Hello, I'm Michael Reinking, Senior Market Strategist at the NYSE, and this is Market Storylines. Every week we are here to keep you to date on the key trends and events driving global markets. We are recording on Thursday afternoon, in what has been a highly anticipated week so let’s dive into this week’s market storylines.

The two primary topics in market circles recently have revolved around AI and the Federal Reserve. This week there were major catalysts on both fronts, making this a pivotal week for the rest of 2025. That ties into an exciting morning here at the New York Stock Exchange where Time Magazine announced the 2025 Person or People of the Year - the Architects of AI. From a market perspective AI has been the biggest driver of US market performance over the last couple of years. The AI trade has been evolving since Open AI’s Chat GPT burst onto the public scene at the end of 2022. It initially drove performance in the “picks and shovels” of the industry namely chips with the primary beneficiary being Nvidia. However, over the last year and change it has had a broader impact not only within markets but also helping to drive economic growth as capital spending levels have gone parabolic. This has been driving gains across companies that are impacted by the buildout of datacenters and the energy infrastructure needed to power them. Up until the last couple of months that capex spending has primarily come from cash flow at the hyperscalers but we’ve increasingly seen companies start to tap credit markets and there were many more circular funding arrangements and partnerships being announced within sector. Investors increasingly drew parallels to the late 1990’s as valuations have gotten stretched with the S&P 500 coming off of back-to-back years of >20% gains and within striking distance of extending that streak this year.

The AI trade is starting to evolve again as the rising tide is no longer lifting all boats. As competition heats up investors are increasingly looking for the winners and losers and for companies successfully implementing the technology into workflows. We’ve also hit a tipping point where increasing investment levels are no longer being blindly applauded with the focus shifting to returns on that investment and risks involved if spending slows down or the expected end demand doesn’t fully materialize. This scrutiny weighed on the sector amidst corporate updates this week. More broadly from a market perspective the AI trade has seemingly crowded out investment dollars in other areas of the market. The increased scrutiny along with this week’s other major catalyst, monetary policy, has fueled a rotation which we’ll discuss more in a moment.

First let’s talk about yesterday’s FOMC policy meeting. This has been an overhang for markets over much of the last two months as the members of the Committee publicized their varying opinions for the path of monetary policy going forward. This drove quite a bit of volatility during the month of November up until November 21st when NY Fed President Williams speech signaled to traders that a cut would be forthcoming which kickstarted a rally in equity markets in the final week of the month reversing the earlier losses. The expectation was that Committee would deliver a hawkish cut whereby they cut rates but signaled that the bar for further easing would be significantly higher. Treasury yields had been moving higher since the start of December while equity markets were in a holding pattern just below the recent highs as investors didn’t want to get too far over their skis.

Yesterday we did get that rate cut but Chair Powell wasn’t quite as hawkish as feared and there was a dovish surprise in the central bank’s balance sheet management as the committee concluded that reserves balance had declined to ample levels and as such the Fed would begin purchasing $40B a month of primarily T-Bills starting at the end of this week trough April at which point the purchases are expected to be reduced. So just on the heels of QT winding down the balance sheet will start to grow again. This was not meant to be a stimulative measure but rather to ensure that the financial plumbing continued to work properly as some strains had begun to show up in the system. The impact of that added liquidity is heavily debated within financial circles.

In terms of the path of policy it is very clear there are varying opinions on the Committee as there were two votes against the cut and six officials signaling their preference for no cut in the DOTS in addition to Steve Miran preferring a 50bps cut. For 2026 the median projection remained at just one additional but there is quite a bit of dispersion. Chair Powell noted that with the dual mandates in tension “there is no risk-free policy path” and the Committee decided to cut as the labor market was softening a bit more than they had previously expected. He believes the Committee is well positioned to wait and see how the economy evolves from here now that the policy rate is within the plausible range of neutral which is a hawkish shift. He once again maintained optionality not outright taking anything off the table and noting there will be a lot of data before the Fed meets again in January including the delayed government jobs, inflation and retail sales reports which are out next week. He also warned that there will likely be large distortions in that data.

Yields moved lower as Chair Powell never dropped the feared hawkish hammer which has given traders the green light for the hoped for year-end rally. Over the last two days equity markets have been moving higher but what is most notable is the rotation as small and mid-cap indices are up ~3% for the week hitting new YTD highs and starting to challenge the all-time highs hit about a year ago shortly after the election. The mega-cap tech stocks are underperforming with the NYSE FANG+ index slightly lower for the week holding back the S&P 500 which is trading only slightly higher for the week. Over the last couple of years we’ve seen similar violent rotations which have all fizzled out. Whether this is just another flash in the pan or the long-awaited broadening will be a hot topic for 2026.

That’s going to do it for this week thanks for spending some time with us. If you liked today’s episode, please tell a friend or leave a comment wherever you listen to your podcasts. I’m Michael Reinking and we’ll talk to you again next week.