Stocks rebound ahead of Fed meeting — but market leaders are changing

The stock market may not be having the best time of year, but it is moving forward. However, the next big test is just around the corner.

Investors’ attention for several days was largely focused on the Federal Reserve’s interest rate decision on Wednesday. Growing optimism that the Fed will cut interest rates at its final meeting of 2025 – based on futures market data, which is seen as a near certainty – has helped major indexes regain most of the strength they lost during the volatile first three weeks of November. Major US indices are within a few percentage points of new records as this week comes to a close.

A lot has changed beneath the surface last month. The Magnificent Seven of tech heavyweights — Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Tesla (TSLA) — nearly entered a technical correction as investors debated whether big tech companies were spending too much on artificial intelligence. On November 20, a strong earnings report from Nvidia failed to calm AI bubble fears, and the Roundhill Magnificent Seven ETF (MAGS) closed the day down 9% from its record high.

Meanwhile, less popular sectors this year, including healthcare and energy, have become the leaders. More than 60% of stocks in the S&P 500 outperformed the index last month, compared to just 33% since the beginning of the year, signaling “a change in leadership heading into 2026,” according to Bank of America analysts. Eight of the S&P 500’s 11 sectors outperformed the broader index, while technology companies lagged, they wrote.

The Dow Jones Transportation Average, an index that tracks stocks of companies that move goods and people around the country, rose for the ninth straight day on Thursday. According to Dow Theory, this is a bullish signal for stocks if observed alongside a rise in the Dow Jones Industrial Average. (The Dow Jones fell on Thursday, but is up more than 4% over the past nine sessions.)

The Fed faces a difficult decision. Traders expect a reduction

Fed officials are divided on how to proceed. Some policymakers fear that cutting interest rates too aggressively will stoke inflation, which has exceeded the Fed’s 2% target for more than four years and then accelerated again in recent months. Others fear that leaving interest rates unchanged will hurt the weak labor market, which could push the US economy into recession. The government shutdown has delayed the release of several vital economic reports, leaving officials no choice but to fly partially blind next week.

The latest official labor market data sent by policymakers has mixed signals, but data from private sources suggests the labor market has continued to decline. The private sector lost 32,000 jobs in November, according to payroll provider ADP. Employers announced the layoff of more than 150,000 workers in October, the highest number for the month since 2003.

Wall Street generally expects the Fed to prioritize hiring over inflation next week and move to lower interest rates. Investors see an 87% chance the Fed will cut interest rates, according to federal funds futures trading data. Just two weeks ago, this number was 30%.