Santa Rally Takes a Breather
AI hyperscalers’ move to off-balance-sheet financing is a sign of potential credit stress.
Key Takeaways
Dollar Weakness Erodes Market Returns: The trade-weighted U.S. dollar is ending the year down by -7.0%. That means that almost half of the gain in the S&P 500 was pure money illusion from the depreciation of the Big Dollar. In fact, if you are a European-based investor, all you have made in the broad U.S. market so far this year is barely more than +3.5%. You would have done better rolling over T-bills.
Passive Investing Continues to Dominate: In a sign of these tempestuous “throw caution to the wind” times we find ourselves in, U.S. retail investors yanked $1 trillion out of actively-managed equity funds in 2025, the eleventh consecutive year of redemptions, and plowed $600 billion into passive index investing. The dangers for any stock picker grow when the S&P 500 is 40% dominated by ten mega-cap growth stocks. Because of this intense concentration, which far surpasses what we experienced in the late 1990s, only 27% of active fund managers managed to beat the index this year. These are the vagaries of managing risk.
Q3 GDP Growth Came from a Narrow Base: Three-quarters of the U.S. economy experienced no growth in the third quarter. The only reasons for the +4.3% headline were (i) lower imports, (ii) government expansion, (iii) AI buildout, and (iv) the high-end consumer running down its savings rate dramatically. Had the household sector been constrained to spend its income only, the sum of consumer spending, residential construction, business spending on industrial equipment, and non-residential construction would have actually contracted fractionally last quarter.
