recent government shutdown and the almost constant stream of on-again / off-again sales of AI chips to China.
Valuations don’t help the mood. Stocks are not cheap by most traditional measures, particularly in the areas that have driven returns. High valuations don’t cause corrections on their own, but they reduce the margin for error. When expectations are elevated, anything short of perfect execution feels like disappointment–no consolation prize–only winners and losers. That’s a tough environment for markets trying to build momentum late in the year.
Meanwhile, the labor market is showing signs of cooling. Nothing dramatic, nothing recessionary, but enough to remind investors that employment is a lagging indicator that eventually responds to tighter financial conditions. Slower hiring and rising jobless claims feed concerns that consumption–the backbone of this economy–could soften further.
And finally, there is the broader fear of an economic slowdown. Not a collapse, not a crisis, but a gradual deceleration that limits upside surprises. Growth can slow even while remaining positive, and markets tend to struggle when the direction of travel feels uncertain rather than outright bad or good.
Put it all together and you get a market that feels tethered–held back not by one dominant risk, but by many smaller ones pulling at the same time. These are not the ingredients of a bear market, but they are absolutely the ingredients of hesitation and tenuous investor sentiment. And while 2026 may still deliver solid earnings growth and continued macroeconomic expansion, these overhangs are unlikely to disappear with the turn of the calendar. Santa may still show up, but he’s carrying a very heavy sack this year.
YESTERDAY’S MARKETS
Risk off mood dragged stock indexes lower yesterday as AI bubble anxiety bubbled away. Conflicting messages from Monday’s labor data dump caused indigestion. Investors were on edge ahead of today’s CPI release.
NEXT UP
Consumer Price Index / CPI (November) is expected to have ticked up to 3.1%.
Initial Jobless Claims (December 13th) is expected to come in at 225k, lower than last week’s 236k claims.
Important earnings today: CarMax, Darden Restaurants, FedEx, and Nike.