Key Takeaways December 2025
Market Backdrop: Supportive, but More Nuanced
North American equity markets pushed to new highs into mid-December, helped by easing inflation and the start of a rate-cutting cycle. While the U.S. Federal Reserve delivered another 25 bp cut, the more important message was caution: rates are coming down, but future cuts are not guaranteed and will remain data-dependent.
Canada: Record Levels, Rotating Leadership
Canadian equities continued to reach record levels, but leadership shifted beneath the surface. Financials and materials have performed well, while energy weakened as oil prices fell sharply on supply and demand concerns. Markets remain constructive, but returns are increasingly driven by sector rotation rather than broad, uniform gains.
Year-to-Date Market Performance (as of December 15)
- TSX Composite: +25%
- Nasdaq 100: +17%
- S&P 500: +14%
- Dow Jones: +12%
Strong performance across markets reflects a supportive macro backdrop, but dispersion has increased as investors differentiate between sectors and themes.
Volatility Returns as AI Is Stress-Tested
After months of strong performance, markets showed renewed volatility as the AI trade was put under scrutiny. Investor focus shifted from AI demand to AI profitability and cash flow. High-profile earnings and guidance—particularly around rising capital expenditures—raised questions about balance sheets and near-term returns on investment, even as long-term demand remains intact.
Why Markets Remained Resilient
Despite AI-related volatility, markets held up for several key reasons:
- Central banks remained supportive, acknowledging progress on inflation while retaining flexibility.
- Liquidity conditions quietly improved as reserve management actions provided a modest tailwind.
- Canadian inflation remained stable near target, giving policymakers room to stay patient.
- Lower oil prices eased near-term inflation pressures, even as they reshaped sector leadership.
- December seasonality and year-end portfolio adjustments amplified short-term swings but did not derail the broader trend.
U.S. Rates: Messaging Matters as Much as the Cuts
The December rate cut was welcomed, but policymakers emphasized it was a close decision. This reinforced that policy is not on autopilot. Markets are now reacting as much to forward guidance and tone as to the cuts themselves, with expectations for future policy likely to shift as new data emerges.
Canada: Steady Policy, Earnings Take the Lead
The Bank of Canada held rates steady after its October cut, with inflation holding around target. This allows policymakers to remain patient and shifts the focus of Canadian markets toward growth, earnings, and sector fundamentals rather than further immediate rate relief.
What We Are Watching
- Inflation and rates: Cuts are underway, but the path matters. Markets remain sensitive to any signs of inflation re-acceleration or more restrictive messaging.
- AI investment quality: Demand remains strong, but earnings are forcing differentiation between growth stories and sustainable cash flow.
- Energy and commodities: Falling oil prices are disinflationary but continue to reshape winners and losers.
- Global growth signals: China’s weaker data remains a swing factor for commodities and cyclicals.
- Market breadth: Ongoing rotation raises the question of whether participation broadens or leadership narrows again.
- Consumer pressure points: Cost pressures remain uneven, particularly for lower-income households, which could influence 2026 positioning discussions.
Maintaining a positive outlook requires broad participation, stable inflation, and evidence that AI investment is translating into durable earnings growth.
Portfolio Positioning: Invested, Selective, and Diversified
- Equities: Cash held earlier in November was redeployed into technology ahead of the Fed meeting, while remaining selective given elevated AI spending.
- Fixed income: We continue to favor high-quality fixed income and selectively add where yields are attractive.
- Overall stance: We are fully invested, well diversified, and mindful of areas where risks are rising.
Bottom Line
Markets remain near highs and the overall backdrop is supportive, but leadership is rotating and headline sensitivity is elevated. In December, the most important drivers have been central bank communication, AI earnings and capital spending headlines, and commodity moves—often more influential day-to-day than the rate cuts themselves.