December in the markets, especially during years of strong gains, can often be filled with holiday and family distractions, and the market can sometimes go on a type of “autopilot.” But that’s not the case this year, as the coming weeks contain important events for two of the four pillars of this rally: Expectations for Fed rate cuts and AI Enthusiasm.
Starting with the Fed, obviously, the decision on Wednesday is important not just because of an impending rate cut but more so because the Fed will reveal just how committed it is to continuing to cut rates in 2026. To be clear, the idea of ongoing Fed rate cuts is key to the rally, and if that idea is invalidated (and investors have to think about rates staying at levels near these for the longer term), then it would be negative and cause year-end market volatility.
Regarding AI Enthusiasm, this is a potentially very important week because there are three possible market-moving events: ORCL earnings, AVGO earnings, and the release of ChatGPT’s model update. ORCL has become the poster child for concerns about overspending and overcapacity in data centers.
Put simply, ORCL is spending hundreds of billions and potentially running negative free cash flow, and investors have noticed, as the credit default swaps on ORCL have risen sharply. To be clear, the risk of default is still very low, but the bottom line is investors will want to see ORCL earnings: 1) Produce strong financial results on revenue/ earnings, 2) Provide aggressive guidance on future orders, and 3) Acknowledge the ramp in cap-ex and stress positive ROI is expected.
The key to AVGO earnings is to confirm robust demand (which should continue). Chips remain the critical resource in the AI cap-ex race, and reinforcement that demand remains solid, especially in the company forecasts, will boost AI Enthusiasm and support tech and the broader markets.
Finally, ChatGPT’s impending model update is important because performance metrics need to equal (or better yet, surpass) Google’s Gemini 3 model to keep excitement over the AI derby intact. As we covered last week, Google’s Gemini 3 model represents a mortal threat to OpenAI. And since literally trillions have been committed to be spent by OpenAI in the coming years, it’s important for the tech sector and economy in general that expectations for that spending don’t change. If ChatGPT’s release underwhelms, it’ll further increase AI skepticism, and that will likely result in volatility. Bottom line, this week is important for the Fed and AI enthusiasm, the two factors most responsible for the 2H 2025 rally.
For the rally to continue into year-end, we’ll need to see 1) The Fed signal more cuts coming, 2) ORCL and AVGO reinforce strong guidance and acknowledge some fiscal discipline, and 3) OpenAI release an improvement to ChatGPT that keeps major tech firms spending to try and catch up.
I have sent all of my clients a summary of the history of the markets in midterm election years. The results are volatility and uncertainty. As a result, I am sending all of you a summary of possible changes in the portfolios depending on your risk threshold. Understand that the volatility is followed by a year that is historically very attractive. You will be asked if you want a moderate portfolio of 60/40 stocks to bonds, or growth 80/20 stocks to bonds, or an aggressive 100% in stocks. I have past performance for all models, and even the aggressive model performed admirably in 2022 when the markets were down over 20%.
I will be sending out these choices in January and will need you to respond quickly so I can make the necessary changes. Until then, my hope is for a Santa Claus rally if the Fed is positive about rates.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. The information does not represent, warrant, or imply that services, strategies, or methods of analysis offered can or will predict future results, identify market tops or bottoms, or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc.