Weekly market wrap

Markets resume their climb: 3 things to watch in December

Key Takeaways:

As we enter the final few weeks of 2025, markets have delivered double-digit gains across all major U.S. and Canadian indexes. We are watching three key catalysts heading into 2026:

December Fed and Bank of Canada meetings: In our view, the Federal Reserve is likely to cut interest rates at its December meeting, while the Bank of Canada (BoC) is likely to remain on hold. The Fed will likely bring its policy rate down to around 3.5% next year, while the BoC may be done with rate cuts for this cycle.

Labor market in focus: The November U.S. nonfarm jobs report (due December 16) will provide clarity on labor conditions, with forecasts call for slower job growth and a slight uptick in unemployment, though wage growth remains positive in real terms. In Canada, the November jobs report surprised to the upside, with the unemployment rate falling from 6.9% to 6.5%.

Will Santa Claus come to town? Investors are watching for a potential Santa Claus rally, which historically occurs 73% of the time in late December. In preparation for 2026, we recommend solidifying your rebalancing and diversification strategies to ensure your portfolio remains aligned with your intended allocations.

Three catalysts to watch in December

Stock markets began the month of December on a positive note, with the S&P 500 moving modestly higher for the week. Overall, year-to-date, the S&P 500 is up about 17%, while the Canadian TSX is up a solid 27% in local currency terms*.

With just a few weeks left of 2025, what are some of the key data points we are watching to help guide us into year-end and 2026? We highlight three: The December central bank meetings, the November jobs report in the U.S. and Canada, and whether we will see a Santa Claus rally at the end of December.

1) Fed is likely to cut rates, while BoC remains on hold in December

Perhaps the biggest catalyst between now and year-end are the central bank meetings in the U.S. and Canada, which will be held on December 9-10.

In the U.S., keep in mind that investors will not only get an interest rate decision at the end of the Fed meeting, but also an updated set of economic projections and the Fed's "dot plot," which represents the best estimate of where the committee sees interest rates heading over the next three years or so.

We believe the Fed will likely cut interest rates next week and is on track to move the fed funds rate toward a neutral level of 3.0% to 3.5% in the year ahead. It is important to note that the reason for the Fed's rate cuts is to return the fed funds rate to a more neutral level, not because the economy is in imminent danger of a recession or downturn. Historically, when the Fed is cutting rates and the economy is holding up, stock markets perform better; conversely, if the Fed is cutting rates because the economy has weakened, market performance tends to suffer*.

Another supportive factor for the Fed cutting rates is that inflation has remained relatively contained, in the 2.5% to 3.0% range. Last week's Michigan data, for example, showed that one-year inflation expectations fell below forecasts, from 4.5% to 4.1% — another signal that higher inflation outlooks are not yet entrenched among households. All of these factors, we believe, point to a Fed that is likely to continue its rate-cutting cycle at next week's December meeting.

In Canada, the BoC has already cut rates seven times this cycle, starting in June 2024, bringing its policy rate to 2.25%. Given the recent economic data in Canada has surprised to the upside — including a better-than-expected GDP report for September and a strong jobs report for November — we believe the BoC will likely keep rates on hold for now. Notably, market probabilities are starting to indicate that the BoC may raise rates in 2026, but we believe it is still too early, and more data is needed to justify this view.

2) The U.S. nonfarm jobs report will provide insights on the labor market

The second data point to watch are the November jobs reports in both the U.S. and Canada.

In the U.S., investors will get the first complete reading of the U.S. nonfarm jobs report since the government shutdown began in early October. On December 16, investors will get the November jobs report data, which should help clarify the state of the U.S. labor market. 

The expectations for the November jobs report remain relatively soft. Forecasts call for total jobs added to be 38,000, well below the September reading of 119,000*. The unemployment rate is expected to tick higher, from 4.4% to 4.5%, while wage growth is expected to tick lower from 3.8% to 3.6% year-over-year*. Notably, wage growth should continue to outpace the inflation rate, helping households and consumers receive positive real wages.

Overall, while U.S. labor market data has been mixed, the broader direction has been slower demand for labor and lower supply of labor. On the demand side, employers have been easing their hiring activity, with job openings moving lower and the ADP private payrolls falling to negative job gains last month*. 

Meanwhile, on the supply side, we have seen some pressure on labor supply given trends like the aging U.S. demographic, stagnant labor force participation, and ongoing immigration reform*. In our view, while lower demand and supply of labor could keep the U.S. unemployment rate contained, investors will likely also have to get used to seeing lower average job gains in nonfarm payrolls report as a new normal.
 

In Canada, the November jobs report was released last week, and the data surprised nicely to the upside. Net change in employment (new jobs added) totaled 53,600 — well above the forecast of a decline of 2,500 jobs, and modestly below last month's 66,600 reading. The unemployment rate ticked lower to 6.5% from 6.9%, also below forecasts of 7.0%. Meanwhile, the wage growth figure remained steady at 4.0% year-over-year, also above Canadian CPI inflation rates of around 2.1%. Overall, the job market in Canada seems to be steadying after a period of below trend growth.

3) A Santa Claus rally has occurred 73% of the time since 1980

Finally, the third catalyst to watch in December is whether Santa Claus will come to town for investors again this year. Historically, December has been a good month for investors. Traditionally, the last five trading days of the year plus the first two trading days of January are known as the "Santa Claus rally" period. Since 1980, this period has been positive 73% of the time, with an average S&P 500 gain of 1.1%**.

More broadly, the stock market has had a nice run since the April lows, with the S&P 500 up about 38%, and the Canadian TSX up about 39% in CAD terms*. As we approach year-end, investors are likely considering how to position for the year ahead. After three years of stock market gains, a portfolio of 60% stocks and 40% bonds may now look more like 70% stocks or higher. We recommend reviewing your portfolio and considering rebalancing to ensure alignment with your intended asset allocations.

Portfolio positioning for the year ahead

As we enter the final weeks of the year, we are watching the central bank December meetings, labor market data, and stock market seasonality closely. In addition to rebalancing portfolios, we recommend investors lean more into market diversification in 2026, especially to avoid overconcentration risks in your portfolio. 

We favor both U.S. large-cap stocks, which are exposed to the AI and technology themes, alongside U.S. mid-cap stocks, which are tilted more toward cyclical sectors and have scope for catch-up potential, particularly as the Fed considers lowering interest rates. We also recommend looking globally — including emerging-market equities, which can do well during rate-cutting cycles and offer exposure to a global technology theme, as well as developed overseas small- and mid-cap stocks, which have relatively favorable valuations. Finally, among Canadian equities, we remain overweight in the materials, industrials, and energy sectors, all of which we think have favorable outlooks and earnings power in 2026.

Mona Mahajan
Senior Investment Strategist

Weekly market stats

^{Source: *Bloomberg, **FactSet}

^{Source: FactSet, 12/5/2025. Bonds represented by the Bloomberg Canada Aggregate Bond Index. Past performance does not guarantee future results. *4-day performance ending on Thursday.}

The week ahead

Important economic data and events for the week ahead include a Bank of Canada meeting and, in the U.S., labor and productivity data, as well as a Federal Open Market Committee meeting.