What the recent commotion in markets reveals about the underlying cycle.
Key Observations
- After a brisk rally in October, November saw muted returns across most asset classes.
- Policy participants have expressed sharply divergent views on future interest rate decisions, leaving investors cautiously optimistic.
- Leadership rotated toward real assets and commodities, while emerging markets lagged.
- Persistent concentration and high valuations raise the possibility of fragility in markets and warrant thoughtful portfolio construction as we look to 2026.
Market Recap
November’s market action was defined by turbulence. The S&P 500 fell more than 3.0% during the first three weeks of the month amid fears of an AI-driven bubble. However, near the end of the month fears receded on growing expectations for interest rate cuts, allowing the S&P 500 to finish with a modest gain of 0.2%. Small caps, represented by the Russell 2000, outperformed with a 1.0% advance, hinting at a tentative rotation away from mega-cap dominance.
International developed equities, as measured by the MSCI EAFE Index, rose 0.6%, supported by a softer dollar and improving sentiment in Europe and Japan. In contrast, emerging markets declined 2.4%, as China’s recovery stalled and geopolitical risks weighed on sentiment.
Fixed income delivered modest gains, as both the Bloomberg U.S. Aggregate and High Yield Indexes advanced 0.6% amid falling rates and resilient credit fundamentals.
Real assets led the month, with REITs up 2.2% and commodities rallying 3.2% on renewed demand and supply constraints. Lodging/resorts and Healthcare were the best performing REIT sectors due to a resilient consumer and improving fundamentals. Precious metals boosted commodities on the back of inflation concerns and a weaker U.S. dollar.
With diverging views on policy direction, all eyes were on the December Fed meeting. Available indicators suggest that economic activity has been expanding at a moderate pace, job gains have slowed, the unemployment rate has edged higher, and inflation—while still elevated—has moderated. Against this uncertain backdrop, the Fed announced a 0.25% rate cut at its December 10th meeting.1
A Pause for Perspective
Markets navigated a turbulent November as headlines shifted from government shutdown risks to delayed economic releases and renewed debate over AI valuations. While the market’s price swings captured attention, they tell only part of the story. Recent market behavior encourages a deeper look at what is driving returns beneath the surface.
Including December’s cut, the Fed has now delivered 175 basis points of rate cuts since the first cut in 2024. The bond market’s reaction has been unusual: despite ongoing easing, long-term yields have remained elevated. In fact, when looking back the only comparable period was during the stagflation era of the 1970’s. Today, the bond market is seemingly pricing in similar concerns about inflation. This raises the question, What happens when the Fed stops cutting rates? For investors, active management in fixed income may help navigate what could be a non-linear rate environment.
Valuations remain elevated across major indices. The S&P 500’s year-to-date gain of 17.8% leaves earnings multiples above historical averages. Positive earnings growth provides some justification, but the margin for error is narrowing. For long-term investors, being mindful of current valuations and thoughtfully allocating portfolios remains essential to help attain investment goals.
Market concentration remains a defining feature and creates structural risk in portfolios that are not diversified. Today, the top ten stocks in the S&P 500 make up roughly 40% of the index’s total market capitalization, driven predominately by enthusiasm in AI related constituents2. Astonishingly, NVIDIA’s market cap has grown to nearly twice the size of the entire Russell 2000 Index2. This market leadership has created significant performance dispersion amongst index constituents, a trend that has accelerated since early 2024. Concentration amplifies both risk and opportunity. Understanding how portfolios are positioned and the underlying portfolio exposures will help investors weigh potential market scenarios and the impact they may have on investment outcomes.
Outlook
As the year winds down, markets remain supported by moderating inflation, accommodative monetary policy, and a favorable corporate fundamental backdrop. However, elevated valuations, concentration driven by the strength in AI related securities, and persistent macro uncertainty call for thoughtful diversification and disciplined risk management.
1.https://www.federalreserve.gov/newsevents/pressreleases/monetary20251210a.htm
2.Source: Morningstar Direct as of November 30, 2025.
