December Market Recap: Flat Returns, Strong Year, and Why Scenario Planning Matters

December was a fitting finish to a year that tested investor patience, challenged assumptions, and ultimately rewarded discipline.

While the final month of 2025 delivered muted returns, the broader year reinforced an important theme: macro outcomes like inflation, growth, and Fed policy are driving market leadership shifts faster than most portfolios can realistically adapt.

That’s why heading into the new year, investors and advisors should be asking a simple question:

Are we positioning our client portfolios appropriately to adapt to both their objectives and the current market landscape?

Because increasingly, advisors can’t afford to manage portfolios with only one brush for all clients or a base case market assumption.

2025 Market Overview: Flat Month, Strong Year

December market performance was largely flat:

• S&P 500: +0.06% for December 2025 (per Bloomberg)
• Bloomberg U.S. Aggregate Index: -0.15% for December 2025 (per Bloomberg)

But full-year results were strong:

• S&P 500: +17.88% in 2025 (per Bloomberg)
• Bloomberg U.S. Aggregate Index: +7.41% in 2025 (per Bloomberg)

Markets finished the year with solid returns, but the path there was not easy. There were major events inside of the year that impacted sentiment, volatility, and Fed expectations. Advisors and investors had to stay flexible. As such, the market was quite divided.

Monetary Policy and the Macro Backdrop

The Federal Reserve delivered its third rate cut of 2025 during its December 9 to 10 meeting.

What stood out was that the decision was not unanimous, which was important because it reinforced how uncertainty may persist as we go into 2026.

Markets are still wrestling with four big questions:

• Will inflation remain under control?
• Will growth cool without breaking?
• How far will the Fed go with additional cuts?
• Could geopolitical tensions escalate into war?

Small caps reacted positively after the rate cut but weakened later in the month as uncertainty resurfaced. That’s a reminder that policy relief alone is not enough. Investors want confidence from economic and earnings releases.

Economic Data Highlights: Jobs and Inflation

Two recent reports have done most of the heavy lifting for the “soft landing” narrative: the nonfarm payroll report and the CPI report.

December’s non-farm payroll and unemployment releases pointed to a labor market showing signs of resiliency.

Payroll growth came in slightly below expectations, but unemployment was better than expected. On paper, this may feel like much ado about nothing. In reality, it’s another data point investors are weighing against one critical question: has the Fed successfully engineered a soft landing?

Well, CPI figures helped reinforce that concept. December inflation numbers came in roughly within expectations, with year-over-year CPI rising slightly less than forecasted.

In our opinion, the biggest market implication is whether and to what extent the Federal Reserve cuts rates from here.

This is where the Goldilocks narrative comes in. The economy cools just enough to justify further easing, but not enough to tip into recession.

It’s still too early to say whether the Fed tightened too much too fast, but between December’s nonfarm payroll report and CPI report, early signs are moving in the right direction.

Earnings Themes: AI Still Leads, but Costs Are Differentiating Winners

Earnings in December reflected a selective market.

Micron exceeded revenue and earnings expectations, reported expanding margins, and issued strong 2026 guidance driven by AI-related demand. Oracle and Broadcom also beat expectations, but highlighted rising capital expenditures and resulting margin pressure. We believe AI remains a structural tailwind but scaling costs are beginning to differentiate winners and losers, which we believe is something worth monitoring closely.

On the consumer side, FedEx exceeded expectations, supporting a constructive outlook for logistics and retail activity.

On the other hand, Nike reported continued margin compression, which is another sign that discretionary spending could remain pressured.

The takeaway is that the market is rewarding strength, but it is also becoming less forgiving when margins and consumer demand start to show cracks.

What does it mean for portfolio impact?

The key question for advisors right now is less about whether CPI or jobs prints come in slightly above or below expectations. The real question is what environment we’re heading into, and whether portfolios are positioned for it. If inflation continues to cool and growth holds, the case for a continuation of a rate-cutting cycle strengthens but not at the expense of the economy.

On the other hand, if inflation proves sticky, markets may be staring at a prolonged inflationary environment with a rising recession risk.

Either way, both present certain levels risk and require evaluating where your portfolio stands and how to rebalance efficiently.

Taking Action

We believe it’s important to customize portfolios at scale that can adapt to current market conditions and align with client objectives.

Artha’s AI-driven portfolio optimizer is designed to allow advisors to use natural language prompts to explore what-if environments, stress test allocations, and pivot portfolios with speed and precision, while adhering to client risk and customization requirements, before they get stuck reacting after the fact.

• What if inflation stays sticky through Q1?
• What if the Fed cuts rates faster than expected?
• What if growth slows and recession odds rise?
• What happens to this portfolio under higher-for-longer rates?
• How can I adapt but adhere to client constraints?

Bottom Line

December macro and earnings data didn’t deliver a definitive answer, but it did reinforce the possibility that a recession remains less likely and a rate cutting cycle could continue.

Regardless, in our opinion, advisors shouldn’t try to guess front run data. They ought to build portfolios that can adapt regardless of what comes next.

So heading into the new year, the question remains:

How are you properly preparing your portfolios and are you able to deliver your clients customization at scale?

Disclosure

The S&P 500 is a stock market index weighted by market capitalization that is made up of 500 of the largest public companies in the United States. The companies discussed herein are provided for illustrative purposes only and do not imply affiliation with or endorsement and is not a recommendation of investment.

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