Despite all the dire warnings that investors were about to be crushed by an artificial intelligence bubble, markets made it through November largely unscathed.
The S&P 500 ended the month roughly where it began, and with the traditionally volatile autumn period behind us, attention is now on December.
Historically, the final month of the year is positive for markets, with the S&P 500 rising three-quarters of the time. So, can we finally crack on with the seasonal Santa rally, or is it too early to let down our guard?
Today’s bull market has been running for years, given fresh legs by the excitement surrounding AI, but the longer it continues, the more anxious investors have become.
The big worry was that hyperscalers such as Meta Platforms, Microsoft, Amazon and Alphabet might struggle to generate a big enough return on the hundreds of billions of dollars they are ploughing into the technology every year.
Nerves were further rattled by the scale of AI cross-shareholdings, with Nvidia pumping $100 billion into its customer, ChatGPT-maker OpenAI, which had, in turn, funnelled tens of billions into high-flying chip rival AMD.
Surely something had to give? Autumn was choppy yet every dip brought out bargain seekers, who piled in and prices rallied. Nvidia’s strong results on October 19 helped.
Just when it looked like markets might crack in late November, the month closed with what Bloomberg labelled an “everything rally”, as shares, bonds, gold and commodities clawed back lost ground. Not quite “everything” though – Bitcoin still ended the month down 20 per cent.
Yet, investors might want to go easy with the seasonal cheer. Just because the AI bubble hasn’t burst yet doesn’t mean it won’t at some point.
JPMorgan chief executive Jamie Dimon is one of many to warn of a serious AI-fuelled correction of up to 30 per cent. His timeline? Somewhere between the next six months and two years. The threat is still out there.
There’s also a nearer-term event that could move markets sooner. The US Federal Reserve meets on December 9 and 10 to decide whether to cut interest rates for a third consecutive month.
President Donald Trump is pressing hard for looser monetary policy, but Fed Chair Jerome Powell has made it clear the decision still hangs in the balance. Fed officials are openly divided. Some worry inflation remains above its 2 per cent target, others about weakening employment. The recent government shutdown deprived the Fed of key data for policy decisions.
Markets are currently pricing in an 85 per cent chance of a cut, a dramatic improvement from just 20 per cent in November.
David Kohl, chief economist at Swiss private bank Julius Baer, is optimistic, saying that recent figures show the US labour market is cooling exactly as the Fed hoped. “Stable growth, softening labour conditions and constrained pricing power create favourable conditions for the Federal Reserve to continue easing its restrictive policy stance.”
Markets are also looking ahead to next year. Reports suggest Mr Trump is lining up a successor to Mr Powell, whose term ends in May.
Economist Kevin Hassett is the front-runner, seen as a clear monetary “dove”, in favour of faster, deeper rate cuts, a move likely to boost stock markets.
Kyle Rodda, senior financial market analyst at Capital.com, says rate-cut hopes are lifting sentiment, alongside strong US corporate results. “This is also weakening the US dollar and pushing gold prices back towards record levels.”
Gold, priced in dollars, becomes cheaper for non-US buyers when the greenback weakens. Lower US interest rates will also hit yields on cash and bonds, reducing their advantage over gold, which pays no income.
Gold rose again in November to around $4,250 an ounce, the fourth consecutive monthly climb.
Mr Rodda is optimistic. “Things ought to pick up again after a bit of a lull, due to slower data and the end of the US reporting period and Thanksgiving holiday.”
Yet, that Fed cut isn’t guaranteed. Fawad Razaqzada, market analyst at City Index, says resilient retail sales, stronger inflation and Mr Powell’s hawkish tone could still persuade the Fed to freeze rates, in a big blow for markets.
Whatever happens, it may be time for investors to look beyond the “Magnificent Seven” tech stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla).
Joshua Mahony, chief market analyst at Scope Markets, sees growing signs of life in the remaining 493 members of the index, as health care, consumer cyclicals and consumer defensive stocks post strong gains.
“With earnings season largely behind us, we have seen a bumper 11.3 per cent growth in earnings for the S&P 493, highlighting the strength of US stocks despite recent economic concerns,” he says.
senior financial market analyst, Capital.com
The S&P 500 has delivered double-digit growth in each of the last two years. It ended in November up 16.71 per cent over the year, so an impressive hat-trick could be in sight.
Aadil Ebrahim, group head of equities at Klay Group in Dubai, says it’s already beaten the index’s 50-year historical average, which stands at 11 per cent a year.
2026 looks positive, too. “Investors are now factoring in accelerated earnings growth in 2026 and 2027, fuelled by AI and technology advancements, alongside improved sentiment in financials and health care.”
Mr Ebrahim argues that the November dip stemmed from concerns over financing AI capital expenditures, rather than doubts about AI-driven growth prospects. But he warns: “AI-related capex financing pressures are likely to endure for months, possibly constraining year-end advances for the broader S&P 500.”
It won’t all be plain sailing. “Economic data is expected to remain highly volatile over the coming months,” he adds.
Many still fear that we are living through a repeat of the dot-com boom of the late 1990s, but Laith Khalaf, head of investment analysis at UK platform AJ Bell, says investors need to learn the right lessons from history.
“Former Fed Chair Alan Greenspan was warning about ‘irrational exuberance’ in US stocks as early as December 1996. Investors who took this as a signal to sell missed intoxicating returns over the next three years.”
Second-guessing a crash by pulling out of the market is always risky. “Another danger is that investors could be sucked back in just at the point a bubble is about to burst,” he warns.
If concerned, Mr Khalaf suggests making regular monthly savings to smooth market swings, while diversifying into cash, bonds and other assets. “A small slice of gold adds stability, as do multi-asset funds. Check your stock exposure, especially in US tech, and trim if too concentrated.”
After three months of volatility, December could be the month it all goes wrong. Yet historically, the festive season tends to deliver a seasonal pick-me-up. Investors won’t want to miss that.
