Good morning investors,
I hope everyone had a wonderful Thanksgiving. There are just 22 trading days left in 2025. We have navigated the November chop, the setup looks promising heading into December. The S&P 500 up 16% year to date has investors eyeing a third consecutive 20% year, something that's only happened once before during the 1990s bull run. CME's data center cooling failure halted futures trading this morning, but don't let technical glitches distract from the underlying strength building beneath the surface.
Opening Bell: Futures Frozen, Momentum Intact
Trading halted across equity futures due to CyrusOne data center issues at CME, with Dow ($DIA ( ▲ 1.36% )) futures stuck up 52 points, S&P ($SPY ( ▲ 0.23% )) futures up 0.1%, and Nasdaq ($QQQ ( ▼ 0.32% )) futures gaining 0.2% when frozen. Treasury and metals trading resumed, but equity and oil futures remain impacted as of 7:30 AM ET.
This disruption on traditionally thin Black Friday volume could amplify moves once trading resumes. But technical issues don't change fundamental momentum, as Wednesday's close capped the best four-day run since May with all major indexes gaining.
November's Deceptive Weakness
The monthly scorecard looks uninspiring, S&P down 0.4%, Dow off 0.3%, Nasdaq down 2.2%, but this masks the violent rotation beneath. We witnessed peak fear around November 20th with inverse ETF volume hitting two-year highs, exactly the capitulation signal needed for sustainable rallies.
Weekly gains tell the real story: S&P up 3.2%, Dow gaining 2.6%, Nasdaq surging 4.2%. The small cap Russell posting four consecutive 1%+ days, and continue strength in the equal weight S&P confirms broadening participation beyond mega cap tech. This is healthy market behavior, not concerning weakness.
The Santa Rally Setup
History favors aggressive year-end strength from current levels. The S&P needs just 4% to deliver a third straight 20% year, matching the 1990s precedent before the dot-com bubble. But this isn't 1999 as earnings support valuations, AI investment drives real productivity, and sentiment remains skeptical rather than euphoric.
My four bold calls remain intact: Bitcoin returning to $100K, Russell hitting new highs, December Fed cut, and S&P reclaiming 6,800. The pieces align perfectly for a powerful December rally as tax-loss selling exhausts and institutional positioning turns aggressive.
Labor Market Threading the Needle
Wednesday's Beige Book revealed businesses avoiding layoffs through hiring freezes and attrition rather than cuts. The Kansas City Fed noted companies remain "cautious about losing talent" despite workforce reductions. This goldilocks dynamic, cooling without breaking, gives the Fed cover to cut while maintaining economic stability.
Companies want to preserve optionality heading into 2026. They're managing costs without destroying capacity, betting on recovery rather than recession. This behavioral shift from past cycles supports soft landing narratives and equity strength.
Wall Street's 2026 Optimism
Deutsche Bank sees S&P 8,000 next year with JPMorgan outlining similar scenarios. Yes, these targets seem aggressive from today's 6,800 levels, but consider the drivers: AI productivity gains accelerating, Fed easing cycle underway, corporate earnings inflecting higher, and global liquidity expanding.
The K-shaped economy creates winners and losers, but markets price marginal buyers, not median outcomes. Asset owners benefit disproportionately from current dynamics - exactly who drives equity prices higher. The wealth gap widening isn't socially optimal but remains bullish for stocks.
Nvidia's Information Campaign
Nvidia's defensive memo to analysts rebutting Michael Burry's criticisms shows the pressure on AI leadership. The company arguing it "does not resemble historical accounting frauds" unprompted suggests exhaustion at current valuations. When you're explaining, you're losing.
But Nvidia's challenges don't negate the AI thesis, they validate rotation into second-derivative plays. Google's TPU success, Meta's infrastructure spending, and enterprise software adoption show AI broadening beyond semiconductor concentration. The trade evolves rather than ends.
Black Friday's Paradox
Record crowds expected but spending appetite dropped, this captures the consumer dichotomy perfectly. Traffic remains strong but dollars decline as shoppers become increasingly selective. Winners will be those offering genuine value, not just discounts.
This selective consumption pattern reinforces my K-shaped thesis. Premium brands thrive serving affluent consumers while value retailers like Walmart capture budget-conscious shopping. The middle gets squeezed - avoid department stores and undifferentiated retail.
Final Thought
November delivered exactly the consolidation needed for sustainable gains. We saw peak fear, violent rotation, and sentiment exhaustion, textbook correction completion. Now with 22 trading days remaining, the setup for year end strength couldn't be clearer.
Three consecutive 20% years happened only once before, during the 1990s technology revolution that transformed productivity and created trillions in wealth. Today's AI revolution offers similar transformational potential with better fundamental support. We're not in 1999 yet, we're closer to 1996.
My conviction strengthens for aggressive year-end rally. Use any remaining weakness from November's overhang to position for December strength. Small caps, quality tech, and selective AI beneficiaries offer the best risk/reward. The Russell breaking out while mega-tech consolidates shows healthy rotation, not concerning weakness.
The labor market threading the needle between cooling and collapse gives the Fed flexibility. Companies managing through attrition rather than layoffs preserves recovery potential. Wall Street's aggressive 2026 targets reflect building optimism that this cycle has legs.
Santa Claus rallies aren't guaranteed, but the setup rarely looks better. Sentiment reset, valuations reasonable in quality names, Fed pivot approaching, and seasonality turning positive. The ingredients for a memorable year-end surge align.
As always, feel free to reach out with questions about positioning for year-end.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.