Last week felt like one of those holiday parties where everything starts off jolly, everyone’s toasting to good times, and then suddenly someone spills the punch bowl and the mood shifts. Markets kicked off with a post-Fed glow, small caps were stealing the show, and it looked like we were in for the classic end-of-year melt-up. But by Friday, cracks appeared in the big tech and AI story, and suddenly people were whispering about tighter credit, spending restraint, and whether the Fed’s latest moves are more than just a technical fix.
I’ve been around long enough to know these swings aren’t new, but the speed at which sentiment flipped caught my attention. One minute we’re celebrating dovish signals, the next we’re staring at double-digit drops in names that carried the indices for years. So let’s unpack what actually happened—and more importantly, what it might mean heading into the new year.
The Holiday Market Battle: Santa or the Grinch?
Right after the Federal Reserve meeting, stocks surged. It felt like the perfect recipe for a Santa Claus rally—rates coming down, inflation looking tamed, and the central bank sounding less hawkish than feared. Small-cap indices were leading the charge, finally getting some love after years in the shadows.
But then came the earnings and updates from key players in the data center and artificial intelligence space. Words like “solid backlog” and “new client wins” were thrown around, yet shares plunged anyway. Guidance that would have been cheered six months ago suddenly felt inadequate. Expectations, it seems, had run far ahead of reality.
In my experience, this kind of reaction usually signals that valuations got stretched. When investors reward every dollar of announced spending with several dollars of market cap gain, you know the bar is sky-high. That “free money” era—where capex announcements alone drove massive reratings—appears to be winding down.
Technical Levels That Matter Right Now
The tech-heavy indices are flirting with important moving averages. We’re hovering around the 50-day line after pulling back from recent highs. A clean break higher could reopen the path toward previous records, but failure here often invites more selling.
More concerning is how the 100-day average acted as a floor earlier this year—and how obvious the central bank support became at that level. Rate-cut odds swung dramatically once prices dipped there. The question now: if we test it again, will policymakers ride to the rescue the same way? The next meeting feels ages away in market time, and communication options are limited.
Meanwhile, small caps continue to outperform on a relative basis. That rotation trade has legs as long as growth holds up and rates stay supportive. But history shows these moves rarely stay isolated forever. When mega-cap leaders stumble badly enough, the tide tends to pull everything lower eventually.
- Tech still dominates index weighting
- Wealth effect tied heavily to those names
- Corporate spending narratives revolve around AI and data centers
Any sustained weakness in the sector would make it hard for the broader market to ignore.
The Sudden Focus on Corporate Credit
Something fascinating happened last week: conversations turned to single-name credit default swaps in a way I haven’t heard in years. Certain high-profile tech credits widened noticeably, even as equity traders debated whether the moves were overdone.
Credit markets often lead when equity investors get too complacent. Executives can brush off bondholder concerns when shares are flying high. But when spreads blow out and become part of the daily narrative, management teams usually take notice.
When credit starts speaking louder than equity, companies tend to listen.
We’ve seen this movie before. Periods of aggressive spending followed by tighter credit conditions frequently lead to more disciplined capital allocation. Think of it as a corporate debt diet—nothing dramatic overnight, just a gradual shift toward balance sheet prudence.
The good news? These adjustments are often healthy in the long run. Clearer communication about return hurdles, cash flow timelines, and contingency plans can actually rebuild investor confidence. Creditors aren’t the enemy; they’re stakeholders whose concerns, when addressed thoughtfully, help sustain access to capital.
From Debt Diets to Potential AI Restraint
So far, the evidence points more toward a debt diet than a fundamental demand problem. Backlogs remain robust, new contracts are being signed, and the build-out continues. But three yellow flags keep popping up in conversations.
First, corporate budgets. After two-plus years of aggressive AI investment across industries, some CFOs must be asking hard questions about realized returns. Not every initiative delivers immediate productivity miracles. In a slower-growth environment outside of tech, those ROI conversations get louder.
Second, geopolitics and chips. Policy is easing some export restrictions, which should support volumes. Yet domestic champions in restricted markets continue pouring resources into their own capabilities. The risk isn’t outright collapse in demand—it’s capped upside if alternatives gain traction faster than expected.
Third, and perhaps most structural, is power supply. Data centers are extraordinarily energy-intensive, and grid constraints are real. Building generation capacity takes time, permitting, and investment. If electricity becomes the binding constraint, even willing spenders may face delays.
- Corporate ROI scrutiny likely rises in 2026 budgeting cycles
- Geopolitical chip dynamics could limit rather than kill growth
- Power infrastructure remains the biggest long-term bottleneck
None of these issues scream imminent crisis. But together, they suggest the explosive growth phase may moderate into something more sustainable—and probably less rewarding for equity valuations.
Is the Fed Already Doing Quiet QE?
The central bank’s recent announcement about front-end purchases raised eyebrows. On the surface, it addresses technical dislocations—secured rates trading rich to unsecured, largely due to regulatory quirks.
If the operations stay temporary and targeted, they’re more plumbing fix than stimulus. Markets seem to agree; risk assets cheered modestly but haven’t gone wild.
However, if Treasury issuance patterns shift—more bills, fewer long-dated bonds—these purchases could morph into something closer to balance sheet expansion. History shows fiscal authorities rarely pass up an opportunity to finance cheaply when central banks open the window.
Yields remain attractive relative to recent history. The curve has steepened to levels not seen in years, creating room for policy coordination to push long rates lower. Whether that coordination happens explicitly or just through well-timed comments remains to be seen.
Central banks and treasuries often find ways to align goals without announcing it outright.
Looking Ahead: Choppiness Likely, Opportunity Too
Coming weeks bring thin liquidity, year-end positioning squaring, and some unusual data releases. Volatility feels almost guaranteed.
Yet beneath the noise, several themes seem durable. Small caps and value segments still screen cheaply versus large-cap growth. Credit markets may reward selectivity after years of complacency. And fixed income offers yield levels many investors haven’t seen in a decade and a half.
Perhaps the most interesting aspect is how quickly narratives can shift when credit joins the conversation. Companies that proactively address investor concerns—both equity and debt—tend to emerge stronger. Those that don’t often face higher funding costs exactly when they need capital most.
As we close out the year, I’m keeping an eye on spreads, power grid developments, and corporate commentary around 2026 capex plans. The Santa rally might still have legs, but the Grinch has definitely shown up to the party—and he’s making some valid points about discipline and sustainability.
Whatever happens near-term, the setup for active investors in credit and rates looks compelling. After years where everything seemed priced for perfection, a bit of discernment feels refreshing. Maybe even healthy.
Here’s to a lively finish to the year—and hopefully a 2026 where markets reward fundamentals a little more and hype a little less. Though knowing this business, we’ll probably get both in generous portions.
