F.N.B. Wealth Management Fast Five

1. What happened in markets during December?

December closed out another strong year for markets, marked by solid long-term performance and short-term fatigue. In the early part of the month, markets rallied in anticipation of another Federal Reserve rate cut that was fully priced into expectations by the time it was delivered. Mid-month, U.S. markets pulled back as investors weighed the sustainability of the AI-driven boom, rising debt levels and the path to further interest rate cuts. While the S&P500 was roughly flat for the month, market leadership continued to broaden as more stocks participated in the return. Value stocks outperformed growth stocks, and international markets, especially Europe and emerging markets, outperformed their domestic peers.

The S&P 500 finished +0.06% month-over-month (m/m), the Dow Jones Industrial Average was +0.92% m/m, and the tech-heavy Nasdaq saw selling pressure at -0.47% m/m. Small companies struggled in this risk-off sentiment, with the Russell Small Cap Index -0.58% m/m. International markets posted standout returns, with international developed markets (MSCI EAFE Index +2.72% m/m) and emerging markets (MSCI Emerging Markets Index 2.17% m/m) being the beneficiaries of concerns over market valuations of AI companies and rising debt levels in the U.S.

The yield curve steepened slightly as the two-year Treasury yield dropped from 3.53% at the end of November to 3.47% at the end of December, while 10-year Treasury yields actually rose during the month by .08% to 4.17%. Given the rise in longer term Treasury yields bonds finished slightly negative for the month (Barclays US Aggregate Index -0.28%).

Gold increased +2.2% for the month, while crude oil fell -1.45%.

U.S. equity markets had another strong year, delivering 18% returns for the S&P 500. This is the third straight year of above-average returns for the index and the first year in this decade in which international stocks outperformed the U.S. As we start 2026, there are a number of tailwinds that suggest the momentum in equities can continue.

2. Did the Federal Reserve have a meeting in December?

Yes, the Federal Reserve’s Federal Open Market Committee (FOMC) did have a meeting in December and decided to cut the Fed Funds Target Rate by 25 basis points or 0.25% for a third meeting in a row. The question for markets now becomes, is it three strikes and they’re out? The rationalization for December’s cut was like the previous two in that the FOMC believes inflation has moderated at the same time the U.S. labor market has softened (the Committee’s current focus). The new Fed Funds target range is 3.50% to 3.75%. At this level, economists and bond market participants are wondering if the Fed is at or near the so-called “neutral rate,” which would indicate a possible pause, despite the updated Summary of Economic Projections (SEP) showing the Committee anticipates one additional cut in 2026 and another in 2027 (no specifics around timing). Fed Chair Powell reiterated that the Fed believes the U.S. economy is in a good place, and it can be patient. Money fund yields below 4% will make cash and cash-like investments less attractive relative to other asset classes.

3. What did the FOMC decide to do with the quantitative tightening (QT) they discussed in October?

Well, they are opening their wallet. In a new development, the Fed announced that they were going to start buying $40 billion worth of T-bills per month starting in December. The buying is meant to rebuild the reserves within the U.S. financial system. Overall liquidity tightened in November due to the Fed’s quantitative tightening and the government shutdown. As savers and investors start to move out of money market funds and tax liabilities come due early in 2026, the concern is that those events could further drain liquidity, so the purchases are intended to maintain “ample” reserves. The Fed made sure to say that this is not the start of a new quantitative easing (QE) cycle, but we will be watching to see if they adjust their bond buying to bring down longer-term interest rates.

4. Why was the Bank of Japan in the news in December?

The Bank of Japan (BOJ) showed that the synchronized monetary policy amongst global central banks continues to uncouple, as it increased its benchmark interest rate by 0.25% to 0.75% (the highest rate since 1995). The BOJ’s decision to increase rates was largely based on their expectations of economic growth, as well as wage growth, and not just forecasts of inflation — although they did note that inflation is rising moderately. In 2013, the BOJ agreed with the Japanese government that the central bank’s target for inflation would be 2%. Recent data shows that Japan’s November Consumer Price Index was +3.0% year over year (y/y) and was the 44^th month in a row above the 2% target. The yield on the 10-year Japanese government bond (JGB) climbed above 2% for the first time since 1999, as investors started to question the central bank’s commitment to its target.

5. What is the Chief Investment Office watching for in January?

January could be a very dynamic month, as we note three things that we believe are likely to move markets:

1. The rebalancing of institutional portfolios that can occur after the first of the year as portfolio managers realign to their intended targets. Because of the varied performance amongst asset classes last year, some large pools of money, such as target date mutual funds, may need to trim from some asset classes to add to others, which could increase volatility.
2. Quarterly earnings reports for U.S. companies. Consensus expectations are for a “soft-patch” in earnings during the fourth quarter (Q4) reporting cycle, due to macro events like the longest U.S. government shutdown in history. Earnings growth is expected to reaccelerate throughout 2026 as a result of policy developments and continued AI-related capital spending, but any significant surprises in the Q4 reports could change those expectations.
3. Global commodities will be sensitive to geopolitical risks (Ukraine, Venezuela, the Middle East, etc.), and there is a high probability that precious metals remain a haven or store of value, while oil runs the risk of over supply (oil prices lower). Starting 2026 with record high copper prices and the highest aluminum prices since 2022 means input costs in a lot of goods will likely go up (potential inflationary impact).

Charts of the Month

Looking for a measurable impact of AI spending:

U.S. equity markets broadened out a bit in the second half of 2025; however, this is likely to be more of a focus in 2026 as investors start expecting returns on AI-related capital spending from the technology sector. The big question is, when will the AI spending have a material impact on things like U.S. labor productivity? That said, AI-related companies will continue to dominate headlines to start the year, and although there will be certain parallels drawn to 1999, the current strength of balance sheets in the technology sector does not present the same risks as the “dotcom” era.

U.S. Labor Productivity 

Dollar correction but not cratering:

The U.S. dollar had its worst year since 2017 but has stabilized since September 17, as geopolitical concerns have eased and the U.S. economy has been shown to be very resilient. We suspect the U.S. dollar stays rangebound for most of 2026. This could dilute some of the capital appreciation potential of international markets due to currency translations. The Fed’s decisions, geopolitical concerns, government debt levels and the health of the U.S. economy will determine how wide the range will be.

U.S. Dollar Softened